TPN report reveals rising residential vacancies amid declining demand

Residential vacancy rates have increased across all provinces and rental value bands, according to TPN’s latest Residential Vacancy Survey Report. The report shows a significant rise in vacancies, jumping from 4.42% in the first quarter to 6.72% in the second quarter of 2024. The provinces of KwaZulu-Natal and the Eastern Cape were the most impacted, each seeing double-digit vacancy increases. In contrast, Gauteng and the Western Cape reported fewer vacancies, aligning more closely with the national average.

According to Waldo Marcus, Industry Principal at MRI Software and Head of Marketing at TPN, these rising vacancy rates are driven by fluctuating supply and demand, economic pressures, and shifting consumer behavior.

“Rental vacancies have been gradually increasing since 2018, mainly due to the growing supply of rental properties, a trend that continued until 2020. While persistently high interest rates have supported the rental market, supply has now started to decline due to weakening consumer and business confidence,” Marcus explained.

Despite the spike in vacancies during the second quarter, the first half of 2024 recorded the lowest average annual vacancy rate since 2016. The average annual vacancy rate stood at 5.57%—a 17.21% reduction compared to the same period last year.

Marcus also noted that increased vacancy rates between the first and second quarters are not uncommon. “This rise reflects shorter-term leases that expire post-festive season and a temporary boost in student accommodation take-up during the first quarter. However, many students have vacated their rental units early due to financial or academic challenges, contributing to the higher vacancy rates. Additionally, rental escalations earlier this year negatively impacted occupancy, especially in the lower rental value bands.”

Market Dynamics: The TPN Market Strength Index

The TPN Market Strength Index, which measures perceived supply and demand in the rental market, rose slightly from 59.66 points in the first quarter to 60.36 points in the second quarter of 2024. A reading above 50 points indicates that rental demand continues to exceed supply. This improvement in the index was primarily driven by a decrease in the overall supply rating, which fell from 57.54 to 54.51 points. Rental demand, however, dipped slightly from 76.85 points in the first quarter to 75.22 points in the second quarter. Despite this, demand for rental properties remains robust even with the higher vacancy rates seen in the second quarter.

Vacancy Rates by Rental Value Bands

While the overall vacancy rates increased, there were notable shifts across different rental value bands:

• Under R3 000: Vacancies surged from 4.51% to 10.97%, largely due to reduced student occupancy, unemployment, and workforce migration. Supply in this band is expected to shrink further as rent escalations push properties into higher rental categories.

• R3 000 to R4 500: A drop in demand coupled with rising supply caused vacancies to increase from 6.11% to 7.75%. The market strength index for this segment weakened, reflecting its sensitivity to broader economic and employment changes.

• R4 500 to R7 000: Vacancies grew from 4.92% to 6.1% despite marginal improvements in demand and reduced supply.

• R7 000 to R12 000: This band experienced a vacancy increase from 4.31% to 5.51%, with both demand and supply declining. However, demand remains strong, keeping vacancies below the national average.

• R12 000 to R25 000: The luxury market continued to show resilience, maintaining the lowest vacancy rate across all segments, rising only slightly from 3.57% to 4.52%. A decrease in supply also led to a modest improvement in the market strength index.

Provincial Vacancy Trends

Provincial data revealed a stark contrast in vacancy trends:

• Eastern Cape and KwaZulu-Natal: Both provinces saw sharp rises in vacancies—up from 9.4% to 12.94% in the Eastern Cape and from 11.2% to 17.61% in KwaZulu-Natal. These increases were driven by rising supply and declining demand, with both provinces reporting weakening market strength indices.

• Gauteng: The province experienced a smaller rise in vacancies, from 4.3% to 7.99%, while maintaining a stable rental market strength index. Demand has exceeded supply in Gauteng for two consecutive quarters, suggesting positive momentum.

• Western Cape: With the smallest increase in vacancies (from 1.51% to 2.33%), the Western Cape saw a slight improvement in its rental market strength index. Both supply and demand ratings in the province declined marginally, but the region remains relatively stable.

Looking Ahead: Impact of Interest Rate Cuts

Marcus anticipates that the recent 25 basis point interest rate cut in September, along with improving consumer confidence, could stimulate home-buying activity in the coming months.

“This modest rate cut may have a dual effect: first, it could lead to an increase in rental property supply as more investors enter the market, and second, it may trigger a slight decrease in rental demand as some tenants opt to buy homes. Both scenarios are likely to impact residential vacancy rates over time. In the short to medium term, however, well-managed rental properties are expected to remain in demand and maintain high occupancy levels,” Marcus explained.