Municipal rates going UP in major metros

Residential and commercial property owners who are still adjusting to the recent spate of repo rate hikes, need to further tighten their belts as new municipal tariffs come into effect as of 1 July 2023. Most municipalities have now submitted their 23/24 budgets and ratepayers are in for significant increases.

"The increases in municipal service charges alongside the sharp increases in interest rates is likely to put further pressure on homeowners who now face an increase in their fixed monthly expenses. This will leave homeowners with less disposable income to spend each month, which poses risks to our economic growth," says Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa.

What are the possible increases on the cards?
The table below indicates the proposed increases, with eThekwini residents taking the biggest knock with higher increases than other metros across the board. At present Ekuhuleni is asking for the smallest electricity price hike, but all electricity tariffs are subject to Nersa's tariff guideline which is still being finalised so these figures may well change.

What can residents do?

Richard Gray, CEO of Harcourts South Africa explains that "These municipal costs are challenging to mitigate against, as many of them are fixed, and most households cannot significantly reduce their water or electricity usage. Additionally, these increases are likely to have a knock-on effect on tenants as landlords may need to raise rents to cover the higher rates".

The only cost that homeowners can directly appeal against (albeit only once every four years) is their municipal rates. The General Valuation Roll for 2023 is currently underway, granting both residential and commercial property owners leave to appeal. The deadlines differ by municipality, so it is important to check whether the objection period is still open.

In terms of the commercial property sector Neil Gopal, CEO of SAPOA, believes that "No understanding or consideration has been factored into the negative impact of Covid-19 since 2020 and the rental reversions", and would advise property owners, in general, to take a close look at their property valuations as quantified in the General Valuation Roll. Estate agents have a role to play here (and a good way to make new connections) by supplying a market-related valuation of the home, which the homeowner can submit to the municipality in question as part of their objection.

Goslett has another suggestion in terms of dealing with 'fixed' costs like electricity and water "A way to minimize the impact of these increases is to try and invest in ways to help your property rely less on the national service grid. Invest in solar panels to spend less on electricity tariffs or invest in rainwater tanks to minimize water charges".

Where Does This Leave Landlords?

Gray explains that "While landlords may be tempted to pass on the increased costs to tenants, doing so could have unintended consequences. Firstly, it could put the tenant under financial pressure, potentially leading to missed rental payments and other issues. Secondly, the rental market is highly competitive, and landlords need to ensure their properties remain occupied to avoid prolonged vacancies. Therefore, landlords should consider absorbing as much of the increase as possible and only pass on a reasonable portion of the cost to tenants. It's worth noting that tenants are also likely to be absorbing some of these increased costs, such as electricity and water charges".

Goslett adds that "The increasing cost of living is likely to impact everyone, which means that the demand for rentals at more affordable prices is going to increase. Landlords should avoid the temptation to increase rental prices to combat the increases in municipal rates or they might face the possibility of having their units stand vacant".

What About Semigration?

When asked both Goslett and Gray are clear that it's unlikely that municipal rates alone will drive semigration with Gray explaining that "While the higher cost of homeownership will undoubtedly need to be factored into affordability calculations by potential buyers, it should not significantly impact buyer appetite. However, it may require buyers to consider more affordable homes or finance their purchases over longer periods or with larger deposits. Furthermore, it's unlikely that increased municipal rates will lead to more semigration. Other factors such as service delivery, and quality of life are likely to be more influential in determining buyers' location choices. For example, the Western Cape has a better track record of service delivery than other provinces, which may be a driving factor for buyers relocating there".

Goslett believes that service delivery, rather than the costs of the service, will have a bigger impact "Residents may choose to move away from the areas of the country where service delivery is poor, especially following the latest set of municipal increases. However, South Africans also tend to be resourceful and resilient. Residents may find ways to become more self-sufficient to avoid having to rely on costly municipal services that are unreliable".

From a commercial property perspective, Gopal indicates that "Capital is mobile so property owners will develop where there are incentives to do so or where the climate is more conducive to businesses. Investors naturally move out of municipalities where rates are too high and service delivery is low.

Potential Good News for Cape Town Residents and Landlords Alike
As frequently seems to be the case these days, there is some good news for Cape Town residents as the City has reduced Eskom's 18.49% municipal rate increase to 17.6% by absorbing about R15 million a month.

The City has also proposed a 1.1% decrease in property rates, which if approved, will come into effect in July. Cape Town has plans to give residents a break for properties valued at less than R5-million, with the first R450,000 of the property value exempt from rates.