Q3 2015 PAYPROP RENTAL INDEXRENTAL INDE Q3 2015 Q3 2015 Now in its fourth year, the PayProp Rental...

PAYPROP RENTAL INDEX

Including

tenant risk analysis

State of the rental industry

Q3 2015

The most comprehensive report on the state of the residential rental market in South Africa

JUL - SEP 2015

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WWW.PAYPROP.CO.ZA© GIVENGAIN INTERNATIONAL 2015 3PAYPROP SOUTH AFRICA

RENTAL INDEX Q3 2015

Q3 2015Now in its fourth year, the PayProp Rental Index continues to grow in influence

with unmatched insights into the residential letting market in South Africa. This

quarter we track rental data harvested from financial transactions relating to

75 000+ active rental properties, making PayProp the largest processor of

residential letting transactions in South Africa, and the PayProp Rental Index

the most comprehensive study on residential letting trends.

We hope you enjoy this issue.

Louw Liebenberg

CEO: PayProp

STORM CLOUDS GATHERING 4PROVINCES – AND WE HAVE A NEW WINNER! 5PROVINCES – NO RECOVERY IN SIGHT FOR LIMPOPO AND MPUMALANGA 5STABILITY IN THE ANCHOR PROVINCES 6UNDERLYING PRICING DYNAMIC 6CONTINUED GROWTH IN > R15 000 RENTALS 8DAMAGE DEPOSIT RATIOS DROP BACK MORE 9YIELDS DROP 10TENANT HEALTH 11THE AVERAGE TENANT 13SUMMARY AND CONCLUSION – INTERESTING TIMES AHEAD 14

4 PAYPROP SOUTH AFRICARENTAL INDEX Q3 2015

WWW.PAYPROP.CO.ZA© GIVENGAIN INTERNATIONAL 2015

We’ll start off with the good news – the average residential rental in South Africa held steady above the R6 500 level this quarter! This figure is currently at R6 508, but we should also note that there has been no upward movement in it since the previous quarter (ending in June 2015).

The stagnant growth has had far more than just a short-term effect. The background here is that long-term year-on-year growth in rentals has been rallying since January 2015, after a prolonged down-turn. Based on previous growth cycles we’ve been expecting the upturn to last until the end of the year at

STORM CLOUDS GATHERING

least, and growth rates to pick up from 5.04% in January to around 10%. However, as a result of the cessation in growth, this quarter effectively marks the beginning of a dip in year-on-year growth. Average growth dropped from 7.56% in June to 7.28% in July, and ended on 5.18% in September.

Average rentalSource: PayProp

Year-on-year growthSource: PayProp

3 000

3 500

4 000

4 500

5 000

5 500

6 000

6 500

7 000

Dec 11

Feb 1

2

Apr 1

2

Jun 1

2

Aug 1

2

Oct 12

Dec 12

Feb 1

3

Apr 1

3

Jun 1

3

Aug 1

3

Oct 13

Dec 13

Feb 1

4

Apr 1

4

Jun 1

4

Aug 1

4

Oct 14

Dec 14

Feb 1

5

Apr 1

5

Jun 1

5

Aug 1

5

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

Dec

12

Jan

13

Feb

13

Mar

13

Apr 1

3

May

13

Jun

13

Jul 1

3

Aug

13

Sep

13

Oct 1

3

Nov

13

Dec

13

Jan

14

Feb

14

Mar

14

Apr 1

4

May

14

Jun

14

Jul 1

4

Aug

14

Sep

14

Oct 1

4

Nov

14

Dec

14

Jan

15

Feb

15

Mar

15

Apr 1

5

May

15

Jun

15

Jul 1

5

Aug

15

Sep

15



the latest figures showing a 2.2.% decline. And while Limpopo has now recorded positive growth for the first time this year, the 2.6% it registered has hardly been enough to drive a solid recovery in average rental values.

We’ve been predicting this one for some time. The Northern Cape is now officially the most expensive province in which to rent in the country, with average rentals topping out at R7 219 per month this quarter. The “other” Cape has overtaken Gauteng in this respect, which has been in the lead for two consecutive quarters.

Despite consistently high growth rates, Gauteng had no answer for the tremendous growth spurt of the newcomer, which has seen more than 12 months of back-to-back double-digit growth rates.

PROVINCES – AND WE HAVE A NEW WINNER!

Provincial average rentals Q3 2015Source: PayProp

Provincial growth ratesSource: PayProp

R 4 559

R 4 953

R 5 007

R 6 460

R 6 628

R 6 789

R 6 979

R 7 090

R 7 219

R - R 2 000 R 4 000 R 6 000 R 8 000

North West

Free State

Eastern Cape

Limpopo

Mpumalanga

KwaZulu-Natal

Western Cape

Gauteng

Northern Cape

Q3 2015

PROVINCES – NO RECOVERY IN SIGHT FOR LIMPOPO AND MPUMALANGA

Mpumalanga and Limpopo, historically the top-performing provinces, have of late been languishing behind new frontrunners Northern Cape and Gauteng, and still haven’t shown any clear signs of recovery in the latest period. In fact, rentals in Mpumalanga continue to decline on a year-on-year basis, with

Q3 2014 7.2% 5.7% 8.1% 6.0% -3.3% 3.6% 4.1% 11.6% 11.5%

Q4 2014 5.6% 2.5% 5.5% 7.4% 1.6% 1.2% 2.7% 14.4% 12.4%

Q1 2015 2.5% 4.3% 7.9% 6.8% -5.1% -0.8% 0.4% 15.3% 10.0%

Q2 2015 3.4% 7.1% 8.2% 8.0% -2.7% -0.4% -0.4% 11.7% 10.9%

Q3 2015 3.6% 5.3% 8.6% 8.2% 2.6% -2.2% 2.4% 10.8% 9.5%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Eastern Cape Free State Gauteng KZN Limpopo Mpumalanga North

West Northern

Cape Western

Cape



It’s encouraging to see that the economic powerhouses of KwaZulu-Natal, the Western Cape and Gauteng maintained their stable growth at 8.2%, 9.5% and 8.6% respectively. If the three largest provinces continue to post growth that outstrips inflation, it may soften the severity of the decline in average growth rates that we are projecting.

STABILITY IN THE ANCHOR PROVINCES

Over time our quarterly report on residential letting trends in South Africa has pinpointed a migration of rentals from the lower-priced bands to the higher-priced ones. But while the graph below highlights impressive growth in the > R10 000 categories, it is important to keep in mind that 77.4% of all rentals are still below R7 500.

UNDERLYING PRICING DYNAMIC

Distribution of price bandsSource: PayProp

Q4 2014 Q1 2015 Q2 2015 Q3 2015

> 15 000 3.7% 4.0% 4.2% 4.7%

10 000 -15 000 7.1% 7.4% 7.9% 9.0%

7 500 - 10 000 11.9% 12.3% 12.7% 13.8%

5 000 - 7 500 29.7% 30.1% 30.4% 32.7%

2 500 - 5 000 38.6% 37.2% 36.0% 35.7%

1000 - 2500 6.0% 6.0% 5.8% 5.8%

< 1 000 3.0% 3.1% 3.2% 3.2%

3.0% 3.1% 3.2% 3.2% 6.0% 6.0% 5.8% 5.8%

38.6% 37.2% 36.0% 35.7%

29.7% 30.1% 30.4% 32.7%

11.9% 12.3% 12.7% 13.8%

7.1% 7.4% 7.9% 9.0%

3.7% 4.0% 4.2% 4.7%

0%

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30%

40%

50%

60%

70%

80%

90%

100%

A free lunch for your entire office if you can beat this story...

Underwritten by RMB Structured Insurance Limited, an authorised financial services provider– FSP 1027.

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National growth in number of rentals >R15 000Source: PayProp

Provincial growth in number of rentals > R15 000Source: PayProp

Rentals by price categorySource: PayProp

0

5 000

10 000

15 000

20 000

25 000

30 000

< 1 000 1 000 - 2 500 2 500 - 5 000 5 000 - 7 500 7 500 - 10 000 10 000 -15 000 > 15 000

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015

CONTINUED GROWTH IN > R15 000 RENTALS

On further examination, other interesting dynamics come to the fore regarding growth in rentals above R15 000. While the graph on the right shows a decline in that band, it is still an impressive number (from 72% at its highest down to the current quarterly average of 47%).

We often look to rentals in this price category as the ”canary in the mineshaft” when projecting provincial growth rates. According to the hypothesis we’ve developed over the years, a drop in this price category is a first indication of a possible downward cycle in a particular area. If we look at Limpopo, for example, we see that the current downward trend in average

0%

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80% De

c 12

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Q3 2014 67.1% 37.4% 54.8% 51.7% -53.3% 20.1% 51.1% 223.1% 39.6%

Q4 2014 75.0% 21.4% 30.5% 49.1% -44.5% 11.6% 52.5% 120.6% 36.8%

Q1 2015 47.6% 39.2% 33.4% 43.4% -54.0% 24.9% 66.7% 100.5% 38.7%

Q2 2015 49.8% 40.7% 39.3% 45.3% -41.7% 28.5% 66.0% 37.5% 47.3%

Q3 2015 37.3% 48.4% 47.1% 49.0% 3.8% 24.5% 58.9% 32.1% 47.8%

-100.0% -50.0%

0.0% 50.0%

100.0% 150.0% 200.0% 250.0%


West Northern

Cape Western

Cape



effect. In PayProp’s sample set, for example, it means that R10 million less is being held in deposit for the same value of rentals compared to a year ago. When applied to the estimated 1.5 million rental properties in South Africa, we see that R200 million less is being held in deposit to secure a rental pool of the same value.

rental values began with lower growth in high-end rentals.

While the Northern Cape is the largest and currently still the fastest-growing province in terms of monthly rental values, we have concerns about the sustainability of this growth. The first red flag we must heed is a slowing in the phenomenal year-on-year growth that we’ve been seeing in this province. Currently at a quartered average of 10.8%, this figure is at its lowest in 18 months. Over the three months making up Q3, growth fell from 10.9% in July to 10.5% in August, ending in 7.7% in September. If this trend continues, the Northern Cape may not be in the top spot for very much longer.

Additionally, growth in rentals above R15 000 has cooled down dramatically in this province from its heyday levels of 223% (Q3 2014).

It was determined then that the runaway growth was probably the result of bulk corporate rentals being signed on the back of industrial development. We would hazard a prediction, based on the figures we are currently seeing, that the expansion boom is over and may even be contracting, possibly caused byeconomic shifts in towns affected by the downturn in mining activity.

DAMAGE DEPOSIT RATIOS DROP BACK MORE

The damage deposit ratio (how big damage deposits are in relation to rentals in a given area) continues to make for interesting analysis. This ratio peaked at 1.42 in Q4 2014 (where the average damage deposit is 1.42 times the average rental value), but has since gradually dropped to 1.38. While the difference may seem marginal, it has had a significant overall

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Apr 1

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May

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Jul 1

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Aug

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Sep

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Oct 1

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Jan

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Feb

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Mar

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Apr 1

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May

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Jun

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Jul 1

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Aug

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Oct 1

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Nov

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Dec

14

Jan

15

Feb

15

Mar

15

Apr 1

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May

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Jun

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Jul 1

5

Aug

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Sep

15

Damage deposit ratioSource: PayProp



YIELDS DROP

This is the first time in more than two years that we’ve seen net yields drop below the 5% level – currently, they’re at 4.94%. The drop has been driven by quarter-on-quarter rental growth of only 6.7% versus average property value growth (calculated on the same basis) of 7%. Combined with rising costs of ownership, this has held investors back from entering the market. We have experienced a subtle shift in the market as a result of this change in the return model. Larger institutional investors are entering the market as bulk investments generally result in lower capital costs and lower per-unit management and maintenance costs, due to economies of scale.

On a provincial scale, Limpopo still offers excellent returns (7.52%) despite the decline in real values – as it takes a while for the impact of slower growing rentals to affect net yields. We do however expect to see net yields in this province drop back from the number one spot by next quarter, as rental growth remains flat. The Northern Cape comes in second at 7.16% – although this is a slight drop from the 7.64% achieved last quarter.

Surprisingly, the Western Cape and Gauteng are struggling at the lower end of the yield range. This is not, as may be expected, because of low rental values in these areas (which is the reason for the low yields in the Eastern Cape), but because much higher property values make it harder for a buyer to enter

Provincial net yieldsSource: PayProp

the buy-to-let market, raising the barrier to achieving profitability. In these circumstances, rentals need to consistently outpace property value growth to ensure positive growth in returns for investors in these areas.

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015

Gross yield 7.08% 7.09% 7.03% 7.21% 7.24% 7.06%

Net yield 5.11% 5.08% 5.03% 5.08% 5.13% 4.94%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

National gross & net yieldsSource: PayProp

Q2 2014 4.72% 4.00% 4.54% 5.48% 9.53% 6.30% 5.01% 6.40% 4.30%

Q3 2014 4.83% 4.29% 4.47% 5.52% 9.33% 6.51% 4.77% 6.35% 4.18%

Q4 2014 5.28% 4.43% 4.47% 5.14% 8.58% 6.47% 4.90% 6.97% 4.21%

Q1 2015 4.95% 4.24% 4.51% 5.51% 9.24% 6.59% 5.02% 7.13% 4.16%

Q2 2015 5.01% 4.31% 4.55% 5.67% 9.43% 6.65% 5.21% 7.64% 4.11%

Q3 2015 4.19% 4.50% 4.44% 5.29% 7.52% 6.38% 5.02% 7.16% 4.46%

0.00% 2.00% 4.00% 6.00% 8.00%

10.00% 12.00%


West Northern

Cape Western

Cape



TENANT HEALTH

Our tenant analysis is based on data abstracted from tenancy applications – specifically PayProp Capital’s Tenant Assessment Report (TAR). Providing a unique view on tenant risk, the TAR has grown from strength to strength in the market, and in the latest sample batch we were able to include roughly 15 000 tenant records. This data gives us a unique foundation on which to build an understanding of the financial health of the average South African who uses an estate agent to source a rental. However, this report has only been available to PayProp customers for the last 12 months. During this time it has attained coverage in all provinces, but we do not yet regard all provinces’ data as reliable indicators of actual rental trends, and thus exclude some from our data set.

From the available data we draw our first important insight concerning the relation between tenant income and debt repayments. Over the past three quarters a concerning trend has been emerging that shows tenant incomes declining while debt repayment commitments have been increasing. As a result, tenants are currently spending close to 37% of their income on repaying debt, as opposed to 32% at the beginning of this year (otherwise known as the debt repayment ratio).

Provincially, the data provides an even more interesting perspective. Limpopo, where we have seen a decline in average rental increases, a corresponding increase in debt repayments shows up relative to income. The same trends are at work in Mpumalanga. Given that the percentage of high- to very high-risk tenants in this province has increased from 47% to 63%, the data suggests that there is significant economic pressure on tenants in this area.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

20 000

25 000

30 000

35 000

40 000

45 000

Q1 2015 Q2 2015 Q3 2015

Average debt repayment

Average income

Debt repayment relative to income

Q1 2015 35% 41% 34% 37% 16% 33% 35% 15% 30%

Q2 2015 36% 51% 36% 29% 28% 28% 38% 55% 28%

Q3 2015 35% 49% 39% 34% 45% 41% 38% 25% 31%

0%

10%

20%

30%

40%

50%

60%


West Northern

Cape Western

Cape

Tenant debt & incomeSource: Compuscan, PayProp Capital

Provincial debt repayments relative to incomeSource: Compuscan, PayProp Capital



Debt repayment by provinceSource: Compuscan, PayProp Capital

Average income by provincetSource: Compuscan, PayProp Capital

In Gauteng, the debt repayment percentage is of particular concern, as the percentage of high-risk tenants has likewise increased, from 41% to 44%. The Western Cape debt-to-income ratio has been fairly stable, but is accompanied by a decrease in the percentage of high-risk tenants in this province – from 36% to 32% over the past three quarters. KZN shows a similar trend, with a stable debt repayment ratio and a high-risk percentage holding steady at 41% over the three quarters.

When examining the debt repayment ratio in terms of its component parts – debt and income – Western Cape tenants report the highest average income. Worryingly, the Free State has the highest debt repayment commitment but only the third-highest reported income.

R 17 431

R 18 514

R 24 631

R 26 663

R 28 851

R 29 259

R 29 546

R 30 897

R 34 401

R - R 10 000 R 20 000 R 30 000 R 40 000

Eastern Cape

Limpopo

Free State

Mpumalanga

North West

Northern Cape

Gauteng

KwaZulu-Natal

Western Cape

Q3 2015

R 6 146

R 7 338

R 8 281

R 10 648

R 10 734

R 10 866

R 10 966

R 11 586

R 12 164

R - R 2 000 R 4 000 R 6 000 R 8 000 R 10 000 R 12 000 R 14 000

Eastern Cape

Northern Cape

Limpopo

KZN

Western Cape

Mpumalanga

North West

Gauteng

Free State



CPA and NLR accountsSource: Compuscan, PayProp Capital

The high debt repayment levels are driven by the high number of accounts held by prospective tenants. On average, a prospective tenant holds 7.5 CPA accounts (Credit Providers Association accounts, consisting largely of asset finance, retail credit and contractual service providers) and 3 NLR accounts (National Loan Register accounts, which typically involve the provision of cash on credit).

The number of accounts has stayed fairly stable over the year and it would be interesting to see if this figure increases over the festive season.

A tenant’s credit behaviour is reflected through their credit score. Most credit bureaux use a numeric scoring system that rates a tenant’s creditworthiness on a range between 500 (bad) and 700 (excellent). The average tenant scored 596 for this quarter, which is marginally down from 601 the previous quarter.

0.0

2.0

4.0

6.0

8.0

10.0

Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15

Average number of CPA accounts Average number of NLR accounts

THE AVERAGE TENANT

What does all this mean for the average tenant? If we combine debt repayment with all of a tenant’s other obligations in a cash-flow analysis, it is of concern to see how little is left for living expenses (once taxes, rental and debt repayments are deducted).

R27 767 R10 307

R6 508

R5 553

R5 399

R-

R5 000

R10 000

R15 000

R20 000

R25 000

R30 000

Income Debt repayments Rent Tax Remaining

Tenant financial analysisSource: Compuscan, PayProp Capital



Unfortunately, there is precious little positive news about this quarter – and more significantly, the forecast for the near future. Firstly, we are concerned about the slowing growth rate in rentals, which, coupled with a drop in the damage deposit ratio, makes it clear that tenants are under pressure.

When looking at the actual financial data of tenants, our concerns are supported by the increasing levels of indebtedness and a drop in average credit scores.

Provincially, North West, Northern Cape, Limpopo and Mpumalanga ought to provide interesting test cases to see how these dynamics will play out in areas where an underlying resource-based economy is under pressure. Our advice to agents and landlords remains to ensure adequate tenant risk assessments are done, to ensure tenants are able to afford the rentals that they apply for and to consider additional processes and products, including our DepositGuarantee, to cover landlord and business risk.

SUMMARY AND CONCLUSION – INTERESTING TIMES AHEAD



PayProp Rental Index

The PayProp Rental Index is a quarterly guide on trends in the South African residential rental market, and is compiled from actual transactional data collected by PayProp, the largest processor of residential letting transactions in South Africa. This edition details market conditions for the third quarter of 2015.

Contact details

This publication has been produced by PayProp South Africa. PayProp South Africa is operated under licence from GivenGain International Limited. PayProp and the PayProp logo are registered trademarks of GivenGain International Limited.

For enquiries, please contact:

Louw LiebenbergCEO: Property Payment Solutions (Pty) LtdEmail: [email protected]: 087 820 7368

The PayProp Rental Index is available from the PayProp web site at www.payprop.co.za.

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If you would like to know more about using PayProp to manage your rental portfolio, please visit www.payprop.co.za.

DisclaimerThis document is intended as a means for debate and discussion and should not be relied on as legal or professional advice. Whilst every reasonable effort has been made to ensure the accuracy of the contents, no warranty is made with regard to that content. PayProp will have no responsibility for any errors or omissions. PayProp recommends you seek professional, legal or technical advice where necessary. PayProp cannot accept any liability for any loss or damage suffered by any person as a result of the editorial content, or by any person acting or refraining to act as a result of the material included.

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Q3 2015 PAYPROP RENTAL INDEXRENTAL INDE Q3 2015 Q3 2015 Now in its fourth year, the PayProp Rental...

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