The lowest interest rates in nearly 20 years are a godsend for thousands of South Africa's tenants who can now afford to buy their own property for the first time, says Neville Schaefer, CEO of national residential property company Trafalgar.

"But it's not good for landlords," he said. "Tenant demand has halved in some prime areas and rents are falling for the first time in decades."

Schaefer said expensive suburbs around Sandton and the Atlantic Seaboard in Cape Town have been hardest hit, exacerbated by massive development of new flats in those areas.

Trafalgar's Johannesburg North office was getting about 24 new letting mandates for executive flats a month - and finding tenants for them - until June this year, "but now our month's end mandates have doubled to 49 and our available tenants halved to 12", he said.

"We don't think all the extra mandates are new flats. Rather, we are getting flats that other letting agents cannot find tenants for either," said Schaefer.

"Our Sea Point office has a two bedroom flat in The Pavilion on Beach Road to let at R6 500 a month. The owner has reduced the rental to R5 000 a month and it is still not let. This flat is on the market through Realty One at R1.2 million. My wife Helen has just sold her flat in the same building for R1.5 million.

"We have a two bedroom flat in Valhalla on Clifton's beachfront to let at R10 000 a month and have no takers."

Schaefer warned that landlords can expect demand for rental accommodation to continue falling as interest rates drop - particularly in areas where new high rise flats are being built.

But the Durban and Port Elizabeth markets remain strong. "I think this is because the development market has not grown as fast as in Johannesburg and Cape Town," he said.

"These falling rents do not mean the end of the current property boom. Rents usually drop in a property boom and rise when it ends.

"Firstly, property prices will be sustained because tenants are converting to owners and adding to demand in the property market. Secondly, the emerging black middle class will also sustain demand."

What is most likely, said Schaefer, is that tenants will continue converting to owners while interest rates drop. This trend will slow down when the rates bottom out, possibly in the second half of 2004.

Demand will then also be strengthened as rising prices hit people's affordability ceilings and they are forced again to rent. 

He says other factors - falling household sizes, urbanisation and growing demand from long term visitors to cities like students, contract workers and unofficial immigrants - could bring landlords a rosy future in the long term.

But the growing buy-to-let market of small investors - "the fastest growing investment market in the world" - could put a cap on rent rises in some areas. – The Argus