Property Talk

Author: Andeas Wassenaar
Date: 2016-06-17

The news went down like a lead balloon: SA's GDP shrinks by -1,2% in the first quarter 2016! The definition of a "recession" is two consecutive quarters of negative GDP growth. The chances are that we are currently already in a recession. So what industries are performing so badly and what industries are holding out in the midst of tougher trading conditions? According to Trading Economics this is the first contraction since the second quarter of 2015, but the growth rates posted of 0,7% and 0,6% for the third and fourth quarters of 2015 were far from inspiring and imply that on an annual basis from second quarter 2015 to date we are in an annual contraction of 0,2%. The mining and quarrying sector shrank an annualized -18,1%, transport fell -2,7%, agriculture contracted for the fifth consecutive period by -6,5% and electricity , gas and water declined by -2,8%. These negative sectors were countered to some degree by the positive results of the wholesale, retail, motor trade, catering and accommodation sectors that advanced by 1,3%. Finance, real estate and business services rose 1,9%. General Government Services expanded by 1.1%. The year-on-year contraction of 0,2% currently is significant as it is the first annual contraction since the fourth quarter of 2009.

When the recession storm-clouds start gathering we can expect pressure to be exerted on household disposable income. This means that tenants will be harder pressed to pay rentals on time. However at the same time, we can expect to find more people deciding to rent for a while rather then buying. This in turn creates more demand for the existing rental stock and will force better behaviour by tenants. Tenant Profile Network, a registered credit bureau and specialist in the residential rental market, provides a rental monitor that looks at rental payment behavior by residential tenants. The latest published figures indicate that 69% of tenants nationally were in the Paid on Time bracket, while 5% made their payments during the grace period, 11% paid late, 10% only made a partial payment and 5% did not pay. Interestingly when rent is compared to other categories of consumer credit it is evident that the payment of rental (i.e. to keep a roof over your families head) is seen as a priority. The measurement of mortgages in good standing is 91.68% indicating that the payment of a mortgage bond is seen as the primary responsibility by households. Second is rent in good standing which comes in at 84,97%. We then see a significant drop with short term credit, credit facilities and secured credit (74,76%; 73,35% and 71,09 respectively in good standing) being categories of consumer credit that are regarded as less important by households to be current with. Unsecured credit has the worst status with only 65.81% of this category in good standing.

What I find most fascinating is the analysis of rental payment behavior across the rental value bands and using the rentals in good standing as the yardstick. For rentals below R3,000 p.m. the good standing measure is unsurprisingly low at 79.5%. However what is a little surprising is that for rentals above R25,000 p.m. this is even worse with only 77,5% of rentals in good standing. The R3,000 - R7,000 p.m. category shows 86.2% in good standing. Not far below this is the R12,000 - R25,000 p.m. category with 85,4% of tenants in good standing. The star performers are the R7,000 to R12,000 p.m. category with 88,4% of these tenants being in good standing. If you are therefore in the market to purchase a rental property as an investment, the lowest risk category would be the approximately R1m to R1,8m bracket which would typically provide rental income in the R7,000 to R12,000 p.m. range.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com

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