Landlords cautioned on rental increases

Landlords capitalising on demand for rental property in the current economic climate should be cautious about raising rentals too fast and too far.

Gerhard Kotzé, CEO of the ERA South Africa property group, says evidence from the group’s agents operating in the marketplace suggests that a high percentage of property owners are foisting hefty rental increase significantly above the official inflation rate on to their tenants in an effort to keep up with higher bond repayments brought about by higher interest rates.

But such actions will give landlords big problems in the future, he says. “The current buyers’ market will not continue indefinitely and the prospects for lower home loan repayments have improved with the Reserve Bank’s recent decision to hold interest rates at their current levels.

“Some economists are predicting a drop in inflation as early as the first quarter of 2009. Should that prove accurate, the Reserve Bank could start taking its foot off the interest rates pedal. That, in turn, could signal the start of a recovery of the property market and by the same token, those who are renting now could decide to become property buyers surprisingly quickly.

“Putting this into context, FNB Home Loans strategist John Loos said recently that, as opposed to renting, there exists a strong incentive (among South Africans) to invest in one’s residential asset and to add value to it through maintenance and alterations. In other words people want to own their own homes.”

“Some evidence to support Loos lies in the fact that “option to buy” clauses are beginning to appear in rental agreements,” says Kotzé, “meaning that a growing number of tenants now see the possibility of homes becoming more affordable and want first option on the property they are currently renting.”

He says landlords need to ask themselves what will happen to their properties when the market changes and they have not nurtured good tenants with equitable rentals.

“Nobody disputes that landlords are entitled to a fair return on their investment. But they need to remember that there is a definite line between exploitation and good business.”

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