Interest rates could put pressure on landlords


With interest rates likely to rise before the year-end and possibly even before the end of this week, a new era is being entered into in the South African residential property letting market, says Bill Rawson, Chairman of Rawson Properties.

'The last three years,' he said, 'have seen a proliferation of first time yuppie landlords; every second or third young manager/professional and his colleagues has suddenly developed a passion for investing in housing, particularly apartment and sectional title units.

This has been at least partially caused by the poor performance of pension funds, as a retirement investment, and the high risks involved in investing on the stock market. Property has always been, and always will be, the safer and more reliable long-term investment'

Some of these young investors, says Rawson, however, may have over-extended themselves, taking on too many units or buying properties that were too expensive. In both cases they may now be stretching themselves on their monthly bond repayments and recovering far too little because their rentals have seldom covered more than half the monthly outlay.

With increased interest rates, said Rawson, this type of under-resourced landlord is likely to face tough times - he may even have to sell to cut his losses.

In this scenario tenants, Rawson advised, should not allow themselves to be bullied by landlords who would like them to move out so that they can sell the property.

'The Roman-Dutch law principle huur gaat voor koop still applies and an existing rental agreement can only be cancelled if the landlord is liquidated. It cannot be unilaterally changed simply because the owner wants to sell or does sell'

Most landlords, said Rawson, will now try to take advantage of any lease endings to up their rentals by far higher percentages than hitherto and those buying into any units that come up for sale are likely to do the same.

Tenants signing new leases should, said Rawson, try and negotiate as low as possible an increase in their annual escalation clause: anything above a 10% increase per annum, he said, should be avoided. Tenants should also negotiate for longer leases, i.e. for 24 or 36 months, with a fixed escalation for that period, by which time the high interest rate cycle should be near its end.

'Should you be trapped in a high rental situation,' said Rawson, 'it may be possible to move out and find a replacement tenant. The landlord is, however, entitled to refuse to accept a proposed tenant if he has a poor credit rating or comes without references.

'At the very least, his or her credit rating should match that of the existing tenant and the landlord is entitled to a genuine assurance that the property will continue to be well-maintained,' said Rawson.
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