Crumbling infrastructure, deteriorating municipalities, threaten property sector

The rapid pace at which some municipalities are deteriorating threatens to undermine investor confidence and hinder commercial and industrial real estate sector growth, says Neil Gopal, CEO of SAPOA (South African Property Owners Association).

He says that despite recent positive trends in the property market, the ongoing issues at the municipal level could put a hold on the sector’s recovery.

The state of municipal governance has become a key concern as property owners and investors face mounting costs for essential services, including electricity and water, often necessitating private solutions such as solar panels and diesel generators.

Additionally, increasing security costs and the rise of illegal street vendors are further eroding the investment climate, particularly in urban centres such as Johannesburg.

Even in the face of this, though, there has been a positive performance in the retail and industrial markets and stability in the office sector. In fact, “REITs posted a 34% year-to-date return, outperforming other asset classes, including equities, which gained 15.9%, and SA bonds, which returned 16.7%”. Gopal added that the recent interest rate cuts would also continue positively affecting the sector.

However, the association – representing the country’s commercial and industrial real estate companies – pointed to challenges facing local governments.

These include the unsustainable increase in municipal charges, escalating property rates, decaying infrastructure worsened by crime and sabotage, and persistent water shortages and energy crises.

These ongoing issues not only strain the financial viability of property owners but also create an environment of uncertainty that could drive investment away from South Africa’s real estate market, said Gopal, responding to questions by Independent Media Property.

“If the government doesn’t address these challenges, investor sentiment may shift back to offshore markets,” Gopal warned.

Professor Douw Boshoff, a real estate expert from the University of Pretoria(UP), echoed SAPOA’s concerns, stressing the unsustainable rise in property rates and the increasing financial burden on property owners.

In a recent study conducted with the Reserve Bank’s Financial Stability Department, Boshoff found that property rates and municipal charges have increased more than double that of inflation since 2008, with municipalities failing to provide the infrastructure upgrades needed to sustain economic activity.

“This growth in expenses is unsustainable,” said Boshoff. “Even with increasing property rates, municipalities are not providing the necessary local economic stimulus. Instead, poor service delivery, slow processes, and inefficient expenditure make it increasingly difficult for the property market to thrive.”

The professor also noted that municipalities’ inability to maintain essential services has forced property owners to rely on costly private alternatives, putting further strain on the sector. This, in turn, creates an environment that discourages domestic and international investment.

SAPOA has called on the government to take urgent action to address the municipal failures, particularly in infrastructure maintenance and service delivery. Without intervention, Gopal warned, the sector’s fragile recovery could be derailed, and investor confidence could continue to decline.

“We need a more responsive government that can deliver the necessary reforms at the local level,” Gopal said. “If we get this right, we can expect an improvement across all sectors of the economy, and the property market will begin to show sustainable growth.”

SAPOA said the sector has had a challenging past few years with the impact of the COVID-19 pandemic, followed by the July 2021 riots, a lack of economic growth, continuous load shedding (which has now slowed), inflation, high interest rates and global tensions.

The organisation said given the above, the sector is starting to show positive signs. It added that where municipalities have failed about service delivery, some of these functions have been privatised.
Gopal said they were appealing to the government to resolve the devastation of infrastructure at the local government level, to intervene where necessary to financially stabilise dysfunctional municipalities, and cut red tape and the current over-regulation of the economy and the sector.

“We hope that the government of national unity(GNU) starts showing positive signs and that we start seeing the benefits asap. Positive sentiment with the GNU and concrete outcomes will improve the country’s growth prospects. Fundamentals will continue to improve across all sectors if we can get this right. Declining bond yields and further interest rate cuts will also be positive for the economy and the sector.”

Asked about the risks to the sector, SAPOA, the biggest currently facing Gauteng, is the water crisis and the near collapse of the City of Johannesburg. It added that the continued infrastructure degradation is a significant concern amongst investors and citizens.

“The failure of the GNU is another risk to the economy, and the unemployment rate is very worrying.”