Property Flash


June 14 2023

Guest article by the South African Property Owners Association (Sapoa)

The South African Property Owners Association (Sapoa) is raising its concerns at municipalities for increasing rates above National Treasury guidelines. Sapoa says these increases are not only inflationary, as alluded to by the South Africa Reserve Bank (SARB) but also threaten the viability of commercial property tenants who form the bulk of ratepayers in most of the concerned municipalities.

Despite the National Treasury guidelines, municipalities have regularly increased their rates by more than 10% per annum over the past few years, more than the annual consumer price index (CPI). Water and property rate prices rose by a substantial 140% from 2010 to 2021, almost double the rise in the general price level. Sapoa is of the view that the unsustainable increases in property rates materially prejudices the SARB’s ability to deliver on its constitutional mandate.

What is clear is that persistent and excessive increases in property taxes adds upward pressure on the general price level (directly or indirectly), and such cost increases will hold more wide-ranging adverse consequences for the property sector and the broader value chain. Also, given its importance from a national perspective and that the cost channel represents a primary transmission mechanism, CPI inflation serves as an appropriate benchmark to gauge whether property rates have increased excessively and to what extent.

Delving deeper into the aggregate finances of municipalities across South Africa, Sapoa’s research shows that it is clear that property rates are fulfilling an increasingly important role in supporting municipal revenue.

Property rate income rose by a substantial 174% between 2010 and 2021, much higher than the 72% increase in CPI and the 156% rise in overall revenue, thereby compensating for shortfalls on other revenue streams. As for spending, aggregate municipal expenditure rose by 165% from 2010 to 2021, significantly higher than the rise in national government spending at 128%.

Employee costs, which saw an increase of 180%, and electricity purchases, which experienced a rise of 216%, represent the main drivers behind the upsurge in municipal spending. Therefore, administrative charges such as those related to property rates compensate for or subsidise higher expenditures like employee costs, electricity purchases, and contracted services.

When focusing only on the metropolitan municipalities, all recorded increases in property rate income, and commercial and industrial rate income, more specifically, that substantially exceeded the rise in inflation over the 2010-21 period. It shows that property rates are excessive and have increased substantially, as ratepayers faced cost increases well above the rise in general prices as measured by the CPI. When considering the drivers of property rates, which mainly pertain to the tariff rate in the Rand levied and the valuation roll, it is clear that metropolitan municipalities have followed different strategies or experienced different circumstances.

Some metropolitan municipalities witnessed sharp increases in tariffs, also those with lower increases in valuation rolls, while others reported substantial increases in valuations (those with lower increases in tariffs). Nonetheless, what ultimately drives the effects of property rates is the level and increase in the cost faced by ratepayers.

Excessive costs or increases in costs associated with property rates could hold various adverse consequences, and this, in turn, can determine whether such adverse impacts are materially and unreasonably prejudicing Section 16(1) of the Local Government: Municipal Property Rates Act 6 of 2004. Concerned about these rate increases, Sapoa commissioned Oxford Economics to produce a comprehensive economic report on the impact of property rates in South Africa.

“The report indicates quite clearly that the five biggest metropolitan municipalities in the country: City of Johannesburg, City of Tshwane, City of eThekwini, City of Cape Town and City of Nelson Mandela Bay, have, over the past years, increased rates and taxes to such a level that it is detrimentally affecting the local economy of each municipality and the national economy,“ Sapoa CEO Neil Gopal said.

Reserve Bank Governor Lesetja Kganyago also warned about the inflationary effects of government institutions, including municipalities, increasing their prices above inflation when announcing the Monetary Policy Committee’s decision on the repo rate on 25 May 2023.

Gopal stressed that it is unconstitutional for municipalities to continue levying rates that unreasonably prejudice national economic policies, economic activities across municipal boundaries or the national mobility of goods, services, capital or labour. It is also confirmed by the Oxford Economics report, which indicates that the continuous high increases in municipal rates contravene these constitutional imperatives.

“We have addressed correspondence to the relevant municipalities, the South African Local Government Association, the Minister of Finance and the Minister of Co-operative Governance and Traditional Affairs to commence the engagement process as required in Section 16 of the Rates Act,” Sapoa said

“Meanwhile, we trust the municipalities will heed the call to constructively engage with our sector as our members constitute the largest rate-paying bloc in most of the municipalities concerned,” said Gopal.

A willingness by the municipalities to engage on the matter will demonstrate their commitment to listening to investors and businesses who play a vital role in developing the areas under their jurisdiction. Failing to do so will lead to disinvestment. Sapoa is calling on municipalities to ensure that property rates are correctly levied while carrying out their constitutional obligations with respect to service delivery.

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