Rent growth retreats into negative territory

Following two consecutive months of growth, the twelve-month average growth in the First National Bank (FNB) rental index retreated into negative territory - posting a contraction of 1.7% at the end of June 2022. This unexpected setback was mainly driven by price contraction of 7.7% year-on-year within the two-bedroom segment, which reached a twelve-month average level of N$6 102. This is the lowest level seen in 6 years and highlights the impact of a sudden economic shock on households, characterized by rising interest rates, inflation and fuel prices. Similarly, the one-bedroom and three-bedroom segments also disappointed on the downside albeit by a smaller degree, posting rental contractions of 0.3% and 1.8% year-on-year at the end of June 2022 to N$3 611 and N$N$9 446, respectively.

Conversely, the more than three bedrooms segment continues to sustain stability in the rental market on the back of improved tenant retention. In effect, this segment registered rental growth of 7.7% year-on-year, bringing the twelve-months average rent to N$19 518 from N$18 129 recorded a year earlier. Consequently, the overall twelve-months national weighted average rent came in at N$6 964 at the end of June 2022 from N$6 926 recorded over the same period of 2021. Although the rental market has recovered somewhat between the second half of 2021 and the first quarter of 2022, agents and landlords should continue to remain mindful of the negative effects of the current macroeconomic environment on tenants’ ability to pay their rent. The continued financial hurdles faced by consumers could force households to downscale their lifestyles by seeking out cheaper accommodation options, which would further derail a complete rental market recovery. On the flipside, rising interest rates and the subsequent reduced appetite to borrow may also mean that some higher-income tenants may decide to keep renting instead of buying their own properties, which will have the opposite effect.

Regions

Additionally, the regional market analysis shows year-on-year rental contractions across most jurisdictions such as Oshakati (-29.6%), Ondangwa (-21.8%), Rehoboth (-18.1%), Rundu (-13.8%), Arandis (-12.8%), Windhoek (-8.0%), Walvis Bay (-5.6%) and Ongwediva (-2.5%). In contrast, Swakopmund recorded a surge in rental growth of 20.4% and continues to attract high demand for larger lifestyle properties in general. This is not surprising given the impressive rise in residential building plans that have been approved and completed in Swakopmund relative to the rest of the country. This signals the growing attractiveness of the coastal region as an ideal jurisdiction for residential property investment. In fact, Swakopmund accounted for 42.1% of N$116.6 million value of building plans completed in May 2022 based on NSA Building Plans Completed Index.

Residential rental listings have totalled 2 181 units in the second quarter of 2022, up by 7.8% year-on-year and down by 70.9% quarter-on-quarter. Interestingly, the share of rental listings within the two-bedroom segment remain broadly flat at 34% on the quarterly basis but lower than the 45% recorded over the same period of 2021. This trend is further observed across the more than three bedrooms segment, highlighting a relatively high retention of tenants in these market classes. High retention of tenants was particularly found to be concentrated in towns where the rental market has not adequately come of age such as Otjiwarongo, Karibib, Usakos, Katima Mulilo, Outapi, Oshikuku and Oshikango, amongst others.

Deposit

Overall rental deposit contracted by 6.2% in the 12 months to June 2022, compared to contractions of 16.4% and 22.8% recorded at the end of the prior quarter and corresponding quarter of 2021, respectively. Whilst rental deposit requirements remain largely a voluntary practice in a Namibian context owing to a regulatory gap, the notable rebound in deposit payable may appear to highlight a continuous slow recovery of the rental market. Green shoots in deposit growth were mainly noted across the two-bedroom and more than three-bedroom segments, which in our view is indicative of increased demand and competition for these residential property classes. Thus, the twelve-month average deposit-to-rent ratio remained unchanged at 3.9% on a quarter-on-quarter basis, but still lower than the 4.3% recorded at the end of June 2021.

The gross rental return on a residential property was estimated at 6.7% on an annual basis. This reflects 0.1 and 0.2 percentage points below the levels seen at the end of the prior quarter and corresponding period of 2021, respectively. Whilst rental yields remain competitive by regional comparison, the cost of amenities and inflation in general appears to be accelerating at a much higher pace than the growth in rental yields – a common phenomenal witnessed across the world. This has a negative impact on the profitability of real estate business particularly in an environment where the cost of capital is also increasing. In effect, inflation in Namibia has averaged by 4.7% in the 12 months to June 2022, while the repo rate has cumulatively increased in the last twelve months by 225 basis points to 5.50%.

It is increasingly becoming more expensive to maintain a home compared to a year ago due to higher cost of building materials such as steel and other essential household amenities. Rising interest rates are also lifting bond instalments, yet it is difficult for landlords to pass on the sharp cost increases to tenants in the current difficult economic environment. Looking ahead, we expect nominal rentals to continue to rise slowly in the next year or so but at a much slower pace than the consumer inflation rate.