Rising municipal rates and taxes are a hot-button issue which not only negatively affect operating costs and gross rentals but it also makes a demand on property management resources.
SAPOA CEO, Neil Gopal comments:
“SAPOA members contribute significantly to the rates base, and we believe it to be in the interest of both ourselves and municipalities across SA to partner on this matter. As a sector, commercial and industrial property wants to contribute in a positive way towards the efficient functioning of municipalities.“
This is in response to a statement made by Johannesburg Mayor, Herman Mashaba, regarding the outcry from property owners about some of their properties facing increases of up to 1 000% in the City
To put some numbers around the issue, consider that total operating costs for commercial properties averaged R50.80/m² as at June 2017, of which 22% or R11.30/m² went to municipal rates and taxes. Considering that municipal rates & taxes accounted for R2.20/ m² in 2000, this means that it has effectively doubled in real terms over this period – a fivefold increase in nominal price terms.
As Gopal points out, rates and taxes have been the second fastest-growing operating cost item for property owners and investors since 2007 with a compound annual growth rate of 9.7% (inflation + 3.6%). Indeed, only electricity costs have risen at a higher pace. Over the last decade rates and taxes have consistently increased at a faster rate than inflation and has increasingly come under the microscope as landlords focus on preserving their net income in a challenging trading environment. Over the period 2005-2016, rates and taxes grew at an annualized rate of inflation +8.2% equating to a compound annual growth rate of 12.1% in nominal terms.
“Real increases in rates and taxes have been especially pronounced in the retail sector. Since 2007, retail property rates and taxes have grown by a compounding 12.7% per annum (inflation plus 6.4%)” says Gopal.
Given its above inflation growth and its higher growth relative to other operating costs, rates and taxes have increased as a % of total operating cost over time. In 2005, rates and taxes worked out to 17.3% of total operating costs – by end 2016 this had escalated to 22.8%. In real (inflation-adjustment) terms, rates and taxes amounted to R2.1/sqm in 2000, by June 2017 this had increased to R4.1/sqm – almost doubling in real terms. For the year ending 2016, rates and taxes grew by 22% on a square meter basis.
SAPOA has, in the past, been vocal in challenging the legality of increased municipal rates charged to its members. “Rising operating costs threaten the sustainability of net returns across the spectrum of commercial and industrial property investment. Since the sustainability of the property sector is a key focus for SAPOA, we have been vocal in challenging the basis and consistency of municipal rates charged to our members,” says Gopal.
The increases post 2007 have come in a much tougher macroeconomic environment with economic growth currently significantly lower than the preceding 3-4 years. Consequently, the tougher trading environment is making it increasingly challenging for landlords to deal with the additional tax burden.
Also, of concern to SAPOA is not only the revaluation of properties but also the high rates tariffs in some Municipalities in relation to others. In such municipalities, the increased property valuations will result in the rates payable being higher than the neighbouring counterparts. “Not only is this unsustainable, but property owners pass these increases through to tenants, which has a material impact on the health of businesses in the economy.” On an overall level, rates and taxes equates to 7.5% of gross income and R11.3.sqm. However, there are visible variances at a provincial level, arguably driven by different ‘cents in rand’ rates levied by respective municipalities within the provinces, timing of the respective general valuation rolls and the municipal valuation accuracy relative to the actual valuation.
SAPOA acknowledges that rates are necessary to fund municipal service delivery and outputs, but these must be levied correctly. “Our Constitution and laws are clear that rates and taxes must be levied in a just and equitable way and this should be done by accurately determining the value of properties. SAPOA is committed to ensuring rates are being levied from a correct base, and not being overcharged. We believe this is essential to further an enabling environment for business and the commercial property sector in South Africa, and to help ensure the sustainability of our economy,” says Gopal.
“An ever-increasing rates environment kills investment and has negative consequences towards job creation” concludes Gopal.
SAPOA has appointed its team of consultants, Rates Watch, to comment on the revaluation.