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Tenant arrears

Tenant arrears are very common. Should landlords and rental agents be worried?

Over the past few months, South Africans have faced high inflation and rising interest rates, with increased load shedding adding to the stress of staying afloat financially.

As the cost of living continues to rise, many residential rental agents and property owners may be concerned that the increasing financial pressure on tenants could lead to rental non-payments.

“Although it seems likely that further economic pressure could potentially lead to defaulting tenants, the effects of the cost-of-living squeeze and other factors on tenant payments have been minimal,” says Johette Smuts of PayProp, the largest processor of residential rental transactions in South Africa. The company uses transactional data to compile the PayProp Rental Index, a quarterly guide outlining the South African residential rental market trends.

Survey results

“The PayProp Rental Index for the second quarter of 2022 reported a slight increase in residential rental arrears. This is the first increase in this metric since the peak in the second quarter of 2020, the start of the worldwide pandemic,” says Smuts.

However, Smuts remarks that fewer tenants are in arrears now than in the first quarter of 2020. In the most recent quarter of 2022, 18.5% of tenants were in debt to their landlords, compared to the 18.4% in the first quarter of 2022.

“Although the quarterly uptick is small, it could still be indicative of rising financial pressure on tenants,” says Smuts. She advises landlords and property professionals to keep a close watch on tenant arrears in their portfolios and they should work with their tenants to find mutually beneficial solutions.

Average arrears

In addition to the percentage of tenants in arrears – which records the number of tenants in arrears as a percentage of the total number of tenants managed by the company’s clientele – the PayProp Rental Index also keeps an eye on the average arrears percentage.

This metric expresses the average arrears amount as a percentage of the average monthly rent. For example, an average arrears percentage of 80% means that, a tenant in arrears owes, on average, 80% of one month’s rent.

Smuts says the average arrears percentage peaked in the third quarter of 2020. This average has been slower to recover than the percentage of tenants in arrears. This suggests that fewer tenants owing significantly more are finding it difficult to get themselves out of debt.

“The average arrears percentage currently sits at 80.8%, which is 2% higher than before the pandemic,” says Smuts.

Tenants at risk

PayProp data shows that tenants who spend less on rent tend to be at higher risk of defaulting on monthly rental payments. This is because they are usually in lower income brackets.

  • In the R1 000 to R2 500 rent bracket, 46.6% of tenants were labelled high-risk in the second quarter of 2022. Conversely, just 11.2% of tenants were in the minimum-risk category.
  • In the R5 000 to R7 500 rental bracket, 34.2% of tenants were classed as high-risk. This is the largest of the six rent brackets tracked by the index.
  • In the R7 500 to R10 000 bracket, 24.7% were deemed high-risk, and just under 40% were classed as minimum-risk.
  • Only 12.7% of tenants who spent more than R15 000 monthly on rent were flagged as high-risk during the most recent quarter.

Spending patterns

In the most recent index, the data shows that tenants with higher income levels tend to spend more on rent – in rand terms and as a percentage of their income.

  • In the lower rental brackets, tenants spent, on average, 21.8% of their take-home pay on rent.
  • In the most expensive bracket, tenants spent 34.4% of their income on rent.

Smuts says that although tenants in the lower rental brackets spend proportionately less of their income on rent, they spend a much greater percentage on debt repayments than higher-income tenants do. However, the opposite is true for tenants in the higher rent brackets.

“This further emphasises the fact that lower-income tenants are more likely to be affected by rising inflation and interest rates as the cost of servicing debt goes up,” says Smuts.

She points out that not all tenant expenditures will look like the averages in this index.

“It’s important that rental agents – and landlords – understand the spending behaviours of their specific tenants,” says Smuts.

“In the current economic climate, with prices rapidly rising and debt becoming more expensive, a good agent should understand the potential effects of this situation on tenant expenditure and, in turn, their ability to pay rent.

Download the full PayProp Rental Index here.

Writer : Sarah-Jane Meyer

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