According to TPN Credit Bureau’s most recent Vacancy Survey, South Africa’s rental vacancy rate saw a significant improvement, falling from 6.72% in Q2 2024 to 5.07% in Q3.
For the first three quarters of 2024, the average residential rental vacancy rate stood at 5.4%, marking the lowest figure since TPN began publishing its Vacancy Survey in 2016.
TPN predicts that this positive trend will persist, with vacancy rates remaining in the mid-5% range through the rest of 2024, while rental growth is expected to accelerate in Q4.
“The residential rental market continues to perform strongly with rental properties still in high demand as new supply is slower to come online,” stated Waldo Marcus, marketing director at TPN from MRI Software.
“Post-election economic sentiment is positive, with improved confidence and economic indicators. The second interest rate cut in November 2024 adds to the positive outlook, offering relief to tenants and property owners.
“S&P Global’s upgraded outlook for South Africa and potential structural reforms could lead to lower government borrowing costs, stimulating economic growth and addressing unemployment.
“While unemployment decreased slightly in Q3 2024, the number of discouraged workers increased, highlighting the need for a strong job market to support the residential rental market.”
He said that maintaining stable employment is key to keeping vacancy rates low. High interest rates, however, can be detrimental.
Although high interest rates discourage consumers from purchasing property, they also have a negative impact on property owners who may need to compromise on high rental growth to ensure tenants stay and pay their rent on time.”
As the cycle of interest rate cuts begins, some tenants might transition to homeownership, which, according to Marcus, could lead to increased vacancies in higher rental price brackets.
Demand Outstrips Supply
One key reason for the decline in residential rental vacancies is the higher demand relative to supply.
TPN’s Rental Market Strength Index, which tracks demand and supply across various property types and market segments, dropped from 60.36 points in Q2 to 58.97 points in Q3 2024.
An index of 50 points indicates equilibrium between supply and demand, while values above 50 indicate greater demand than supply.
Vacancies for rental properties priced under R12,000 a month all saw a decrease in the third quarter. For rentals in the R3,000 and below range, vacancies dropped from 10.97% in Q2 to 6.89% in Q3, with its market strength improving to 60.11 points, up from 59.95 in the previous quarter.
Similarly, the R3,000 to R7,000 rental range experienced a decrease in vacancies from 6.75% to 5.8%, although its Market Strength Index saw a slight decline due to a rise in supply and a minor decrease in demand.
Despite more rental units becoming available, demand remains strong in this price band. The R7,000 to R12,000 range recorded the lowest vacancies at 3.4% in Q3, down from 5.51% in Q2.
In the R12,000 to R25,000 rental range, vacancies climbed from 4.52% to 5.93% due to lower demand, despite a steady supply.
Although demand remains strong in this sector, the rise in vacancies may signal an early trend of market migration.
For the most expensive rentals, those above R25,000 per month, vacancies jumped from 7.16% in Q2 to 12.03% in Q3, despite a decline in available luxury units.
The Western Cape continues to report the lowest vacancy rate of all provinces, attributed to very low supply and high demand.
Rental increases are highest in the province, which benefits property investors but may eventually price out lower-income households. Vacancies decreased in all other provinces during Q3.
“Despite strong demand for residential rental property, investors have been cautious about increasing supply due to economic uncertainty and high interest rates.
“While a lack of supply has prevented a potential rental bubble, it may lead to slower rental growth, higher vacancy rates, and more tenant defaults. The downward trend in completed residential buildings suggests that supply will continue to be limited,” said Marcus.