South Africa is experiencing a rising demand for rental properties due to slow economic and household income growth, political uncertainty, and the need for flexibility. The number of households renting has increased from 17.7% in 2020 to 23.9%. Well-located properties with engaged landlords see better rental returns. Despite high demand, new property construction is slow. Rental returns for sectional-title properties are 10.62%, while full-title properties increased from below 7% in 2022 to 7.44% in early 2024. Cape Town benefits from partial migration and shows strong property value growth, while Gauteng and KwaZulu-Natal offer higher rental returns.
South Africa is witnessing a surge in demand for rental properties. Some of the reasons behind this growth in demand is due to stilted economic and household income growth, political uncertainty, flexibility, and mobility. The StatsSA Household survey revealed that the number of households renting has gone up from 17.7% in 2020 to 23.9%.
Waldo Marcus, an industry principal at TPN has said that properties that are in good locations and have landlords who are actively involved are seeing better rental returns. This is true for both sectional (units within a larger property, like flats) and full-title properties (entire standalone properties). There is still a high demand for rentals, but new properties are being built at a slower pace.
Marcus, who was a speaker at the Residential Investment and Development (Reside) Summit, also pointed to data from the TPN Vacancy Survey for the first quarter of 2024 that illustrates that vacancies have reduced to a new low since 2016, at 4.42%. Recently, reasonable increases in rent have encouraged more investors to enter the market. In 2023, investors were more careful because the cost of borrowing money was high, and rent growth was still below the average consumer price inflation rate of 6%.
The Western Cape benefits from partial migration - people moving there from other parts of the country. It has lower rental returns but is seeing good increases in property value. On the other hand, Gauteng and KwaZulu-Natal have smaller increases in property value but offer higher rental returns. Marcus said that the rental returns for sectional-title properties (like flats) are currently 10.62% and are expected to go up. For full-title properties (like standalone houses), the rental returns were below 7% in 2022 but have increased to 7.44% in early 2024.
Market analyst and property investor Miguel Martins explains that a decrease in vacancies and rising rental returns point to a strong rental market. Prior to COVID, vacancies were at 7.5%, while in the last year, vacancies are 8.2%. A 42 square metre flat bought for around GBP 350,000 can be rented out for GBP 3,600 per month, giving a net rental return of 10.27% in Johannesburg. Property prices in Johannesburg are as low as they were 14 years ago, and areas like Bryanston, Sunninghill, and Paulshof offer good deals.
In Cape Town, a 41 square metre flat costing GBP 470,000 can go for a rent of GBP 4,500 per month, giving a 10.48% return. In Ballito, KwaZulu-Natal, a 57 square metre one-bedroom flat costing GBP 670,000 commands a rent for GBP 4,500 per month, resulting in a 6.56% return. In Cape Town's Southern Suburbs, a one-bedroom flat worth GBP 720,000 that rents for GBP 4,100 provides a 6.8% return. Martins noted that Cape Town excels in property value growth.
In summary, the South African rental market is experiencing a surge in demand, driven by factors like economic and household income challenges, political uncertainty, and a preference for flexibility and mobility. The data shows an increase in the number of households renting, from 17.7% in 2020 to 23.9%. Properties in good locations with active landlords are seeing better rental returns, both for sectional-title and full-title properties. While new property construction has slowed, the rental market remains strong, with vacancies reaching a new low since 2016. The different regions, like the Western Cape, Gauteng, and KwaZulu-Natal, exhibit varying trends in terms of rental returns and property value growth, providing opportunities for investors to consider.
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