Price sensitivity top concern for landlords, property managers in 2023

Trends influencing 2023 property market

Michelle Dickens, Deputy CEO of payment and reconciliation platform PayProp, says that price sensitivity remains top of the agenda for landlords and property managers in 2023.

Taking a longer-term view, she says that this trend will compound in future years as tenant income growth remains weak, unemployment levels remain, interest rates creep upwards, and inflation – particularly utility and municipal expenses – outpaces rental escalations.

However, savvy rental agents will see the opportunities in 2023. By providing stellar service to landlords by using PropTech to enhance their offering, they can attract the best properties and court the most financially secure tenants to bolster their bottom line.

Dickens lists the following trends for the year ahead:

  1. Affordability impacted by rent escalation and inflation mismatch 

The pandemic period had a dramatic effect on rental growth, which briefly turned negative (-0.3% YoY in November 2020). Meanwhile, inflation (Consumer Price Index or CPI) bottomed out at 2.1% in May 2020.

Inflation has fallen back from its high but is still soaring at 7.2%. However, landlords are being left behind. Rental escalation was a mere 3.1% in August 2022 and dropped lower to 2.6% in September 2022.

Landlords are now feeling the pressure thanks to the combined effects of increasing interest rates and low rental escalation. Added to that, property expenses like levies and municipal charges continue to increase at higher-than-inflation rates.

  1. Rising interest rates worsen the debt-to-income ratio and drive down rental escalation

While most tenants are receiving below-inflation rent increases, each interest rate hike has put tenant affordability under increasing pressure as tenants’ debt obligations to credit providers increase. The increasing cost of other essentials has also taken a bite out of tenants’ ability to pay rent.

All that is putting downward pressure on rents. Johette Smuts, head of data analytics at PayProp says the most recent PayProp State of the Rental Industry Survey found that 85% of agents reported “moving to a more affordable property” as one of tenants’ top three reasons for moving, up from 58% last year.

“Prior to the COVID pandemic, SA tenants’ debt-to-income ratio hovered between 42 to 48%,” says Smuts. “The low interest rate cycle of 2020 and 2021 helped bring this ratio down to 37%, giving tenants the chance to save on interest-related repayments.

But as inflation started to rise in mid-2021 and interest rates did the same in November 2021, so too did the tenant debt-to-income ratio, which breached 48% by the beginning of 2022.”

This reinforces the overarching trend of affordability being the real driver behind the real estate market in 2023.

How PropTech can help alleviate the affordability crunch

Dickens says that now more than ever, landlords and tenants will want to know that they are getting value for their money and that their payments are being handled securely.

“Property managers will have the vital role of keeping rental income flowing even as affordability is being squeezed,” she says. “Not only do they have a fiduciary responsibility to ensure accuracy and transparency of the reconciliation of money between the parties, but they are also uniquely well placed to reach out to tenants and check on their ability to afford rent, recover late payments and, if necessary, agree and monitor repayment plans.

The PayProp Tenant Assessment Report, which uniquely combines traditional credit scoring with rental payment behaviour, also helps rental agents to match landlords with tenants who pay reliably.”

She adds that PropTech and FinTech will help real estate businesses to keep clients onside despite inflationary pressure.

“Landlords, like tenants, will become increasingly price-sensitive as their rents fall behind inflation. Rental agents who want to stop their clients from switching to lower-priced rivals or to self-management will need to deliver a high level of service without increasing their headcount. PropTech-driven efficiencies will be key to achieving this in 2023,” concludes Dickens.



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