South Africa’s property owners face a complex landscape of rising rates and taxes alongside evolving market dynamics and strategic shifts across sectors.

In Johannesburg, property rates and taxes have outpaced both property price growth and Consumer Price Index (CPI) inflation over the past five years, increasing cost pressure on residential and commercial property owners. In contrast, Durban’s are in line with inflation while Cape Town’s property rate increases, although minimal until now, are set to skyrocket with both rates and fixed charges linked to property values. This means the actual municipal tax burden, relative to inflation and property value growth, varies significantly by city with Johannesburg property owners facing the greatest squeeze.

According to StatsSA, property rates recorded an average annual growth rate of 6.8% between 2009 and 2024 across 39 municipalities, more than doubling in the last 15 years, with inflation increasing by an average of 5.1% per year over the same period. Property owners in some municipalities have been harder hit than others, with some facing massive increases in values, and in turn, property rate hikes due to discrepancies and questionable valuations.

“Understanding how property rates and taxes have changed relative to South Africa’s CPI inflation provides key insights into the real burden on property owners in SA’s major metros,” says Gary Palmer, founder and CEO of Paragon Finance.

Property rates for Johannesburg and Durban municipalities are currently based on a statutory calculation known as the cent-in-Rand tariff (the rate a person would pay for each Rand of property worth as indicated by the formula) applied to the market value of a property, without a separate fixed charge component.

Cape Town, in contrast, has adopted fixed charges tied to property values as part of its rates and taxes structure, meaning that property owners will pay a fixed monthly or annual fee based on the value of their property, in addition to the cent-in-Rand tariff. While this approach aims to make the rates system more equitable and transparent, it has been particularly controversial due to the increased burden on higher-valued properties.

Delving deeper into the aggregate finances of South Africa’s municipalities, research from SAPOA shows that property rates are fulfilling an increasingly important role in supporting municipal revenue, used to subsidise other declining sources of their income.

Some of the key drivers behind these above-inflation increases include maintaining and replacing aging infrastructure, a declining revenue base due to poor collection rates, mismanagement of municipality budgets, property valuation hikes leading to compounded increases in charges, and urban migration, adding service pressure to the region without adequate funding being made available.

For property owners, this means a growing financial burden, especially as utility costs for water and electricity also continue to rise sharply. These escalating costs can lead to affordability gaps and arrears, which in turn risk higher vacancies and tenant churn if not managed proactively.

Rising property rates and taxes can reduce the market value of properties and increase the financial burden on borrowers.

“For example, a significant increase in property tax expenses can lower a property’s net operating income (NOI), which directly diminishes its market value. This, in turn, affects the loan-to-value (LTV) ratios that lenders, like us at Paragon Finance, rely on to assess risk, potentially making existing loans riskier than initially anticipated,” explains Palmer.

Net operating income (NOI) volatility, a measure of how much the NOI of a real estate property fluctuates over time, helps Paragon Finance understand the stability and predictability of cash flows from the property by quantifying the risk associated with the income-generating ability of the property.

A key issue many property owners face is the accumulation of outstanding rates over time. Section 118 of the Municipal Systems Act requires that all municipal debts for the preceding two years be settled before transfer, but it also opens the door for clients to challenge and potentially reduce rates that have been outstanding for longer periods.

“We’re also seeing more clients take advantage of Section 118, which allows them to apply for reductions on rates that have been outstanding for an extended period. This can result in significant savings and helps facilitate the transfer process, especially in cases where the amounts owed are substantial.”

To mitigate risks and capitalise on opportunities, property stakeholders in the commercial property sector are adopting certain strategies, such as repricing leases to include cost pass-throughs for rising municipal rates and utilities, exiting low-yield suburbs and office stock vulnerable to high levies and operational costs, investing in resilience measures such as generators as well as focusing on logistics and industrial properties that offer better returns and lower utility dependence.

“We’re seeing commercial office spaces challenged by high municipal costs and increasing operational expenses, prompting some owners to exit low-quality office stock whilst residential properties, particularly in lower to middle-income segments, face pressure from rising rates and utility costs, affecting affordability for tenants and homeowners.”