Commercial property owners warn that the City of Johannesburg's service delivery failures and the rising costs of rates and utilities are weighing on sentiment for real estate, leading to stiff competition from coastal areas.
Estienne de Klerk, CEO of Growthpoint Properties in South Africa, said this week that Johannesburg was competing with other municipalities and attracting investment should be a priority to ensure growth and job creation.
“Post-Covid the economy within the city has not recovered, and other cities are attracting more investment.”
De Klerk said that over the past 15 years the city’s rates and tariff increases had exceeded inflation and eroded returns for property owners.
“These increases coincided with a systematic deterioration in the quality of services that the city should provide. Increasingly the onus has reverted to property owners to ensure the sustainability of the services at their real estate, which has had a further impact on their profitability.”
De Klerk gave the example of property owners funding city improvement districts for building highway off-ramps and providing water, electricity and refuse removal.
“This has resulted in specific underinvestment in real estate in certain areas of the city and will continue to result in a deterioration in the attractiveness of investment in real estate. To the extent that rates move to unaffordable levels, ultimately the city will suffer because property valuations will drop.”
He said Growthpoint had objected to unjustified valuations. Growthpoint owns and manages a portfolio of 371 retail, office and industrial properties in South Africa.
The challenges faced by Johannesburg come amid an oversupply of commercial property and weak economic growth.
Redefine CEO Andrew König said there was an automatic 5% increase built into calculating rates and taxes after a change in the City of Johannesburg's tariff structure.
“On top of that, on average, there has been a proposed 12% increase in the valuations of properties across the board in Johannesburg. If you combine the two it is roughly about a 17% increase in rates and taxes,” he said.
König, who was speaking after the release of Redefine's interim results, said: “To have a 12% valuation increase in a market where commercially it is flat at best is grounds for objection. That does not mean you are going to be successful, unfortunately. We do object, we are not always successful, and there are cases where we have to accept the higher valuation and by implication a 17% increase in rates and taxes,” König said.
Kgamanyane Maphologela, the City of Johannesburg’s director of communications and stakeholder engagement, said in the past 15 years the city had produced three general valuation rolls with the fourth to be implemented on July 1.
“Over the years, the property market conditions have had peaks and lows. Therefore one can’t say the city has significantly increased values over the years,” Maphologela said, adding that there was a process to object and/or appeal valuations.
He added that the municipality conducted an annual public participation process before the implementation of rates and tariffs. Issues that were considered in determining tariffs included “spatial planning, disaster management, finances, performance targets and economic development”, Maphologela said.
Redefine said during the six months to February, rental levels remained under pressure given the oversupply in the market, but its quality office portfolio continued to benefit from the demand for premium properties.
Redefine COO Leon Kok said the company did not hold a positive view of the Johannesburg CBD, given the high levels of crime and poor maintenance. However, Rosebank and Sandton were proving to be popular, particularly given the limited availability of premium space.
“A number of factors contribute to the attractiveness of these areas, including a good selection of prime grade, relatively new office buildings, access to public transport and specifically the Gautrain,” said Kok.
He said the proximity to good residential suburbs, access to major highways and effective city improvement districts also contributed to the success of Sandton and Rosebank.
Geoff Jennett, CEO of Emira Property Fund, said the company was concerned higher valuations, if accompanied by the same rate in the rand charges, would translate into high rates charges incurred by landlords.
“They will, in turn, seek to pass on this higher cost of occupation to tenants in the buildings. This may have an adverse effect on the level of net rentals charged to tenants and the future viability of tenants to rent space,” he said.
Municipal rates and utilities tariffs have climbed and infrastructure and service delivery have not always kept up
— John Loos, economist at FNB
John Loos, a senior economist at FNB’s Commercial Property Finance, said over the past decade or more property rates and utilities tariffs in Johannesburg had exceeded inflation, placing an increasing cost burden on landlords and tenants.
He said the Johannesburg CBD had decayed over many years and, more recently the decentralised parts of Johannesburg had also seen infrastructure and services coming under pressure.
“Municipal rates and utilities tariffs have climbed and infrastructure and service delivery have not always kept up. The increasing operating cost implications on landlords, businesses and individuals alike are intensifying the search for regions where municipal rates relate to services and infrastructure quality, and that has been leading to an intensifying and significant semigration of individuals, and sometimes businesses, to the likes of the Western Cape.”
Gauteng still had by far the biggest economy of the nine provinces, but it was increasingly being challenged for business by major coastal regions, especially the Western Cape, he said.
Bathobile Chime, division director for client solutions at Cushman & Wakefield | BROLL, said it was possible some commercial property companies would change their long-term strategy to look for growth opportunities outside Johannesburg.
“That being said, Johannesburg is still a major economic hub in South Africa and the African continent, and there may be many companies that continue to see it as a key market for growth,” she said.
Ross O'Mahoney, director of operations at Sirius Group, which owns industrial and commercial properties in Johannesburg, said that while the city remained an attractive investment destination, there was migration to Cape Town due to better service delivery.
“You get higher yields in Joburg than Cape Town because of the perceived risks. It is very difficult to say it is Joburg as a whole because there are a lot of different areas that have been rejuvenated and you could get a better price.
“The capital rate in Johannesburg is higher than in Cape Town, meaning that the yield will be higher in Johannesburg than in Cape Town on an income return basis. However Cape Town, due to better service delivery among other factors, will better hold on to capital growth,” he said.
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