Bad news for business and property owners as municipal rates spike

The municipal rates increase kicking in on 1 July 2024 will not be good news for business and property owners in Gauteng’s three biggest cities. It will simply pile on more costs for businesses and consumers without developing and growing the economy.

Neil Gopal, chief executive officer of the South African Property Owners’ Association (SAPOA), says SAPOA members control approximately 90% of all commercial and industrial property in South Africa. SAPOA is recognised as the representative body and official voice of the commercial and industrial property industry in South Africa, with a combined portfolio exceeding R500 billion.

“It should be noted that SAPOA members represent billions of Rands worth of investments and developments in Johannesburg, Ekurhuleni and Tshwane, which generate substantial revenue in the billions in terms of rates, taxes and service payments for the cities.

Unsustainable municipal service increases

“SAPOA remains concerned that the priorities relating to the growth of the economy, attracting investment, supporting entrepreneurship and creating jobs are not particularly always responsive to business and investment needs.

“Given the large-scale investments in property development and the ownership of the majority of shopping centres and office parks, we have been a significant contributor to employment in the property and construction industry.”

By doing so, Goal says, SAPOA recognises and supports the need for the focus on pro-poor development to address spatial and income inequality and improve the quality of life for all its citizens.

“Given the ongoing infrastructure and other challenges in our cities, we believe that unsustainable rates increases will do nothing more than reduce the rate of development and investments. In addition, a municipality’s belief that increasing rates on fixed property and vacant land will somehow spur developers into action is highly misplaced.”

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He warns that capital can and will relocate to other jurisdictions locally and internationally where the rate of return is more palatable.

“Charging a development levy for “bulk services” and then using that levy for other purposes and/or in other areas is also inevitably leads to a greater infrastructure related problems. Developers will relocate their capital elsewhere or simply not go ahead with their developments.”

Gopal also says not everyone is getting value for money, particularly where property owners have to contribute to a Central Improvement District for the upkeep of the precinct and also pay property rates.

“This is a double whammy for property owners in addition to the unsustainable operational costs where the lack of electricity and water means property owners have to spend more money to cater for this where a municipality cannot always guarantee the supply.”

Municipal services increases reduces disposable income

Julius Kleynhans, executive manager for local government at Outa says increases in the municipal services rates reduces disposable income, leading to decreased consumer spending in other areas of the economy, such as retail.

“This can slow economic growth and affect local businesses which may add to job losses. Increased tariffs raise operational costs for businesses which can lead to higher prices for goods and services and some businesses have been forced to close down in Johannesburg.

“In fact, many businesses are reconsidering investing or expanding in these cities because operating costs become too high, while municipal service provision is declining. They rather invest in the Western Cape or abroad.”

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He is also concerned about what these increases mean for the viability of commercial property in these cities. “An increase in the operating costs of commercial properties affect profitability for property owners and should they push prices up, it may become unaffordable for tenants.

“This may result in higher rent or reduced demand for commercial space and reduction in tenants. People want to live and work in communities where it is safe and clean and where municipal services are sustainable and affordable. Better services could maintain or enhance property values, but in Johannesburg we have seen a large decline in property value.”

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Higher living costs could impact affordability

For the property sector these increases will mean that homeowners face higher living costs, which could impact affordability and demand in the housing market, Kleynhans says.

“Potential buyers might hesitate to enter the market, or current owners might struggle with increased monthly expenses. An escalation in costs may also lead to people who cannot afford to pay their bonds anymore losing their properties or assets in the process.”

Kleynhans warns that the attractiveness of the cities in Gauteng for new commercial developments might also be affected. “Property investors might shift their focus to areas with lower operational costs, potentially leading to uneven development and investment across the region.”