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New law to ravage rental market

Jul 17 2011 09:48 Elma Kloppers

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Johannesburg - The proposed amendment to the Municipal Property Rates Act recently published in the Government Gazette could sound the death knell for the residential rental property market.

Property experts have said the amendment also represents a serious threat for the rest of the housing market – and could put property prices under serious pressure.

People renting property will probably also have to pay more.

In terms of the amendment a property used to house people other than the owner for financial gain will, in terms of property rates, no longer be assessed as residential property.

What this amounts to is that investors in residential property who let the property will in future be assessed at the much higher business rate instead of the residential rate.

Ben Espach, a property valuer and expert in municipal property taxation, said the amendment would result in a significant rise in property rates.

The property rate for a person letting a Johannesburg property worth R1m will rise from R372 a month to R1 533. In Pretoria the rate for a property with a similar value will rise from R622 a month to R2 015.

In Cape Town that for a R1m property will increase from R375 to R935.

Property experts reckon the proposed amendment could lead to at least two worrying scenarios.

First, investors who bought property to let could flood the market with their properties because the additional expense no longer makes it worthwhile to let the property.

Someone in Pretoria letting a R1m house currently receives between R6 000 and R7 000 in rent. If he has to cough up an additional R1 400 for rates, his yield is certainly no longer worthwhile.

These units could further swamp the property market, which already has a significant oversupply of houses. Prices would come under pressure.

Second, owners could try to pass the rate increases on to tenants, making rentals unaffordable.

Many households are forced to rent these days because their financial position does not allow them to buy.

Rode & Associates property valuer Erwin Rode said the amendment is unfortunate as the country needs a powerful letting market with a segment of the population preferring to rent a roof over their heads than to own it. He said renting also afforded the workforce mobility.

He said the amendment would discourage owning a property for purposes of letting it, which could be the death knell for the rental market

The demand for property for the purpose of letting seriously declined after downturn in the housing market.

According to First National Bank’s property barometer, the number of properties purchased with a view to letting them was a mere 8% of total sales in the second quarter of this year.

At one stage more than a quarter of all property was sold to investors.

Dr Andrew Golding, chief executive of Pam Golding Properties, said the amendment came at a time when the residential property market was staggering under a profusion of negative factors and regulatory issues.

He believed the biggest threat was that additional stock would come to the market while there was still an oversupply.

Seeff Properties chairperson Samuel Seeff said the amendment would deter investors from entering the rental market. This could eventually negatively impact the entire property market.

Schalk van der Merwe, a property attorney at VFV Mseleku, said the investor market is an important part of the residential property market because investors set many developments in motion by buying the properties off plan.

FNB property analyst John Loos said the initial impact on the tenants would be negative, because they would have to absorb most of the additional cost. But Loos believed that in the long run there would be a limited supply of rental properties, which would be positive for rent increases.

property  |  house prices  |  landlords  |  rental
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