Municipal rates and tariffs made up 63.9% of the commercial property sector’s operating costs in 2018, up from around 41% in 2000, according to the latest Macro-Commercial Property Outlook report by FNB.
This comes as rates, electricity tariffs and water costs have spiralled over the last decade on the back of ailing infrastructure and mismanagement at Eskom and municipalities.
FNB property strategist John Loos says the situation is unlikely to improve. “The reality is that above inflation hikes in municipal rates, as well as tariffs for electricity, water and other services, are set to continue for the foreseeable future considering the poor state of government and Eskom finances.”
He adds that operating costs are expected to experience further upward pressure from strong municipal increases… “Such cost increases for tenants, in a weak economic and rising vacancy rate environment, could exert further slowing pressure on landlord pricing power and thus on rental growth.
“In fact, according to the MSCI database, rental growth already recorded a below inflation rate of 3.6% in 2018.”
Loos says the increasing municipal rates and tariffs component to commercial property operating costs could be even higher if it were not for landlords rolling out on-site self-generation solar power and water projects.
Concerns around spiralling municipal costs and the impact on the commercial property sector have been raised on numerous occasions by the South African Property Owners’ Association (Sapoa).
Just last month, former Sapoa president and boss of Motseng Investment Holdings, Ipeleng Mkhari, described it as a “burning issue” for the industry during an address at the Sapoa Convention.
“Rising municipal rates and taxes negatively affects not only operating costs and gross rentals, but also puts demands on property management resources. It has been the second fastest-growing operating cost item for property owners and investors since 2007, with a compound annual growth rate of 9.7%.
“In fact, only electricity costs have risen at a higher pace.”
Mkhari added that over the last decade, rates and taxes have increasingly come under the microscope as landlords focus on preserving net income in a challenging trading environment.
“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.”
She said the commercial property sector acknowledged that rates were necessary to fund municipal infrastructure and services, however, it needed to be levied correctly and come with the requisite level of service delivery.
“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. As an industry body, Sapoa is committed to ensuring rates are being levied from a correct base, and not being overcharged,” said Mkhari.
Meanwhile, in his latest report Loos also raised concerns that the government’s finances “poses a significant risk to property capitalisation rates”.
“The parlous state of government and Eskom finances threatens the performance of the property market in a few ways. In addition to the impact of above-inflation municipal rates and tariff increases, rising government and parastatal indebtedness makes the future scope for fiscal stimulus for the economy less possible, thus constraining economic growth and the demand for commercial property,” he said.
“But a further key risk is that at some future point the bond investors (will) become far more concerned with the possibility of government defaulting on its debt, exerting significant upward pressure on bond yields. And, higher long bond yields can exert upward pressure on property capitalisation rates,” Loos warned.