SUREN NAIDOO: Sapoa, or the South African Property Owners Association, is one of the country’s oldest property bodies. Over the years Sapoa has perennially raised the issue of spiralling commercial rates and taxes and its impact on the industry. In this episode we zone into the issue with Sapoa CEO Neil Gopal.
Sapoa has more than 800 members and is the voice of the commercial property industry in South Africa. Hi Neil, welcome to the Property Pod.
NEIL GOPAL: Thank you, Suren, for giving me the opportunity and inviting me to the podcast.
SUREN NAIDOO: Neil, you’ve been at Sapoa for over a decade, so you know this issue well. It’s a hot-button issue for your sector. What I want to know is how serious municipal rates and taxes are, especially in the context of Covid-19.
NEIL GOPAL: Suren, as you know, we have been at pains for many years, long before Covid-19, trying to highlight the catastrophic value destruction that municipalities are causing with unsustainable above-inflation increases in municipal rates. Just to give you an idea of some of the statistics – we’ve been keeping decades’ worth of stats on particularly administration charges and operational costs – from 2006 to 2019 municipal charges grew faster than any other operating cost.
They [commercial property rates and taxes] quadrupled from R10 in 2006 to R41 as at end-December, 2019.
This is becoming a bigger and bigger and faster-growing property operating cost since 2006. This is also prior to the global financial crisis. On a five-year rolling basis annualised growth and property taxes have exceeded CPI since 2008. As a result, rates and taxes, according to our numbers, have grown by a cumulative 318% over the last 10 years or so, compared to 78% of CPI. So way above CPI.
SUREN NAIDOO: Those are some crazy numbers you throw out there. When you talk about R41, what are you referring to?
NEIL GOPAL: Out of every R100 of rental that a landlord would make, close to 50% is going towards operating costs, and a huge chunk of that then goes to property rates. You’ve still got your water cost, you’ve got your electricity costs. The trouble with this is it’s unsustainable, particularly with property rates. The challenge, of course, with the water and electricity, as we’ve experienced, particularly with electricity, is there’s no guaranteed supply of electricity – and those costs are going up by over 25% a year. So it’s a triple-whammy of combined costs, which the property owner has no control over and it’s very difficult to budget for these things.
SUREN NAIDOO: Neil, we still hear CEOs of listed and private property companies complain about unsustainably high rates and taxes. The likes of Resilient and Growthpoint on the listed side often mention this in their annual results or results presentations. Despite this, service delivery from municipalities is generally poor. So you have really high rates and taxes and you don’t have the commensurate level of service. Maybe you want to wade in here?
NEIL GOPAL: It’s important to start off with the basis of this matter. Local municipalities, as organs of state, are constitutionally bound to provide services to taxpayers. So that’s the starting point. But what we’ve seen over the years – if you look at the graphs very, very carefully, if you read the auditor-general’s report last year – is that there’s a dire situation out there.
The AG’s report is extremely disturbing. You have 98% of municipalities that are dysfunctional. Only 20% in the country have achieved a clean audit.
There’ve been a spate of court orders forcing services to be placed in the hands of residents, which is unfortunate. We shouldn’t have residents or residents’ associations or businesses running a municipality. This is why we pay rates and taxes.
This speaks to your point of the lack of service delivery. [It] is largely as a result of wasteful and irregular expenditure, corruption in procurement processes, and poor adherence to financial controls. The dire state of our roads, water and electricity services is as a result of poor governance measures. And, of course, we have increased levels of false declarations regarding municipal tenders that play into all of this.
So not a good situation for property owners. We’ve had to establish central improvement districts [CIDs] around the country, to which property owners have to pay a certain amount on a monthly basis; but they also pay their property rates. So a double-whammy for property owners. You are paying property rates and a levy to the CIDs to provide the service that the municipality doesn’t provide.
SUREN NAIDOO: The CIDs are another story altogether. They are doing some good work across the country in various cities and urban areas. When it comes to specific municipalities or metro cities, which are the worst performers in terms of overcharging, would you say? Are you in a position to maybe highlight some of the bad performers in terms of overcharging?
NEIL GOPAL: Yes, I can. We ran an interesting exercise a year ago, looking at the property-rates revenue of municipalities, and what the results have shown is that over the last few years there has been an unreasonable and unacceptably excessive increase in revenue from property rates.
So, if you look at some of the budgets, Buffalo City, for example – that’s East London and its surrounds – in the 2018/2019 budget they generated nearly 46% of all of their revenue from property rates.
If you look at a place like the City of Johannesburg, a metro like the City of Johannesburg, in the 2018/19 financial year 37.5% was generated from property rates. Now, in Ekurhuleni you’re looking at nearly 30% during the 2017/2018 financial year. These are staggeringly high figures, and it’s also a bit of a dangerous situation for a municipality to rely so heavily on property rates. The impact of Covid has now kicked in, and properties being devalued is likely to mean that less property rates will be paid. So a challenging time lies ahead for both property owners and municipalities going forward.
SUREN NAIDOO: On that note, Neil, you’ve kind of moved to my next question. In this environment where commercial property is taking a hit from the Covid-19 financial fallout, we are not really going to see municipalities dropping their rates, are we?
NEIL GOPAL: Well, we are hoping some of them do. We’ve been in negotiations and discussions throughout the integrated development-planning process with many municipalities. We have formally made submissions to the top 50 municipalities with regard to their rates policies and their budgets.
Some disturbing trends we are noticing are that, even during the middle of Covid, municipalities are budgeting for significant salary increases – double CPI for senior management. It’s unfortunate and an extremely disturbing pattern out there. I think Moneyweb reported that [Mpumalanga’s Steve Tshwete] municipal manager last July, in the middle of Covid, gave himself I think a 50% salary increase. So not a nice situation.
But I think if municipalities do want to incentivise businesses, given the impact of Covid, given the fact that a lot of small businesses are shutting down, one way to revive the commercial property sector is to not have any property rates increases. That’s what we’ve pleaded with the municipalities for. But not all of them have come to the party, as you’ve suggested.
SUREN NAIDOO: It’s a cash crunch. Where do they get the money from, though? You often have complained and, from our discussion now it’s clearly a case of the commercial property sector being the cash cow, the golden goose – and you don’t want to kill the golden goose, as it were.
NEIL GOPAL: I agree with that, Suren. I think there’s a number of factors that come into play. The municipalities need to understand that you cannot continuously try to squeeze blood out of a rock. I prefer to look at the entire property-rates universe as an iceberg; 90% of the iceberg is under the water and you can’t see it. So I suspect what the municipalities are doing is that they’re going after that little 10% that’s above the water – and it’s easy to nail those guys.
They are listed on the Johannesburg Stock Exchange. They have their annual reports. You can pull up the annual reports. You can see for yourself, as the chief valuer in any city, this is what the value of Sandton City is, for example. But of 90% of the iceberg that’s lying under the water you don’t have any sight. There are no annual reports.
There’s a huge component of the residential sector – if they just get to fix up the property values around that side of the equation, I think it should be a fair and transparent process and everybody should pay their fair bit; but you cannot continuously hammer a small component of the business community to keep you alive and make sure that the municipality keeps its head above water. It’s an unsustainable situation.
SUREN NAIDOO: From Sapoa’s side, Neil, I know Sapoa advocates for lower hikes, and in some instances on various other issues takes municipalities to court and that sort of thing. But what can Sapoa do, because clearly municipalities are not listening? Are you speaking to the South African Local Government Association, Salga? Are you speaking to Treasury? How can you contribute to these municipalities’ looking at a more sustainable way in terms of getting income?
NEIL GOPAL: Suren, you mentioned something important – taking municipalities to court. I think that’s the last resort. It’s a lengthy process, it’s an expensive process. It’s not conducive to any relationship-building exercise between the public and private sector. So for us going to court and trying to put out fires around the country at every municipality – where the members have huge assets and are huge contributors to the rates space of a municipality – is not an ideal situation.
We know that the Minister of Cooperative Governance and Traditional Affairs [Cogta], Minister [Nkosazana] Zuma, is empowered in terms of the Municipal Property Rates Act to issue a directive to many of these municipalities, if not to all of them, particularly the ones that are abusing the rates policy, and the directive is that she can impose certain limits on the percentage by which rates and property categories – or a rate on a specific category of properties – may be increased and what that rate is.
We made an approach to the Cogta minister last year [stating that] given that we were hit with Covid, largely the office and the retail sectors and shopping centres were all empty, and yet property owners had to pay their property rates. So we have made an approach to the minister. We hope to have an engagement with her going forward – with her and Minister Tito Mboweni, the minister of finance – to find a solution around this. So yes, they use an advocacy parallel process that has been run in terms of negotiating directly with government.
SUREN NAIDOO: Neil, we will have to leave it there. We will have to also see what happens in terms of your discussions with government. Hopefully there is a middle ground. But thanks for your time, Neil. That was Neil Gopal, CEO of the South African Property Owners Association.