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Affordability will drive 2023 real estate trends: South Africa

Proptech and fintech, according to Michelle Dickens, are essential for real estate sustainability through efficiency

In 2023, landlords and property managers must be most concerned with the price if they want to find and keep renters. This defining trend will likely exacerbate and gain significance over the coming years as tenant income growth stays poor, unemployment remains absurdly high, interest rates rise, and inflation—particularly increases in utilities and municipal costs—outpace rental price increases.

Intelligent landlords and property managers can add significant value by future-proofing their assets, according to Michelle Dickens, Deputy CEO of PayProp. For instance, using intelligent energy and alternative energy sources will offer cost savings in utility prices and other property expenses.

Trend 1: A discrepancy between rent increases and inflation affects affordability
The South African tenant had to put up with 3.5–4.5% rental increases before the pandemic, which was about inflation at the time.

Rental escalation was significantly impacted by the pandemic period that followed and unsettlingly became negative (-0.3% YoY in November 2020). In the meantime, inflation (measured by the Consumer Price Index, or CPI) peaked in May 2020 at 2.1%.

The inflation rate is currently at 7.6%, but landlords are being left behind because the rate of rental escalation only reached 3.1% in August 2022 and fell to 2.6% in September 2022.

Landlords are under pressure due to a combination of factors, including sluggish rental growth, higher-than-inflation property costs (such as levies and municipal fees), and, most importantly, rising interest rates.

Trend 2: Declining rental escalation and worsening debt-to-income ratio result from rising interest rates
Rising interest rates are the second trend that will affect the real estate market in 2023. With each increase in interest rates, tenants’ debt obligations to their credit providers will grow, placing pressure on the affordability of rent.

Additionally, there is downward pressure on rental escalation at the same time that interest rates are rising.

“Tenants who downscale are becoming more common,” observes Johette Smuts, PayProp’s head of data analytics, “as reported in the PayProp State of the Rental Industry Survey, where one in three tenants reported moving to more affordable homes.”

Notably, the debt-to-income ratio for tenants was 42-48% before the pandemic. Tenants had the opportunity to save money on interest-related repayments thanks to the low-interest rate cycle of 2020 and 2021, which helped to reduce this. As a result, tenants’ debt-to-income ratio decreased to 37% during this time.

But as interest rates and inflation started to increase in the middle of 2021, the tenant debt-to-income ratio also increased, crossing the 48% threshold at the start of 2022.

According to Michelle Dickens, this “confirmed the general trend of affordability being the real driver behind the real estate market in 2023.”

How maximizing energy efficiency might ease the affordability crisis
According to Michelle Dickens, energy conservation and alternative energy sources are now more critical than ever for tenants and landlords.

Property managers, according to her, “are at the front lines of managing monthly meter readings, readings between occupants, as well as collection and disbursements of the flow of money between utility providers, tenants, and owners.”

As a result, they have a fiduciary duty to ensure that the parties’ financial reconciliation is accurate and transparent.

Proptech’s function: Size and effectiveness
Proptech and fintech, according to Michelle Dickens, are essential for real estate sustainability through efficiency.

Energy efficiency is one aspect of this. Proptech effortlessly equips renters and landlords with the insight to inform their energy usage, allowing tenants to better budget for monthly utility bills. Proptech interacts with intelligent meters to ease data analysis. Monitoring excessive or zero use due to a smart meter breach benefits landlords.

In 2023, Michelle Dickens writes, “Affordability will be the main driver of real estate, and proptech drives efficiencies for property managers, enabling them to operate at a higher scale and grow their businesses, as well as reduce costs.”

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