By Renney Plit
Johannesburg - Property owners in Johannesburg have become used to COJ pushing through unrealistic property valuations every four years, and in a time when GDP numbers show that South Africa’s economic recovery is slowing down, this unwillingness of the City to take the lived reality into account is causing huge concern.
With the repo rate now at 7.25%, the “buyers’ market” in residential property is also likely to slow down. Traditionally higher interest rates mean increased demand in the rental market, but when it comes to the affordable housing market in a fragile economy such as ours, it is a very fine balancing act between demand and the ability of consumers to afford any kind of formal accommodation at all. The property valuations COJ proposes are pure fantasy.
For landlords, the typical double-digit property valuation increases that COJ is once again proposing for 2023, mean that property values are in reality going down.
Let’s take a simplified look at the four-year valuation cycle. Municipal tariffs are based on property values at a ratio that is supposed to remain unchanged – around 0.9% of the property value after the rebate on the first R350 000. In fact, this is only the case in year 1, because for the next three years, the council escalates the tariff annually, supposedly in line with inflation, so that by the end of the cycle, tariffs are now, say, almost 2% of the property value.
Come year four, Council revalues the property according to supposed inflation-linked growth, drops the rebate, and then increases the tariffs on top of the last tariff that applied, so that now, instead of 0.9% of the value of the property, the tariffs are now 2% of the new, higher value.
This double accounting means the property owner is hit with a double whammy.
In earlier times the council used to reset the tariff ratio to the 0.9% at the start of a new four-year cycle, at the new higher property value. This self-correction is not happening any longer, for whatever reason, and property owners bear the brunt of this deception.
Take a typical 50 bachelor-unit inner-city apartment block with rent of R3 500 per month per unit in year 1.
Council charges per apartment – electricity, water, sewage, refuse and rates – are about R1 300 per month of which the owner will recover about 65% (R756 ) from the tenants. Other costs such as cleaning, maintenance and security will be about R544 per apartment. At a 12% capitalised rate the value of the building is R10 780 000 in year 1.
For the past three years, due to Covid, the dire economic situation and COJ’s continual double-digit tariff increases, owners have not been able to put through any rental escalations. Some have even gone so far as to reduce rentals in an attempt to minimise vacancies. This is evidenced in the reputable TPN credit-bureau rental-monitor reports that track residential rentals and collections. Many owners of inner-city affordable housing properties have now for the first time in four years increased rentals for the 2023 year by 2% to 4%.
A detailed financial model compiled shows that the average decline in inner-city property values over these four years is around 11.5%. In the above example, the property value in year one of R10 780 000 is now downto R9 554 000. But despite this reality, COJ has increased the value by 26%, to R13 609 502. This staggering overvaluation of R4 055 502 is 42% over the true value of the property in 2023. This appears to be a very common over-valuation.
Yes, the owner can lodge an objection, and many do. But even if they do and are ultimately successful, COJ will still expect hard-pressed property owners to pay the higher amount until the objections are finalised. This can take years.
The valuations appear to show a gross lack of understanding by COJ of the current economic situation and the issues faced in provision of affordable housing to the lower-income sector. Or the council is aware and simply choose to ignore reality and the poor in its drive to maximise income..
Council does not care about the poor, and that is evidenced by its tariff structure, and its disregard of the cumulative effect it has on the resources of those who provide accommodation to the poor. COJ needs to understand that there is no golden goose that can be squeezed to lay golden eggs. If the affordable housing provided by the private sector collapses due to unsustainability, Johannesburg will face a major housing catastrophe.”
According to the TPN credit bureau rental monitor’s Q2 2022 report, Gauteng continued to struggle to achieve higher escalations with rentals only growing 1.69% year-on-year. At 6.67%, Gauteng’s vacancies are the second lowest of all the major provinces, but vacancies are expected to increase as supply is added.
Landlords have been easing rentals to ensure higher occupancies and this strategy is starting to pay off as reflected in the data.
However, Gauteng still struggles to collect rental payments on time with only 80.96% of tenants in good standing.
By Renney Plit is the chairperson and member of the Johannesburg Property Owners and Managers Association (JPOMA).