The PayProp Rental Index for Q2 reveals that South Africa has ‘now seen 18 months – or six quarters – of subdued, mostly sub-inflationary rental growth.’

Municipal fees squeeze rental income. Image credit: George Herald

Municipal fees squeeze rental income. Image credit: George Herald

Increases in municipal services such as rates, water and refuse removal are having a far greater impact than the higher electricity prices.

The picture diverges greatly in various markets and in the different segments within those markets. In greater Johannesburg, one estate agent points out that the rental market remains robust in the sub R1-million value range, with demand and yields for properties valued north of R2-million nearly non-existent. PayProp’s index shows that there has been deceleration in rental growth in Gauteng and the Western Cape this year.

While this broadly remains a ‘tenant’s market’, the rental income side of the equation only tells half the story. Flat economic growth and a property market that has been in decline in real terms since the 2007 peak means that residential property investors can’t even count on capital growth.

Worse, landlords are caught in a vice-like grip of below-inflation rent increases (if at all) and sharp increases in administered tariffs.

In a report last year, FNB Commercial Property Finance property sector strategist, John Loos, highlighted that “Sharply rising electricity costs (along with municipal rates and other utilities tariffs) have long since been a housing-related affordability challenge.

“We use the consumer price index for electricity to compile an electricity/per capita income ratio index starting in 2008. It shows that electricity tariff increases applied to consumers have far outstripped per capita income growth, with this index increasing by a massive 82.71% from 2008 to date.

Over a five-year period, annual increases of, say, 11% for these services mean an increase of 70%. This is not a made-up number! And this doesn’t take into account the revaluation of properties that various municipalities have undertaken in recent years.