What you need to know about SA's rapidly escalating municipal charges

Municipal usage charges are escalating faster than the consumer price index (CPI), yet there has been a deterioration in the quality of municipal services. And the compound effect of these rising costs presents significant risk for landlords. 

"There is a direct correlation between the property market and the health of a country's economy. When property prices go up both consumers and investors feel greater levels of confidence in the economy. Both the commercial and residential property sectors have a close correlation to business and investor confidence and the economy. 

"At a time when many people across the country are still feeling the ripple effects of the Covid-19 pandemic characterised as it was by job losses, growing unemployment and financial insecurity, property owners and tenants in South Africa will be hard hit in the coming months by double digit escalations in municipal usage charges.

According to data released by the South African Cities Network (SACN), municipal charges are accounting for a growing proportion of household income. The average municipal bill ranges from R1 425 for lower income households to R6 119 for higher income households. Electricity charges account for the largest proportion of each bill at between 42.3% and 54.7%. Water is the second biggest cost, ranging from 16.7% to 28.2% of each municipal bill.

Above inflation costs

Both electricity and water will see further price increases from mid-year when municipalities announce their new annual tariff structures. Eskom's 15% price hike became effective in April this year after the North Gauteng High Court ordered that an amount of R10 billion be added to Eskom's allowable revenue to be recovered from tariff customers in the 2021/22 financial year.

The cost of municipal water is expected to rise by more than inflation this year at between 6 and 10%. The increase in the cost of refuse removal and sanitation is also expected to be above inflation this year as municipalities try to mitigate their pandemic related losses.

These escalating costs are not only impacting property owners but also tenants given that in recent years, municipal usage charges - even for sectional title properties - have increasingly been passed on to property tenants with new lease agreements now typically including itemised charges, says Dickens.

Compounding effect of growing charges

The affordable rental market will be particularly hard hit by these growing charges, she adds, explaining that it's going to be hard to pass a R300 sewage charge on to tenants who are paying rentals in the region of R4 000 a month.

Dickens says because of its compounding effect, the escalating municipal charges represents significant risk for landlords. "Unless the property was bought at a discount, these escalating charges are literally eroding property investment profitability."

Municipal rates and taxes are linked to municipal valuations which themselves have been subject to a significant degree of controversy in recent years given the frequent disparities between municipal valuations and actual property valuations. Dickens points out that unless property owners have formally disputed the municipal valuation of their property they could inadvertently be paying rates and taxes based on inflated figures.

According to the Municipal Property Rates Act, property rates should be commensurate with the extra cost of providing local government services so that ratepayers are not unnecessarily over-burdened. However, says Dickens, in reality, escalating municipal rates have not been accompanied by a simultaneous improvement in services.

"Inaccurate municipal invoices - and interest charged on these invoices - are exacerbating the challenges faced by property owners and their tenants. Although there is recourse available for property owners when they are presented with incorrect municipal invoices, problems are not easily rectified and the onus is on the consumer to prove that the invoice is incorrect, and not on the municipality," says Dickens.

'Negative escalations, market under pressure'

In previous years, rental escalations - which are typically in line with inflation - have come under pressure as a result of low GDP. The Covid-19 pandemic exacerbated the situation given that most people's incomes have not grown in the past year with the result that rental increases have been very low. In some instances, says Dickens, escalations have even morphed into negative escalations.

Persistent load shedding and the inability of many municipalities to restore power after load shedding due to faulty infrastructure is adding to the frustrations of property owners and tenants.

"Unfortunately, rapidly escalating municipal charges, coupled with the rising cost of electricity and even the increased cost of private security, is making property occupancy increasingly costly, particularly for low income earners, which does not auger well for the country's much needed economic recovery," says Dickens.

"When a household is spending a growing proportion of their monthly income on housing, the municipal charges and there is less disposable income available to be spent on consumer goods which in turns impacts GDP. At the same time, these growing costs will have a negative impact on commercial property owners. In the long term these runway charges will affect the property sector's ability to be sustainable."