Understanding how rental escalations work

The latest PayProp Rental Index revealed that the average rent in South Africa now sits at over R9 000 following a year-on-year rental growth of 5.2% for Q4 2024. This steady rise in rental figures spotlights the importance of understanding how rental escalations work. Whether you’re a tenant or a landlord, understanding this concept is key to managing property costs and income effectively.

Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, explains that rental escalations are a mechanism designed to keep rent aligned with inflation, market trends, and property maintenance costs. “The most efficient way to handle rental escalations is to have a pre-agreed annual increase in rent built into a lease agreement. This helps to set tenant expectations up front, avoiding surprise hikes. It also helps both parties plan their financials with predictability,” he explains.

There are various ways annual escalations can be expressed in a rental agreement. Typically, the increase amount can either be linked to inflation or could be specified as a percentage, but each lease is different.

“Escalation rates are not fixed by law in South Africa but are negotiated between the tenant and landlord, typically before signing a lease if it is included in the agreement. A standard escalation rate in South Africa ranges between 6% and 10% per annum, though this can vary widely,” Goslett explains.

Factors that typically influence the agreed rate include:

• Inflation rate (CPI): Landlords often base increases on inflation to ensure the rental income keeps pace with cost-of-living increases and property expenses. Currently, inflation is at an historic low of 2.7%
• Market conditions & demand: If rental demand is high, landlords may justify higher escalation rates that are above inflation. If the rental market is in the tenant’s favour (e.g., high vacancy rates), there may be room to negotiate a lower escalation rate.
• Length of lease: Longer leases may have more moderate escalations to retain reliable tenants. Overly aggressive escalation rates can lead to tenant turnover, which in turn may cost more than the increased income due to vacancies and marketing.

As rental prices continue to climb, Goslett emphasizes the increasing importance of understanding rental escalations. “For tenants, it’s about protecting affordability. For landlords, it’s about maintaining the value of their investment. With proper awareness and communication, and through the help of a reliable rental agent, both parties can navigate rental escalations effectively and fairly,” Goslett concludes.

Issued by: Kayla Ferguson