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Rising costs hit industrials hard

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Price increases take power out of commercials

Rates and taxes on commercial properties have increased by almost 250% since 2005, and now account for just under a quarter of a company’s total operating costs, new data has shown.

This is second only to the cost of electricity.

When combining rates, taxes and the cost of electricity, the South African Property Owners Association’s (Sapoa) new Rates and Taxes Report for January to December last year shows these costs make up more than half a company’s total operational costs.

Of the three main commercial property sectors, these cumulative costs hit the industrial sector the hardest.

According to the figures, rates and taxes per square metre of commercial property are down 2.9% as at the end of the year, but Sapoa cautions this decline must be put into context as it followed a 21.9% increase for 2016.

“This brings the compound annual growth rate for the 24 months to December 2017 to 8.8%,” according to Sapoa. Therefore, given its above-inflation growth and the fact that its growth is higher than other operational costs, rates and taxes have increased as a percentage of total operating cost over time. So, while rates and taxes in 2005 accounted for 17.3% of total operating costs, by December 2017 this had escalated to 23.1%. 

“Rates and taxes as a category have grown faster than other operating costs. In real (inflation-adjusted) terms, rates and taxes amounted to R2.1 per m2 in 2000. By the end of 2017 this had increased to R4.3 per m2. 

“This translates to a cumulative growth of rates and taxes of 242% over this period, second to electricity, which saw a cumulative increase of 333% since 2005. In the same time, gross income increased by 156%,” the report says. For all three major property sectors – retail, office, and industrial – rates and electricity together account for more than 50% of total operating costs. For the industrial sector, this combination accounts for 62% of total operating costs as at the end of 2017. 

Rates and taxes alone, as proportions of total operating costs, are: 

All commercial property: 23.1%

Retail: 22.2%

Office: 24%

Industrial: 23%

Sapoa says rates and taxes tend to move in line with property capital values over the long term, with multi-year lags in the short term “as municipal valuations are generally slow to respond to shifts in the property cycle given the processes involved”. 

During the early 2000s, the report says municipal rates and taxes trended largely in line with the move in property values. However, from 2005 to 2007 there was an increase in commercial property values underpinned by real economic growth of 5.5%, which saw commercial property values and rates and taxes diverge. 

“However, post the recession, rates and taxes increased significantly faster than commercial property values, resulting in an ‘over recovery’ of commercial property municipal rates. As the economy recovers, the gap might narrow further.”

As at December 2017, the over-recovery in commercial property municipal rates amounted to 5.6%, down from 17.6% in 2016. Examining the three sectors in terms of rates and taxes as a percentage of gross income, Sapoa says the biggest change is in the retail sector as it went from being the best placed sector in 2007, to the worst in 2017 as rates and taxes continued to increase at a faster rate than gross income.

The industrial sector was the only one to see an improvement. 

The figures are: 

All commercial property: 7.8%

Retail: 8.1%

Office: 7.6%

Industrial: 7.1%

KwaZulu-Natal has the highest rates and taxes as a percentage of gross income for all three property sectors.

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