Municipalities suck Reits dry

Listed landlords are easy prey for mismanaged local governments

Commercial property owners, who already face the extra costs of keeping South Africa Inc’s lights on, fear excessive municipal rate increases this year.

Landlords in Joburg, with its R1.5-trillion in commercial and residential property, are likely to be hit by higher values and tariffs when the new municipal valuation roll is implemented from July 1.

The city reviews the value of properties every four to five years and released its 2023 valuation roll last month. The new cents-in-the-rand tariff that monthly rates bills are based on will be announced after its budget in April.

The cents-in-the-rand rate levied on commercial property owners is typically two to three times higher than residentials. JSE-listed real estate investment trusts (Reits) are bearing the brunt of disproportionally large valuation increases.

Liberty Two Degrees (L2D), co-owner of Sandton City, is a case in point. The company recently lost a rates appeal case that dragged on for nearly five years. Joburg pushed the value of Sandton City up nearly 80% in 2018 — from R5.8bn to R10.1bn.

L2D CEO Amelia Beattie says Sandton City’s marketrelated value is closer to R7.9bn. The company is also involved in a rates dispute with the city relating to an excessive adjustment in the tariff last year at neighbouring Nelson Mandela Square.

Beattie says the additional amount owed for rates on Sandton City in 2022 alone is R40m. The upshot for L2D investors is that 2c a share was shaved off the dividends declared last week.

L2D would have achieved dividend growth of 13% for the year to December. Instead, it came to 6.95%. Sandton City retailers will also feel the impact as landlords recoup a large portion (60%-70% in Sandton City’s case) of rates from tenants.

“Landlords and tenants find themselves in a real predicament as the post-pandemic recovery in sales turnover is being diluted by ever-rising rate bills, which have climbed to more than R100/m²/month at Sandton City and Nelson Mandela Square,” says Beattie. “These levels are unsustainable and hurting our tenants and shareholders. Add to that the ongoing electricity crisis and it illustrates just how difficult it has become to do business.”

Estienne de Klerk, CEO of JSE heavyweight Growthpoint Properties, says the double impact of annual tariff hikes on top of higher valuations every four to five years amounts to expropriation without compensation. Property owners are paying more in rates every year but getting less in return, he says.

In the past 10 years, Joburg rates have increased by an annual 10.9%. At the same time, service delivery and infrastructure have deteriorated to such an extent that property owners have to fund central improvement districts, paying private companies for cleaning, refuse removal and security.

“We have to invest millions to create and maintain the urban fabric in our cities a job municipalities are supposed to do,” says De Klerk. “Measures to combat the energy and looming water crises add another layer of costs.”

Last year Joburg added a new levy on developers who apply for rezoning and bulk services approval. “It’s a bottomless pit,” he says. “Property owners, and the South African economy as a whole, are paying the price for municipal inefficiencies and corruption, which is totally unacceptable.”

Growthpoint is still waiting for the outcome on a few 2018 objections. De Klerk says Joburg has again come up with some “ridiculous” valuations in its 2023 roll, especially on office buildings, a sector that has falling demand and rentals.

Jackie van Niekerk, CEO of Mall of Africa owner Attacq, says Reits are an easy target because they are obliged to make public the value of their properties when they declare financial results. She says spiralling rates and deteriorating service delivery negatively affect property owners’ ability to attract tenants and increase rentals.

“If tenants can no longer afford to pay rates and rentals it becomes difficult for landlords to maintain their properties. Eventually you may have no choice but to abandon your buildings.”

The South African Property Owners Association (Sapoa) plans to lobby the government to stop municipalities from pushing through above-inflation tariff hikes.

It follows a study recently commissioned by Sapoa, which CEO Neil Gopal says points to municipal property rates having increased to such an extent that they are damaging the economy.

Sapoa will take the matter further once members have been briefed on the Oxford Economics report.