A big change in South Africa’s property market

South Africans are increasingly taking out loans to construct multiple units on a single property stand to generate short-term rental income or because they can no longer afford to finance a larger single property. 

Despite high interest rates and a buyers’ market, high-income and affluent individuals continue to build their homes while others take out top-up building loans to expand existing ones. 

Standard Bank said that while building loans have declined since 2022, clients aged 30 to 50 remain active, particularly those earning over R50,000 a month. The average value of these new building loans has increased compared to two years ago.

Gauteng leads in building loan registrations, followed by the Western Cape. Both provinces also top the list regarding customers taking out additional or top-up building loans.

However, trends have shifted remarkably within this market as individuals increasingly take out home or building loans for different purposes. 

Chief among these emerging trends is the construction of multiple units on a single property stand that are rented out but are not sectionalised to avoid additional costs. 

“These owners typically don’t plan to sell and prefer not to sectionalise due to time and cost,” head of Standard Bank Home Services Toni Anderson said. 

Another growing trend is converting properties into multi-tenanted dwellings for rental income. However, banks avoid lending for such projects due to zoning issues and inadequate infrastructure for the number of tenants.

“What we’re seeing is that many of our clients are taking a different approach to wealth creation than what we’ve traditionally been accustomed to,” the head of personal and private banking at Standard Bank, Chiko Manokore, said. 

“However, many are focused on short-term income generation but need to consider the long-term implications.” 

Building multiple units without sectional titles may seem costly now, but it could save headaches in the future as market conditions and personal circumstances can change quickly. 

For example, many investors who build larger homes for rental income often face the need to downsize as they approach retirement. 

They may encounter unexpected financial setbacks and be forced to sell quickly, often at a loss.

The emergence of smaller units for rent on a single stand or the conversion of existing properties into multi-tenanted dwellings is relatively new within the formal housing market. 

However, backroom rentals are a well-established business in the informal market that can generate significant cash for property owners. 

A common misconception is that South Africa is characterised by large households with many people living under one roof.

Informal economy expert GG Alcock said this is a misconception as people move from their communal households into their own homes, creating a large sector of backroom rentals.

The backroom rental economy has grown to an estimated R20 billion annually. “That is a conservative figure. It is most likely double that,” he said.

This is part of the move to smaller households with more disposable income and where people spend more money on themselves.

Again, Stats SA’s latest data substantiates Alcock’s claims. The average household size decreased from 4.5 people in 1996 to 3.5 in 2022.

Provincial variations showed that provinces like Gauteng (2.8) and the Western Cape (3.3) recorded the lowest average household sizes.

Alcock said South Africa’s black middle class is now estimated at 3.4 million people, accounting for nearly half of South Africa’s total middle class.

“There are a lot more incomes out there than what the official unemployment figures suggest,” he said.

Furthermore, the growth in the informal property market is not limited to households but extends to larger properties, such as shopping malls, distribution centres, or standalone commercial buildings. 

South Africa’s township economy has weathered the economic storms battering the country better than its formal peer.

This has created tremendous benefits for companies exposed to the sector, particularly property companies such as Vukile, Resilient, Fairvest, and Exemplar. 

These companies have grown within the informal market through the construction of shopping malls such as Gugulethu Square, Dobsonville Mall, Diepkloof Mall and Alex Mall.