Rents continue to soar in the first quarter of 2022

As anticipated, rent growth continued to rally in the first quarter of 2022 - consistent with upward inflationary pressures witnessed across the world. The biggest increase in rent came in from the more than three bedrooms segment - a trend that has surfaced for the past 12 months. In effect, the average asking rent for the more than three bedrooms units was recorded at N$19 329 at the end of March 2022. This is the highest level on record and highlights a high retention rate in the multi-family rental market. It implies that tenants could be renewing their leases at relatively higher rates than ever before due to increased competition and a shortage of family apartments.

Overall, the 12-month average rental index growth came in at 0.6% at the end of March 2022. This is the highest index growth recorded since May 2020. On the flip side, the 12-month national weighted average rent came in at N$6,964 at the end of March 2022 from N$6,926 a year ago. This continues to affirm the sustained recovery of the rental market and economy in general, supported by the mining, tourism and agriculture sectors. Despite the observed mild economic gains, we nonetheless view the erosion of affordability as a critical risk factor in this recovery path, on account of subdued real wage growth in the context of rising inflation.

It therefore follows that; renters need huge income growth in a market where rent-to-income ratios are not improving despite rent hikes. We estimate the average rent-to-income ratio to hover around 39% - close to the affordability ceiling of 40%. Without delving into the weeds on affordability, the two-bedroom segment registered rental price contraction of 5.3% y/y to N$ 6346 at the end of March 2022, while the one-bedroom and three-bedroom segments recorded rental price growth of 0.9% and 0.2% y/y to N$3 674 and N$9 657, respectively.

We are starting to see enormous household formation among renters in the upper income brackets, particularly in the space of multifamily units. We believe this is what’s helping feed demand for these new lease at high price points. Looking ahead, we expect rental prices to increase further even if house prices fall due to rising cost of utilities and lack of housing supply - sparked by a buoyant sales market. Furthermore, the subdued real wage growth and rent-to-income ratio of about 39% would mean the majority of Generation Z would most likely prefer to still rent than buying a house due to associated costs of owning and maintaining a house in a high inflationary environment.

As the rental market becomes more competitive, we are also likely to see landlords going to leverage on things like energy and water-saving improvements to reduce costs for tenants, thereby making their properties more attractive and affordable without necessarily having to sacrifice rental income.