Rates are crippling businesses in South Africa – and consumers are paying the price

Commercial property landlords face mounting municipal costs – including rates, taxes and metered utility costs – which are often passed on to consumers through higher prices.

The TPN Credit Bureau’s latest Rental Monitor Report for the first quarter of 2023 found that municipal costs now make up 61% of the total operating cost and 26.2% of the gross income generated by commercial property.

“A staggering 29% of total operating costs go towards electricity, 25% towards rates and taxes and 6.7% towards water, sewerage and effluent,” reported the financial services company.

As a result, businesses have been hiking prices which are reflected in increased consumer costs.

Municipalities rely on commercial property to keep them afloat through aggressive rate hikes and, in turn, are asked to improve and maintain infrastructure, assist with security and support the local community.

Data from the South African Property Owners Association (SAPOA), corroborated by the South African Cities Network (SACN) shows that property rates have continued to climb over the last decade, as rates from electricity have declined.

This points to municipalities relying more on property rates to bolster their revenues – although to what extent is still up for debate.

Although commercial property owners face increased rates and taxes, they continue to pay despite not receiving value for their money, said TPN.

On top of this, commercial landlords have also resorted to fixing failing infrastructure to protect their investments and tenants. One of the most notable diversions of capital is to provide alternative power supplies.

Property owners with fixed-term lease agreements are now carefully considering their returns on investment. The construction sector is also struggling with a lack of competition, leading to higher costs and increased risk – hindering the availability of new commercial properties.

Meanwhile, consumers themselves are under pressure.

Rising interest rates have been a major pain point for consumers – while a weak and volatile currency, along with higher utility and municipal costs, is contributing to inflation, said TPN.

Inflation is eating away at what little disposable income households have, forcing consumers to cut back spending and completely change their spending habits to make ends meet. This, in turn, impacts businesses as the pressures come full circle.

Best for business

Regarding the economic hubs of the country, TPN reported that the Western Cape has the lowest rates and taxes across all three major commercial property types, including retail offices and industrial.

TPN said that a retail centre in Gauteng pays R36.87 per square meter while a retail centre in the Western Cape pays R23.64 per square metre.

Having lower rates and taxes means the Western Cape also has the highest rate of tenants in good standing in the country, at 82.62% – well above the national average of 72.53%.

In KwaZulu-Natal, only 75.41% of commercial tenants are in good standing, while in Gauteng, 70% were in good standing over the first quarter of 2023.

Business sentiment

According to TPN, metrics reporting sentiment in the business sector, including the BER Business Confidence Index as well as the SA Business Chamber of Commerce and Industry’s BCI, saw declines in the first quarter of 2023, reflecting an overall gloomier sentiment.

“The latest economic indicators leave many South African businesses unsure about what the future holds, and with load shedding and other various economic and political challenges negatively impacting business organisations, it is to be expected that this insecurity is reflected in how well commercial tenants, which includes offices, retail, industrial and storage space occupiers, pay their rent,” said TPN.

Read: Inflation eating away at what little income South Africans have left