Soaring municipal rates and taxes, load-shedding and failing infrastructure in South African cities are affecting the viability of new investments, with a top property body saying investors are abandoning plans for new developments.
Neil Gopal, CEO of the South African Property Owners Association (Sapoa), which has 800 members including JSE-listed companies, said this week it was “meeting with most metros and municipalities to discuss these concerns as they are leading to lower levels of investment”.
He said some municipal rate increases were way above inflation and “not sustainable”.
On top of higher rates, the property industry was “facing a barrage of taxes” — among them a new once-off levy developers have to pay to fund infrastructure related to new developments “regardless of whether the infrastructure exists or not and where capacity exists in infrastructure already paid for”.
Property economist Erwin Rode, CEO of Rode & Associates, agreed that rising municipal rates and taxes were undermining the viability of new offices, retail and industrial properties.
The potential cost per hour to run a generator at a commercial property
— R50,000 +/-
Gopal said exorbitant municipal rates and taxes had been a problem for at least a decade, while infrastructure collapse is also a major concern. “Basic services to core economic sectors, such as infrastructure maintenance, security, the provision of water and electricity” were being pushed to the edge.
“Naturally, these transaction costs to the private sector increase to the point where entire sectors of the economy will be unsustainable to operate. People, politicians and businesses are underestimating the extent and nature of the problems at local level.”
Amelia Beattie, CEO of Liberty Two Degrees, whose portfolio includes Sandton City, Eastgate and the Sandton Convention Centre, said the biggest challenge facing the property industry was the “rising cost of municipal charges, rates, water and electricity”. Property owners were having a “real hard battle with councils”, and had to generate their own energy because of load-shedding.
Beattie said it could cost up to R50,000 an hour to run a generator, depending on the size of the property. The property industry was working hard to address the hikes in municipal rates and taxes as it could not continue passing on these costs to tenants, she said.
Gopal said municipal charges “make up the largest percentage of overall operating costs for property companies, accounting for 60.8% of the total at the end of June 2021”.
Commercial property owners seen as a “milk cow” for municipalities
— Property economist Erwin Rode
Since 2006, despite a moderation in 2020 and 2021, property rates had increased by a compound annual growth rate of 9.4%, he said. As a result of this above-inflation growth, property taxes now represented one-quarter of overall property operating costs — second only to electricity, which accounted for 29% of total costs at June 2021.
Property taxes varied significantly between provinces and types of property, with KwaZulu-Natal and Gauteng on average higher than the Western Cape.
Gopal said KwaZulu-Natal had the “highest rates and taxes as a percentage of gross income for the office and industrial sectors, driven by the relatively higher 'cents in the rand' rates tariff levied”.
“For retail property, KwaZulu-Natal and Gauteng had similar property tax as a percentage of gross income at around 13%, higher than the Western Cape’s 8.2%. The Western Cape had the lowest ratio of rates and taxes to gross income across all three major sectors.”
Rode said eThekwini municipality had “rates and taxes that are horribly high” compared with Cape Town and Johannesburg. He said that Cape Town’s rates were the most reasonable and its management of services and infrastructure was more efficient than Johannesburg and Durban.
He said commercial rates had always been traditionally higher than rates for residential property owners.
“The problem with commercial properties, or nonresidential as opposed to residential properties, is that … there are many more owners of residential properties than commercial, so they have clout when it comes to voting [for councils].”
This makes commercial property owners a “milk cow” for municipalities, “so much so that when valuers value nonresidential properties and they must take a stab what operating costs will grow at, they tend to add 2% to the expected CPI inflation”.
Chris Renecle, MD of Johannesburg developer Renprop, said the rates and taxes charged, especially for offices, did not reflect the fact that the values of buildings declined considerably due to the pandemic, in some cases by up to 30%.
It was difficult to make existing properties, let alone new developments, economically viable, which had the potential to deter investment, he said.
The City of Johannesburg said it “listened to the challenges” faced by residents and reviews its rates policies and bylaws annually through a public process in which property owners can make submissions.
It said the general annual increase in rates is linked to CPI and that it tries to lower rates where it can for commercial property owners.
We are getting the balance right between the delivery of services and affordability of those services
— Cape Town mayor Geordin Hill-Lewis
Cape Town mayor Geordin Hill-Lewis said commercial property owners may be seen as milk cows elsewhere, but “not in Cape Town”, where the increases and rates themselves were the “lowest of any metro in SA”. Increases were “at or below projected inflation”.
“The city’s unmatched high payment ratio compared with other metros and municipalities suggests that we are getting the balance right between the delivery of services and affordability of those services, so that we can ensure the municipality remains healthy, resilient and strong enough to tackle the challenges.”
He said the city was confident its rates were “appropriate to support the growth of the city” and had a scheme to write off debts that qualified.
The eThekwini municipality had not responded to a request for comment at the time of going to press.
Support independent journalism by subscribing to the Sunday Times. Just R20 for the first month.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.