SA’s downgrade increases risk of tenants defaulting on rent

SA’s downgrade increases risk of tenants defaulting on rent

There are several major changes that can be expected to play out in the property market in the wake of South Africa’s credit ratings downgrade, and owners and investors need to put plans in place now to manage these shifts and protect the value of their assets.

“The downgrade means that our currency will be worth less, that inflation is likely to rise and that interest rates and taxes are also likely to increase. This will put consumers under severe financial pressure and many of those living in sectional title schemes will struggle to pay their bonds or rentals - and could easily get into arrears on their levies,” says Shaefer.

“This is a major risk for all owners in the scheme because it means that the body corporate may soon not have sufficient funds to pay the insurance premiums and city council accounts, or to maintain the buildings and common areas. Services could be discontinued and the complex could quickly become run down, which would make their homes much less ‘saleable’ and thus less valuable.”

Shaefer says the scheme could also run into legal trouble for not paying its dues to the office of the Community Schemes Ombud, or for not making sufficient contributions to its own reserve fund as stipulated in the recently initiated Sectional Title Schemes Management Act.

“Consequently, it is more important than ever now for the body corporate to appoint an experienced, reputable property management company to ensure that levies are collected, accounts are paid and that debts are efficiently managed,” says Shaefer.

Another major effect of the downgrade, he says, will be an increase in the number of tenants and prospective tenants.

“Many current tenants who were planning to buy their own homes will probably put those plans on hold now in anticipation of interest rate increases that would make their bond repayments unaffordable. So they will be staying put - or possibly even seeking to move to cheaper units, or units closer to work so that they can cut transport costs,” says Shaefer.

“We anticipate that there will also be quite a number of homeowners who are forced to sell in the coming months because they can no longer afford their bond repayments and the upkeep on their properties. Most of these will seek to rent a new home rather than buy.”

Shaefer says landlords will need to be very aware of the financial pressures on both their existing tenants and any prospective tenants.

“Job losses will be a reality as the economy deteriorates, and even those tenants who remain employed will face the same difficulties as other consumers who are struggling to make ends meet,” he says.

“They will not be able to absorb high rental increases, which is something for property owners to be aware of, especially if they have quality tenants in place who they wish to keep.”

In addition, Shaefer says owners will now need to watch out for overcrowding as a result of unauthorised subletting by tenants who are trying to make extra income to cover their rent and other costs, as this type of activity can quickly devalue a property.

“Meanwhile, developers and owners who have vacant properties to let now will need to be exceptionally careful when screening prospective tenants, a process that is much easier and more thorough when done by a professional property management company,” says Shaefer.

In fact, he says all landlords whose properties are not already under professional management should seriously consider appointing a reputable rental agency right away.

“Times are going to get tougher and it is definitely going to get harder to manage tenants and retain the income stream from rental units,” says Shaefer.

“In addition, strict compliance with all the legislation dealing with leasing, screening of tenants, debt collection and eviction when necessary is going to become even more important now, and this will certainly be easier with the assistance of a qualified and experienced property manager.”