One in five tenancies could fall into arrears

Tuesday 14 April 2020

The Covid-19 crisis will result in greater falls in rents and higher default rates in regions, or suburbs, with higher rents, according to property management companies.

By The Landlord

A new survey, conducted by property management consultancy Real-iQ, attempts to gauge what might happen with rents around New Zealand - in terms of prices and also defaults - going forward.

The survey will be run fortnightly during the Covid-19 crisis and the results of the first survey, which was completed by 32 property management companies, are laid out in the consultancy’s latest newsletter.

It’s the rent default results which stand out, with the general expectation being that regions with higher are more likely to have a higher default rate.

Real-iQ director David Faulkner says property management companies in Auckland and Wellington are predicting default rates in excess of 20%.

“This is concerning and if they are correct, one in five tenancies will fall into arrears.”

After the first week of the lockdown, companies who completed the survey highlighted a rise in arrears from 3.23% at the beginning of the crisis to 6.57%, he says.

“This is inevitably going to rise and some areas, such as Queenstown, are going to be hit far worse than others.”

However, the survey shows that opinions are more divided about how much rents could fall or even if they will fall.

Over 40% (43.75%) of the companies surveyed believe rents will hold, while the rest were split as to how much rents could fall by.

While 9.38% think they could fall by 0-5%, 15.63% think they could fall by 6-10%, 18.75% think they could fall by 11-15%, and 12.50% think they could fall by 16-20%.

No one expects to see rents fall by more than 20%.

Faulkner himself thinks rents will inevitably drop and - using more gut feeling than data analysis - he believes a drop of as much as 10% could be seen nationwide.

There will be variances in different locations though, he says.

“For example, Queenstown may see a 20% drop while some lower-income towns such as Whanganui, Invercargill or Levin may hardly see a change due to the relatively low rents that these towns demand.”

The story is likely to be similar in the main centres where high-end rental suburbs may see a bigger hit as employers lay off staff or freelance workers find that their inflow of work dries up.

That means that suburbs such as Mangere or Manurewa in South Auckland and Stokes Valley in the Hutt Valley are likely to fare better.

Faulkner says his years in the industry have taught him that rent is primarily dictated by two things: people’s income and supply versus demand.

“If rents exceed more than 40% of the tenant’s net income, then they will likely struggle with payments. Incomes are going to decrease and rents will follow suit.

“There are other factors that will also contribute to falling rents – like the demise of Airbnb leading to a much-needed increase of supply of long-term rental property.”

The concerns highlighted in the survey indicate how important it is for property managers to have an open and constructive dialogue with both tenants and landlords alike, he adds.

That’s because there is an enormous amount of emotion, fear and stress involved in the current climate and tenants and landlords will both be feeling the pain and strain financially, as well as emotionally.

“Getting the balance right between protecting landlords and tenants while following the letter of the law and fully respecting each individual case generated by the situation can be extremely precarious.

“As many property managers are finding out, this must be done on a case by case scenario and delicately so.”

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