Virus could ‘devastate’ rental market

Drastic drop in deposits

19 May 2020 | Business

… the rental market will likely hit a growth plateau in the second quarter before it reverts to a negative growth territory. – Frans Uusiku, Market research manager: FNB Namibia

Phillepus Uusiku - The coronavirus crisis is expected to have a devastating impact on local tenants’ ability to pay, while landlords should be concerned about a total shutdown in cash flow.

The impact of the pandemic and lockdown on the rental market in the country is yet to reflect in the data, says the market research manager at FNB Namibia, Frans Uusiku. However, he adds: “The pandemic has disrupted business activity, resulting in job losses and reduced incomes for the most part of the labour force”.

The Covid-19 lockdown hit Namibia at the end of March, just as the local residential rental market started to recover.

The market recorded a 12-month average growth of zero percent at the end of the first quarter of 2020, compared to an annual contraction of 5.2% over the same period last year.

“Whether the observed growth momentum will be sustainable is a boggling question confronting many market players,” Uusiku says.

The national average rental price at the end of March was to N$7 465.

He says it is too early to draw a conclusive view on where the rental market is headed.

“The increasing financial pressure witnessed across most economic sectors would mean that the rental market will likely hit a growth plateau in the second quarter before it reverts to a negative growth territory,” Uusiku adds.

“Given the low expectations on employment prospects coupled with subdued real wage growth, the risk for rental property owners is undoubtedly heightened than before. This will likely result in indebted property owners resorting to refinancing of mortgage bonds to consolidate debt, amongst other measures,” according to Uusiku.

Segments

The listed rental units in the first quarter of 2020 were largely concentrated in the 1-bedroom and 2-bedroom segments, accounting for 43% and 32% of the overall listings, respectively. These rental units were only recorded in Windhoek where the rural-urban migration is relatively high compared to other towns, Uusiku says.

This observation continues to affirm the existing imbalance between the demand and supply dynamics in the housing market, particularly in the medium to higher-end of the market.

The overall improvement in the rental index was driven mainly by the 2-bedroom and more-than-3 bedrooms segments, which grew by 3% and 2% year-on-year, respectively, he adds.

Deposit-to-rent ratio

Growth in deposits charged by landlords contracted by 32.1% year-on-year at the end of March 2020 compared to a growth of 11.8% year-on-year recorded during the same period last year.

This brought the deposit-to-rent ratio to a 10-year record low of 5.8%. The last time Namibia experienced such a low deposit-to-rent ratio was in 2009 during the global financial crisis, Uusiku says.

Rental yields

On an annual basis, rental yields edged up by 0.3 percentage points to 7.8% year-on-year at the end of March 2020. This is consistent with the observed improvement in the overall rental index growth and continues to paint a lucrative picture of the Namibian rental market, Uusiku says.

Rent prices are growing at a relatively fast pace compared to growth in the house prices. It must, however, be cautioned that there is a high risk of overstating the rental yields since this analysis did not consider the actual rent committed to be paid by tenants, but rather what landlords expect to receive before any negotiations, he warned.

With that considered against the backdrop of a depressed economy and tenants gaining bargaining power over landlords, the actual rent received by landlords may be expected to be marginally lower than what appear in the adverts.

The arrival of the Covid-19 pandemic serves as a stark reminder to households and businesses to shore up their emergency funds to ensure that they are better prepared to survive unexpected future events, Uusiku says.