Municipal property valuations and tarrifs set to raise debate

Posted On Saturday, 23 June 2012 12:37 Published by eProp Commercial Property News
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With the first of July comes the beginning of the new Municipal Financial year. Alas for Johannesburg and other city ratepayers that means digging in deeper to those shallower pockets

 

Krish KumarMost Jo’burg ratepayers would have had untimely notice of hikes services and rates due to the postal strike ‘conveniently’ coinciding with the mail drop.

Going back a few years to the previous rates shock, was the adoption of the Municipal Property Rates Act (MPRA). Henceforth property rates are based on the combined market value of a property, as stipulated by the (MPRA). In the past, rates were based on land value only.

The value of each rateable property in the City is listed in the General Valuation Roll. The General Valuation Roll is a legal document containing the property information for each and every rateable property in the city.

The MPRA stipulates that evaluations are to be done every 4 years. The last municipal evaluation roll in Joburg goes back to 2008, quoting its Property Advice Centre:  "The date of valuation of the General Valuation 2008 (upon which rates will continue to be raised until 30 June 2012) is 1 July, 2007. As such The General Valuation 2012 has a date of valuation of 1 July, 2011, and rates will be raised on this Roll from 1 July, 2012.

Anecdotally, the increase in proposed municipal property valuations could be a shocker and will no doubt see many objections lodged; that is if property owners have actually received this notification in the first place!
 
The market value of houses is much debated so how the municipality can be so certain is anyone’s guess. Furthermore, earlier this year, a property analyst caused an almighty backlash from Estate Agents for stating that the residential market was 25% overvalued.

On the other hand there are signs that the market is picking up or at least has reason to. The average House Price Index is now at a two year high and rising at 8,6% per annum; a 12% plus decrease in civil summons in the first quarter of this year; a 42,4% decrease in liquidations and the number of 100% bonds issued has risen by over 35% (according to the FNB Property Barometer).

The other part of the equation once the market evaluation has been done and you minus R150 000, is to multiply that by the “rate in the rand”. The Residential  Rate in the Rand was 0.004928 and is proposed to increase by approximately 6.7% to 0.005258 in the rand. Similarly the Business/Commercial rate is proposed to increase from 0.017248 to 0.01804 in the rand, 6.7%.

EThekwini (Durban) by comparison, which incidentally is the leading city for both collecting and spending its budget, has a residential rate in the rand of 0.009 and Commercial/Business of 0.0179. Both of these are higher than Johannesburg’s' and going up this municipal financial year. EThekwini is the country’s most expensive city to work or live in according to a South African Property Owners Association (Sapoa) commissioned study.

By way of a Gauteng comparison: Tshwane (Pretoria) has a 0.00209 rate in the rand for residential and 0.00418 in the rand for Business/Commercial. This has gone up by 12% for 2012/13 and another 10% in 2012/13.

Given that inflation is established at 5.7% can the municipalities justify the 6.7% increase in the rate in the rand? It’s generally accepted that increases above inflation simply accelerate inflation, and reduce the purchasing power of the rand. They hit hardest at the most vulnerable: the unemployed and pensioners. It was suggested by an opposition party leader in an open letter to the Jo’burgcity manager that “The solution to the problems is to concentrate on the collection of rates revenue from the residents. If the City could pay the requisite attention to this problem, the extra money needed to provide the shortcomings in service delivery would be found. “

The burden to Jo’burg ratepayers doesn’t end there. Refuse removal is up 6.7% too. There are also increases for water and sewage.  Increases vary from 5,7%, up to a high of 15 %. The sanitation increase is 14.5% across the board. How these above inflation figures are justified is a mystery.

Eskom’s national increase of 16% touches everyone. In Jo’burg the proposed increases have been spread across the residents and businesses so that the lifeline tariff users will see an 11 % increase , the prepaid customers will see a 13 % increase, while the domestic tariff users  and businesses are having to foot an increase in the fixed charges of 5 % and the energy charge of 13 %. This means an increase for 1000kWh monthly usage of 11% , and at 501kWh at 10.7% . The business tariff increases are effectively 12% to 13%.

In the abovementioned open letter, an opposition party expressed that the increases (electricity) could have been reduced to “a maximum of no more than 10% across the board, except for domestic consumers above 2000kWh where a 16% increase could have been implemented, to fund the increases, the unaccounted for losses would have to be reduced accordingly by appropriate measures.”  What exactly those measures could be were not elaborated upon.

Coming back to rates there is another side of the coin. Notwithstanding operational inefficiencies, the municipality may justify pushing up the rate randage in order to meet its demands, since decreasing the rates could lead to the city being crippled financially.This means that a process of reaching equilibrium is engaged. In theory for example, where the property value has gone down, the rate randage is increased to compensate theoretically resulting in the ratepayer paying more or less the same amount. However, in reality this perhaps a moot point, since what are the chances of the value going down?

Nevertheless, arguing the issue for the eThekwini Municipality in Durban, Head of Treasury, Krish Kumar said to the Daily News that while residential property prices may have gone down, commercial property prices may have gone up. This was taken into consideration.  He said the city wanted to avoid a situation where the municipal rates were based purely on the property prices because when the prices went up, the rates also skyrocketed. And when they went down, the city would not collect enough money and would fail to function.

 

And what of non-payment? What is troubling is that while rates increase by 6.7% Jo’burg is expecting income to increase by 18%? The explanation for this by city spokesman Gabu Tugwanato the Star is: “What has been taken into account in that year-on-year is growth and tariff (which is limited to 6 percent).” Regrettably, failure by ratepayers to pay is expected to increase.  Jo'burg's budget for 2011/12 estimates  debt impairment at R1.76bn. In 2012/13, this is expected to go up 17% to R2.05bn. Jo'burg's adjusted budget for 2011/12 estimated debt impairment at R1.76bn. In 2012/13, this is expected to go up 17% to R2.05bn then by 12% the next year and 8% the year thereafter.

This brings up the issue of municipalities broadening their rate base. There is a need to look at Jo'burg’s indigent list and tap into those many RDP home dwellers who can afford to make some contribution.  If these communities are not engaged, then the culture of Apartheid days' non-payment continues and a general culture of entitlement is fostered, thereby realising an ever shrinking rates base.

Tragically there just doesn’t seem to be the political will to pursue these options. Many would argue that the current rates model is based on shaky business foundations and is certainly not sustainable.  Regardless the Jo’burg ratepayers are going to have to fork out more this year.

In the mean time many middle class residents will be facing a scenario of having the increased rate tariff applied to a very likely increase in their property municipal valuation. The consequence, quite simply, could be crippling.

eProp's Marc Schneider and Matthew Scott

Last modified on Monday, 19 May 2014 09:34

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