South African property investors face serious risks

Even though South Africa’s rental market is booming with strong yields and rising demand, property investors face significant financial risks from a growing pool of high-risk tenants.

South Africa’s rental property market is experiencing a strong recovery, with gross rental yields for apartments reaching an impressive 10.36% in Q2 2025, up from 9.96% in Q4 2024.

This surge in profitability is attracting a new wave of property investors, particularly in the rental sector where demand is exploding across major metropolitan areas such as Johannesburg, Centurion, Cape Town and Durban.

According to data from TPN, the average rent in South Africa has risen to R8,598, representing an increase of R368 year-on-year.

The number of micro portfolio owners with one to two properties has also risen from 47.7% in 2010 to 57.47% in 2024. Despite these encouraging trends, landlords face a risk that threatens to undermine their investment returns.

According to the Landlord Association of South Africa (LASA), the country’s rental market faces a complex and shifting landscape.

While demand for rental housing is strong, landlords are being warned of an increasingly high-risk tenant pool. Recent data revealed that in the first quarter of 2025, 26% of rental applicants were classified as high risk, up from the previous year.

LASA pointed out that the 26% high-risk figure does not exist in a vacuum and is deeply tied to South Africa’s broader economic landscape.

Inflation has put pressure on household budgets, while interest rate hikes have increased the cost of credit and reduced disposable income.

Many tenants are spending a larger portion of their income on essentials, such as food, transportation, and utilities, leaving them with less margin for rent.

LASA said these conditions and statistics are a wake-up call for landlords, property managers, and investors to strengthen vetting processes, embrace technology, and adopt risk-based management strategies.

Risks are growing

Alfred Wilsenach, Divisional Manager Underwriting at GENRIC Insurance Company, pointed out that rental insurance is a growing risk mitigation tool among landlords.

“There has been a steady uptake of Rental Insurance by landlords and managing agents in a bid to protect their rental book of business from the financial repercussions of tenants failing to pay rent,” Wilsenach said.

These tools also protect landlords from the costs of eviction should this become necessary.

The mathematics of rental insurance becomes compelling when viewed against potential losses. To illustrate this, Wilsenach used an example of a property generating R15,000 per month in rental income.

“Without insurance, a defaulting tenant could cost the landlord R45,000 in lost income over three months, plus eviction costs that can easily exceed R20,000.”

Meanwhile, rental insurance premiums starting at just 5% of the monthly rental – R750 per month in this example – provide comprehensive protection that far outweighs the cost.

“One of the primary reasons landlords need rental insurance against defaulting tenants is to ensure financial stability,” he explained.

“Rental income is typically a crucial aspect of a landlord’s cash flow and income, and when tenants fail to pay rent, it can lead to financial strain. Rental insurance provides a safety net during the time of non-payment until a resolution is reached.”

Rental insurance can offer landlords some of the following protections:

• Income Protection: Covers unpaid rent if tenants fail to pay.
• Legal Cost Coverage: helps landlords cover the cost of eviction proceedings.
• Flexible Recovery: Upon receipt of rental payments from tenants after a claim settlement, landlords reimburse the insurer only for amounts actually recovered, ensuring fairness in the claims process.

With a housing shortage of 2.2 million homes, Wilsenach said demand is continuously being driven in the real estate market. This creates excellent conditions for both homeownership and investment.

According to Ooba Home Loans, home loan applications increased by over 18% from Q4 2023 to Q1 2025, indicating renewed market confidence.

“However, this growth occurs against a backdrop of economic uncertainty that makes tenant screening more challenging and payment defaults more likely.”

“The combination of strong rental yields and elevated default risks creates a perfect storm where rental insurance transitions from optional to essential.”

Wilsenach stressed the importance of protecting rental investments comprehensively in the current economic climate.

“The rental insurance market is responding to a fundamental shift in investor behaviour. Today’s landlords understand that thorough tenant vetting, while essential, cannot eliminate all risks.”

“Economic pressures can affect even the most creditworthy tenants, making rental insurance the final piece of a comprehensive risk management strategy,” he added.