Commercial property groups are up in arms about soaring municipal rates that have driven up rentals for tenants, driven up the cost of doing business in the country, and eroded the returns of property owners.
Growthpoint Properties CEO Estienne de Klerk said last week that municipal rates had escalated in excess of 10.5% compounded over the past 10 years for JSE-listed Real Estate Investment Trusts (REITS) and their tenants, and materially eroded the returns for property owners.
Currently, the high municipal rates come at a time when rentals are already under significant pressure due to the weak economic environment.
He said raising tenant costs further could result in more business failures, higher vacancies, and decreased investment.
“Above-inflation increases in the costs of rates, taxes, and utilities along with decreasing energy and water security and service delivery pose major risks for the entire property sector, ” warned Emira Property Fund’s chief operating officer Ulana van Biljon.
“We are concerned about the use of the rates charges actually collected not finding their way back into infrastructure and maintenance spend,” said Van Biljon.
“In the long term, property ownership will be driven elsewhere if the ultimate costs of occupation continue to become less and less affordable,” she said.
There is an appeal process that commercial property owners can follow with municipalities, but, as South African Property Owners Association executive director Neil Gopal said in response to questions, the “appeals process in our opinion is not effective or efficient. These processes take years to conclude.”
De Klerk said property owners were being “squeezed between a rock and hard place” when disputing valuations. “Objections to high rates are unheard, and service requests go unanswered…”
He said another challenge was that Valuation Adjudication Boards were not independent, and often the representatives were not qualified to deal with appeals on valuations.
“A further major flaw in the Municipal Rates Act is that ratepayers have very little ability to object to the rate in the rand increases that are set over and above the valuation increases, which effectively has resulted in double compounding of inflation in assessment rates levied by the municipalities,” said De Klerk.
The rates increases have not come with any increases in municipal services. Responding to questions, SA Property Owners Association CEO Neil Gopal said “on the contrary, the higher the rates increases the worse the service delivery. In some cases services are not delivered at all, hence the property owners are undertaking these services themselves”.
“These increases coincide with the systematic deterioration in the quality of services that our municipalities should provide. Increasingly, the onus has reverted to property owners to ensure the sustainability of the services at their real estate, which has had a further impact on their profitability,” said De Klerk.
Examples of these range from participating in and funding city improvement districts (CIDs) to building highway off-ramps and providing water, electricity, refuse removal, and much-needed security, he said.
He said Growthpoint also worked with other property owners, contributing expertise, time and funding to CIDS across the country, including those for Sandton and Wierda Valley, Upper and Lower Rosebank, Claremont and Cape Town CBD.
“These organisations work with property owners and local government to ensure the public urban fabric around our property investments is clean, safe, attractive and well-managed, thus maintaining the appeal of these areas, which supports maintaining the value of our property investments.”
Gopal said the unsustainable increases in rates and other costs were already impacting of investor sentiment.
“The higher the rates, the lower the appetite to develop further. This cycle results in job losses and a lower rates base for the municipalities,” he said.
“Over time this will result in the decay experienced in several of our cities’ CBDs as valuations are eroded due to the high administered costs, resulting in owners not being able to attract tenants or afford the maintenance cost of the properties,” said De Klerk.
Municipalities have struggled due to many challenges including, for example, poor revenue collection, insufficient maintenance, bloated employee costs, lack of capital investment, skills deficiency and corruption.
FNB Commercial Property Finance property sector strategist John Loos said recently the rising proportion of operating costs that municipal rates make up on commercial properties was troublesome for tenants and property owners, and had been made worse in recent years by property income growth coming under pressure from a long-term economic stagnation.
“So, what happens next? Further weakening in national property real values and heightened business migration in search of a “better deal” seem the likely outcome. But can such increased regional competition for household and business ratepayers ultimately lead to improved service delivery in places?” Loos questioned.
He said property taxation costs as a percentage of property income had virtually doubled from 5.12% in 2007 to 10.35% by 2021.
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