Landlords cautioned

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.

Renters could quickly become buyers

"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."

Strict credit hard for landlords and tenants

The financial institutions’ clamp down on defaulting mortgage bond repayments has made it absolutely essential for those landlords who are themselves bonded to receive payment from their tenants on time every month, says Bill Rawson, Chief Executive of the Rawson Property Group.

"In the old days," said Rawson, "the banks were often prepared to be understanding about landlords who had difficulty in getting their tenants to pay their rents and they were open to extending bonds and granting access facilities on existing bonds without stringent credit limitations.

"Those days, regrettably, are now over. Since the National Credit Act the banks have been forced to become very unsympathetic about any breaches in the mortgage repayment schedule."

Should a landlord fall behind on his bond repayments, said Rawson, he may well find that he is credit black listed with those organisations that keep track of these matters. This will make it difficult for him later to get a new bond or indeed any other form of credit.

For tenants, said Rawson, the tighter restrictions have also made life far more difficult. They are often expected to pay a deposit equal to two or three months’ rental upfront. Previously, the deposit was often only one month’s rental and many landlords would accept deferred payment of it.

Later, when the tenant decides to move on, the deposit is often not paid back until he has completely vacated the premises, the reason for this being, landlords claim, that they cannot properly assess damages until the premises are empty.

This in turn means that when asked to pay a new deposit for their follow-up premises they frequently do not have the money. The net result, said Rawson, is that tenants are now far less mobile and far more likely to extend their leases than they were before.

One of the main lessons to be learned by estate agents from the current conditions, said Rawson, is that the initial vetting and selection process of tenants now has to be even more thorough.

"It is only too easy for an inexperienced landlord to be bluffed by an impecunious but glib possible tenant. We have recently seen several instances where the references, on being thoroughly checked, turned out to be bogus and the credit track records in some cases absolutely disastrous."

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