Municipal property rates amendment bill; 28 July 2011
Last week saw the buy-to-let market rocked to its core, with the media and respected commentators reporting that Government is sneaking legislation through the back door that will have the effect of significantly increasing buy-to-let property rates, as such properties would in future be assessed as commercial properties. For example, it was reported that the property rate for a person letting a Johannesburg property worth R1m would rise from R372 a month to R1 533. In Pretoria the rate for a property with a similar value would rise from R622 a month to R2 015. The storm of indignation was fierce.

But, from the perspective of buy-to-let investors, it appears to have been a storm in a tea cup. We examine the course of events:

On 9 June 2011, the Department of Co-operative Governance and Traditional Affairs gazetted the "Local Government: Municipal Property Rates Amendment Bill". The Bill was published "in response to complaints from the public and some municipalities over the years about the lack of clarity of aspects of the original Act and difficulties in implementing it." The date for final comments was 22 July 2011.

About a week ago, the media picked up on the Bill, and the definition of residential property, which reads as follows: "Residential property means property of which the primary use, or permitted use is for residential purposes, excluding such property used to accommodate persons other than the owner for gain."

So, on the face of it, but-to-let property is included in the definition, and the media reports about the increase in rates were warranted. But, the comments, and sometimes inference, that Government was acting in a sinister way by trying to sneak the Bill through by only "giving one week for comments", were not.

Widespread consultation preceded the gazetting of the Bill. Public hearings were held in April last year in all the provinces, and were attended by stakeholders such as ratepayers' organisations, agricultural unions, business chambers, state owned enterprises, community organisations, traditional leaders, municipalities, and individual ratepayers. And the publication of the Bill in the Government Gazette did not take place "last week", but on 9 June 2011.

Some of the reports/comments on the implications of the definition of residential property were:

1. That it could sound the death knell for the residential rental property market.
2. Warning that the amendments pose a serious threat for the rest of the housing market - and could put property prices under serious pressure.
3. That people renting property would probably also have to pay more.
4. That 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, as yields would drop. These units could further swamp the property market, which already has a significant oversupply of houses. Prices would come under pressure.
5. That owners could try to pass the rate increases on to tenants, making rentals unaffordable.

Some made the point that the amendments would decrease rental stock even further (buy-to-let purchases have already dropped from 25% to 7%, according to the FNB Property Barometer), so forcing government to supplement rental accommodation (also for the middle class).

However, only 18 July 2011, Deputy Minister Yunus Carrim issued a statement in response to the widespread condemnation. He said "We understand, especially in these difficult economic times, and with increases in the cost of municipal services, that house-owners are anxious about property rates. But contrary to media reports on the draft Bill, people who own more than one residential property will not have to pay commercial rates on their additional residential properties. The intention is to ensure that guest-houses, bed-and-breakfast establishments, small hotels and the like pay commercial rates. If necessary, we will amend the draft to make this clearer before submitting the Bill to parliament."

"Essentially, the Municipal Property Rates Act is being amended to make property rating simpler, more transparent, more uniform and easier to implement."
"The only policy shifts in the Bill are:

1. Properties used for trading in and hunting of game will be regarded as agricultural property and subject to rates in the interests of equity and fairness.
2. There needs to be greater uniformity across municipalities in rating houses owned by recipients of old-age pensions and disability grants.
3. Aspects of public service infrastructure will be excluded from property rates because of their contribution to the country's developmental needs."

Latest media reports have taken the line that Government is now trying to backtrack as a result of the uproar.
However, this is probably slightly disingenuous. Government clearly erred in that their drafting was sloppy, as measured against their stated intention. Their intention is to include certain types of residential property that are used for commercial purposes such as guest houses, and not buy-to-let properties. But, the definition does not manifest their intention. As such, the outcry was - on the face of it - justified (except for the allegations that Government tried to sneak the legislation through Parliament). But, Government makes the very valid point that the media and commentators never bothered to check with them as to their intention (audi alteram partem), and that the uproar could have been avoided. Commentators say that the Bill contains many other examples of poor drafting, so creating uncertainty and/or negative implications for property owners and municipalities.

Taking Government at its word, a tightening of the definition to exclude buy-to-let properties is thus expected. Until the new definition is published, some questions will remain. The latest media reports asks Government for clarity as to how holiday homes, which are let from time to time, will be affected by the amendment, as well as the status of blocks of flats and townhouse developments owned by individual investors.

For more information of fully furnished, self-catering properties to let / for rent, visit the following website: www.feel-at-home.co.za or read more on our blog: www.proprentals.co.za.