Soaring Municipal Rates Squeeze SA Property Investors’ Returns

Top 3 Key Points:

• Property rates in major metros have outpaced inflation and property price growth, cutting into investment returns.
• Municipalities rely increasingly on property-based revenue to offset budget shortfalls and poor collection.
• Rising rates impact loan-to-value ratios, reduce property values, and increase risk for both borrowers and lenders.

Municipal Rates Surge and Property Investors Feel the Pain

South Africa’s commercial property owners are facing mounting pressure as municipal rates and taxes soar well beyond inflation. With property-based income now a critical lifeline for cash-strapped municipalities, property investors find themselves footing the bill while seeing their returns shrink.

From Johannesburg to Durban and Cape Town, property owners are experiencing rate hikes that are not only out of sync with CPI inflation but are also structurally undermining return on investment,tenant affordability, and market value stability.

STEP-BY-STEP:Breaking Down the Impact

1. Rates Outpace Inflation and Property Price Growth
   From2010 to 2021, municipal income from property rates jumped by 174%,compared to just a 72% rise in the Consumer Price Index (CPI). In some metros, like Johannesburg, rate increases over the last decade have reached 48%.
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2. Differing Approaches by Municipality
   
   • Johannesburg & Durban use the cent-in-rand model, linking rates directly to property value with no fixed charges.
   • Cape Town uses a controversial fixed charge system tied to property values heavily penalising higher-valued homes.
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3. Infrastructure Decay & Revenue Dependence
   Municipalities are under pressure to maintain ageing infrastructure, cover revenue shortfalls from non-payment, and fund urban expansion. As a result, property owners are being leaned on more heavily than ever to plug the gaps.
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4. Direct Impact on NOI and Loan Risk
   “A spike in property taxes directly reduces a property’s net operating income (NOI), which in turn lowers its market value,” explains Gary Palmer, CEO of Paragon Finance.
   
   “This affects LTV ratios, making previously safe loans riskier and tightening access to finance.”
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5. Transfer Delays and Bridging Finance Solutions
   The burden of settling municipal accounts before property transfer has become heavier. Even fully paid-up sellers must often pre-pay months in advance to obtain clearance certificates.
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6. “At Paragon, we bridge this gap by offering pre-transfer finance and paying municipal charges directly,” Palmer notes.
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   “It’s not just for distressed sellers, it streamlines the process for everyone.”
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7. Section 118 Can Offer Relief
   Section118 of the Municipal Systems Act requires payment of municipal debts for the two years before transfer but allows owners to contest older debts.

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“We’re seeing more clients successfully apply for reductions on long-outstanding rates under Section 118,” says Palmer.

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WAY FORWARD: Strategic Responses in a High-Cost Environment

To stay ahead, commercial property stakeholders are adjusting strategies:

• Repricing leases to include rate and utility cost pass-throughs
• Exiting low-yield or high-levy stock, particularly underperforming office assets
• Investing in logistics and industrial property, which tend to offer stronger returns and lower municipal exposure
• Improving property resilience with measures like solar, generators, and water-saving systems

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“We’re seeing both office and residential segments under strain from these escalating costs,” Palmer adds.

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“Our role is to help clients navigate this complexity with tailored finance solutions that unlock liquidity and mitigate risk.”

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A Tipping Point for Property ROI

Municipal rates in South Africa are no longer just a line item, they’re a defining cost pressure with ripple effects across valuations, finance, and asset strategy.

For investors, this means evolving faster than the challenges. Understanding the mechanics of rates, leveraging tools like bridging finance, and investing wisely are now essential parts of maintaining profitability in the property game.

With the right partners and strategies, even a rising tide of rates doesn’t have to sink your returns.

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