Municipal rates and taxes, which have risen higher than inflation and interest rates over the past 15 years, are wreaking havoc on businesses, while billing inefficiencies leave businesses unable to capitalise on commercial property ownership.
Local government remains inundated by billing inaccuracies and transparency problems in various parts of the country, further hampering a culture of payment even among commercial property owners who can afford to pay these high rates.
Gary Palmer, the founder and CEO of Paragon Finance, told Business Times that while homeowners were battling with the rise in municipal rates, owners of commercial property, such as office space, retail, and industrial assets, were having a hard time as well. “Historically, our inflation rates have been quite high. We’ve had high interest rates, and that as a whole has really crippled owner-managed businesses and individuals.
“When you look back on the last decade, you see that there has been high inflation... and increases in [municipal] rates at 174% — it’s completely skewed. Often, if you’re a commercial property owner, you try to pass as many of those costs over to your tenants as possible. But the reality is, it is around affordability. Not only the commercial property owner’s affordability, it [also] has to do with whether the tenants can afford it.”
When it came to billing and collections, there had been a deterioration of basic services and a lack of “trust”, as characterised by the longstanding billing crisis in Joburg, which predates the dramatic increases in municipal rates. “There’s also a trust element. Considering that rates are so important for the municipalities’ budget, as that is where they get most of their income, you look at Joburg CBD for example, rates have increased dramatically and tenants can’t afford to pay it, and then the trust factor comes in, where those paying ask if they are seeing the services delivered — and, in many cases, they’re not.”
You will be earning potentially a lot less on your commercial property, which means the banks will lend you less, so you have to put in more money. But it does mean that the value of the property has decreased, because if your net income that you’re earning on a property falls, that means that the valuation of your property is a lot less
— Gary Palmer, Paragon Finance founder and CEO
Palmer said, as a percentage of income, 30% of commercial property income should go towards expenses, but increasingly, larger portions of commercial property income are going towards operating expenses.
“You will be earning potentially a lot less on your commercial property, which means the banks will lend you less, so you have to put in more money. But it does mean that the value of the property has decreased, because if your net income that you’re earning on a property falls, that means the valuation of your property is a lot less.”
As a consequence of the high municipal rates, businesses may struggle to sell their commercial properties if their payments are not up to date. Councils can pursue the last two years of owed rates to pave the way for a clearance certificate, and sellers are encouraged to secure a section 118 clause in the sale agreement to ensure the buyer is not held liable for arrears.
Wayne Duvenage, CEO of civil action organisation Outa, said there was a significant impact when municipalities incessantly increase tariffs, often above inflation, and introduce additional surcharges and fees over time, as these costs become unaffordable to property owners. “This chases people away from ownership to renting, and the market becomes depressed.
“In addition, people and businesses will move their property investment interests to municipalities and cities where service delivery is consistently better supplied. This causes the shift we have seen from Gauteng to the Western Cape.”
He said more and more owners were challenging the valuations of their properties by municipalities, and appealing the findings of the council. This was costly to property owners, but necessary.
Paul Berkowitz, CEO of research and consulting company Hlaziya, said that with the chronic interruption of services like water and electricity to properties over the past 15 years, local government failure has hampered the capacity of businesses to function. “Businesses are being squeezed. They must pay out of pocket to replace services they are not receiving, for example, generators and solar panels. So their margins are thinner, and it has an impact on their bottom line.”
He cited Clover’s plans to close down its factory in Lichtenburg, the North West, as a prime example of how established businesses are leaving struggling municipalities where service provision is poor. “There have been some challenges to property valuations… I suspect they are trying to go off the grid as much as possible, [which is] harder [for commercial property owners] than for residential property owners.”
According to a recent TPN report on rates and taxes, Cape Town attracted buyers of commercial property away from Johannesburg due to lower prices and better collections. That has, in turn, caused the prices of this category of property in Cape Town to rise due to the surge in demand.
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