SAPOA readies new fight over municipal property charges

SAPOA is preparing fresh legal action over municipal property charges as President Itumeleng Mothibeli warns the property sector can no longer sit on the sidelines of South Africa’s municipal crisis.

• SAPOA is preparing another legal challenge over municipalities linking property values to levies and fixed service charges.
• President Itumeleng Mothibeli says deteriorating municipal infrastructure and governance have become critical issues for the property industry.
• For investors, rates, tariffs and infrastructure are increasingly affecting operating costs, development feasibility, NOI and ultimately property values.

Municipal risk moves up the property agenda

South Africa’s commercial property industry is intensifying its fight over municipal charges, with the South African Property Owners Association (SAPOA) preparing another legal challenge over the way municipalities charge property owners.

But the issue emerging from SAPOA’s 60th Annual Convention at Sun City is considerably bigger than another rates dispute. SAPOA President and Vukile Property Fund MD Itumeleng Mothibeli warned that the property industry can no longer remain a passive observer while municipal infrastructure, finances and governance deteriorate.

“We cannot afford to sit on the sidelines anymore. We need to be involved, and SAPOA is the best vehicle and voice from which to do so.”

The reason is straightforward: property cannot outperform indefinitely if the city around it is failing. Roads, electricity, water, sanitation, refuse removal, public transport, planning approvals and municipal finances ultimately influence occupancy, operating costs, development feasibility and asset values.

Another municipal legal battle looms

SAPOA is preparing another legal challenge after a further metro adopted property value-linked levies and fixed charges, similar to a methodology the association previously challenged in Cape Town.

That follows SAPOA’s earlier court victory concerning the City of Cape Town’s property value-based fixed charges for cleaning, water and sanitation services.

The central issue is important for property owners: Should the market value of a property determine what its owner pays for a municipal service when the cost of providing that service is not necessarily linked to the property’s value?

The Cape Town judgment distinguished service charges from property rates and found no rational connection between property value and the cost of providing the services in question.

SAPOA has also challenged Mangaung Metropolitan Municipality’s non-residential waste-management tariff, which links a fixed refuse charge to property value. Its broader contention is that municipalities should not use property values to determine service tariffs in the same way they determine property rates.

For investors, the principle matters. Two properties could receive essentially the same municipal service but face substantially different charges because their market values differ.

The bigger issue: can our municipalities deliver?

The legal battles are only one part of the problem. Mothibeli used the Convention to put the deteriorating condition of municipalities firmly on the commercial property agenda.

Only 39 of South Africa’s 257 municipalities achieved clean audits in the 2024/25 financial year, according to Auditor-General figures cited in the briefing.

That creates an uncomfortable contradiction for property owners: municipal charges can continue increasing while the quality and reliability of the services and infrastructure they fund deteriorate. And that changes the investment equation.

A prime building with strong tenants is not insulated from:

• unreliable electricity and water;
• deteriorating roads and public infrastructure;
• sewerage and sanitation constraints;
• rising rates and service charges;
• slow planning and building approvals; and
• weak municipal financial management.

As Mothibeli told delegates: “Real estate is directly linked to the prospects of this country.”

SAPOA steps up its municipal focus

SAPOA is consequently broadening its engagement with municipalities beyond individual disputes. Its focus includes:

• municipal budgets and tariff structures;
• rates policies;
• revenue collection and expenditure;
• institutional capacity;
• infrastructure performance; and
• the impact of rates and taxes on property values.

SAPOA is also undertaking work to quantify how municipal rates and taxes affect property values, with the intention of contributing to government’s White Paper process on municipal and local government reform.

That represents an important shift. Instead of fighting questionable charges only after municipal budgets are adopted, the property industry is seeking a greater role in how the underlying municipal funding model is structured.

Why this matters to investors

Municipal costs are no longer simply an administrative expense at the bottom of an income statement. They directly influence net operating income, tenant affordability and asset values.

The chain is simple:

• Higher municipal charges
• Higher operating costs
• Higher tenant recoveries
• Higher occupancy costs
• Affordability pressure
• Potential pressure on rentals, NOI and valuations.

Where a landlord cannot recover the increase, the owner absorbs it. Where the increase can be recovered, the tenant still pays more to occupy the building. Either way, the economics change.

Historical SAPOA research illustrates the scale of the issue: municipal charges accounted for 61% of overall commercial property operating costs and 25.7% of gross income in its 2022 Infrastructure Report.

Infrastructure becomes an investment metric

Investors traditionally focus on location, yield, tenant covenant, lease duration and capital growth. Another metric increasingly belongs on that list: Municipal performance.

A good building in a deteriorating node can become a weaker investment. Water failures interrupt businesses. Electricity instability requires additional private capital. Poor roads affect access and logistics. Sewerage constraints can prevent development. Inefficient planning departments delay projects.

And rapidly escalating municipal charges without corresponding improvements in services can undermine the competitiveness of an entire property node.

What property investors should check

Municipal risk should therefore become part of every acquisition, development and asset-management decision.

Before committing capital, investors should ask:

• Valuation: Is the property correctly valued and categorised by the municipality?
• Rates: How quickly have rates and tariffs increased compared with rentals and inflation?
• Recoveries: Which municipal expenses can actually be recovered from tenants?
• Infrastructure: How reliable are electricity, water, roads and sanitation?
• Approvals: Can the municipality efficiently process zoning, planning and building applications?
• Future costs: What happens to the investment return if municipal expenses continue rising faster than income?
• Capital expenditure: Will the owner eventually have to provide infrastructure previously supplied by the municipality?

That final point is becoming particularly important. An acquisition yielding attractively today may look very different after several years of above-inflation municipal increases and additional private infrastructure spending.

Property needs to become part of the solution

Mothibeli’s message at Sun City was not simply that municipalities are failing. It was also a challenge to the property industry. SAPOA believes property owners and institutional capital need to become more actively involved in addressing South Africa’s infrastructure and municipal problems.

Despite the challenges, Mothibeli pointed to the sector’s resilience: development continues and capital is still being deployed across listed and private property markets.

He described property investors as having the ability to “look through the crisis, through the cycle”, an important characteristic of long-term real estate capital.

The bottom line

SAPOA’s latest legal action should not be seen simply as another dispute between property owners and local government. The bigger question is how South African cities fund themselves while remaining investable, functional and competitive.

Municipalities need sustainable revenue to provide essential infrastructure and services. But investors also need predictable, legally sound and economically sustainable charges if they are expected to continue committing capital to South Africa’s cities.

For property investors, the message coming out of SAPOA’s 60th Convention is increasingly difficult to ignore: Location matters. Yield matters. Tenant quality matters.

But now, the municipality matters too. Municipal risk is moving from the bottom of the property due-diligence checklist towards the top.