Roy Tilley: The municipal "Rates Randage Monster" strangling South Africa's property owners

Durban businessman Roy Tilley says a deeply flawed municipal rates formula is pushing property owners and small businesses toward a financial breaking point. In this interview, the Queensmead industrial property owner explains why he believes ever-rising rates are becoming impossible to absorb, hurting tenants, jobs and investment, and argues that Parliament must step in to cap what municipalities can charge.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..Watch here.Listen here.Roy Tilley's Excel Model.Edited transcript of the interview.Patrick Kidd: Joining us today is Durban-based businessman and BizNews Tribe member Roy Tilley, who owns an industrial property in Queensmead. Roy has raised the alarm over what he says is a deeply flawed municipal rates system, saying that the formula used to calculate rates is driving bills steadily higher and making them harder and harder for property owners and small businesses to absorb. Roy, could you just unpack for us what you found.Roy Tilley: Yeah, thanks, Patrick, for this opportunity to explain this to the rest of the South Africans out there. Because basically what we've got is a rates formula that's mathematically flawed. It affects all types of property — residential, commercial and industrial. And what it boils down to is that it's a blank cheque for any municipality to take as much as they want from your building in terms of rates. And rates, unlike water or electricity, you can't switch them off. You can't say, right, I've had enough of the water, I'll go to the stream and boil some water, or I'll switch off my electricity and get some candles. With rates, you can't escape it. So what they've got is a formula that ever increases the percentage that is applied to the actual value of the property. The percentage applied is mathematically infinite in terms of the current formula. And then every four years, what happens is they up the value of your property and take a bigger percentage of that new property value. And that goes on every four years. But every year you keep getting a bigger percentage of it. And then after four years, you get a double whammy when they actually take another big chunk of it based on a bigger value. So the big problem is that it affects everybody, and it can turn your property — that was maybe a positive cash-flow type generator if it was let out, or even your residence, which is now occupied by you — into a negative cash-flow type setup, where you basically have a bond that you never, ever can repay, in effect, and it just keeps going up and up and up. And so you can't pay it, and then the municipality comes along and says, right, we want your property.Patrick Kidd: And where has there been any pushback from ratepayers?Roy Tilley: Well, there will probably be a protest in July by the eThekwini Ratepayers Protest Movement. Basically, we need people to withhold their rates and not pay anything over. The money will be put in a trust account. This is the same organisation that fought the case with the Westville ratepayers. They have learned from that and they've got a new plan to basically say, look, enough's enough — we need you guys to listen to us. We've got the money in a trust account, and if you come to the party then we can release the funds. One needs to put pressure on the municipality because this municipality has mismanaged funds. And as we know, throughout the country you've got a problem, possibly, with municipalities. But unfortunately, we have a particularly bad one here. I mean, they're famous for recently spending R22 million on a statue when people are basically starving. But that's not really my issue. We know the municipalities have got a problem. But my major issue is with a formula like this. It's just a blank cheque for any municipality to just keep on increasing the percentage they apply. So that has to be stopped. We have to cap this. This has to go to Parliament. They have to amend the Municipal Property Rates Act of 2004. The one important thing too is, in our particular setup, we have lots of small-scale tenants and we are like the incubator for small business. We have areas that are mostly under 100 square metres, and that's another reason why we've got a defensive setup, because we can never lose one big tenant. But the reality is that if this thing eventually closed down, down the road, all these small businesses would have no place to pick up or rent out a place under 100 square metres. So there are a lot of small businesses tied to these particular types of businesses. And ultimately, the staff suffer, because we've got guys who've been working for us for over 30 years and now, basically, they're going to have to be on short time because we can't keep absorbing these ridiculous rate hikes that the government is putting on us.Patrick Kidd: What avenues have you branched out to try and fight this? You say it comes from a 2004 law. How are you trying to fight this? Who have you reached out to?Roy Tilley: Well, it's the Municipal Property Rates Act of 2004. It doesn't seem to have a cap on the randage, or the percentage applied to your property. There is some kind of a limit from one year to the next that they can increase your randage by, but there's no cap on the ultimate randage. So I have reached out to ActionSA here and also the eThekwini Ratepayers Protest Movement, but the biggest problem that you have is that everybody initially doesn't see the real problem. They just say, well, you've got a problem — you could object to your rates. But the objection process is only focused on the municipal value, which is deeply flawed in that, over time, based on their stupid formula, the connection between the property value and your rates goes way out. In fact, it has no relevance eventually. And in my particular model, if you compound the randage at 6% a year, your rates will still go up regardless of whether your property goes up. Your property doesn't even have to go up. And then if you want to stop the rates going up, you actually have to apply minus 21% to the value of your property every four years just to stop the rates going up. That's the absurdity of this particular formula.Patrick Kidd: So in essence, your property needs to devalue by 21% for those rates not to rise, or even just to stabilise.Roy Tilley: Yeah, to stabilise your rates bill going forward, you need minus 21%. That's at a 6% compound of the randage. But if they compound it at 7% or 8%, because they get more greedy and mismanage the funds more in these municipalities, then it'll be worse. You need more like minus 25, minus 26. It's a very simple Excel model that I've built. But it's really been exposed in KZN because we've got such a bad municipality because, you know, Johannesburg, they say, is not good, not well run, but it's run a lot better than KZN because the randage on an industrial property is two-and-a-half cents in Johannesburg and five cents here.Patrick Kidd: Could you just explain randage in simpler terms?Roy Tilley: Randage is just a fancy name for the percentage applied to the municipal value of your property. That's all randage is. So if they talk about five cents in the rand, it's 5% of the municipal value of your property. Five percent times your municipal value. And all other municipalities have a much lower sort of randage, or percentage, applied to them. But they're all going to have the same problem ultimately because, over time, the compounding occurs and you'll creep up. Like, for example, in Durban we had 1.5 cents in the rand on residential property. But over time that'll creep up to two, two-and-a-half, three, because there's no limit on it. And eventually they'll be in the same position as people with industrial property. So we just happen to be on the front line here.Patrick Kidd: At what point — 2030, 2034 — is this just completely unsustainable?Roy Tilley: Yeah, it's a good question. I have modelled certain things, but it really comes down to what purpose you're using your building for. If it's a pure rental property and you could even escalate your rent at eight-and-a-half percent, then what might happen is you could stay around for a bit longer. If the economy turns down and the guys can't pay, you could be in trouble in a shorter time. It all depends on the economy — at what rate you can escalate your rents to try and cover up. That's what happens. It's not really sustainable at the moment, particularly for somebody who's actually got a building and it's not freehold. If it was not freehold, even if you're running a big business through your building, not just renting it out to tenants and stuff, you could still have a major problem because the mortgage is going to be big, the rates are going to be big. You're going to be in a situation where you can't afford anything, and we'll end up with Durban industrial areas like Detroit.Patrick Kidd: And are you seeing any value coming from these high rates that you're paying?Roy Tilley: Very good question, Patrick. And the answer is zero — zero value. Because we live in our industrial area, which is the Queensmead one, and if you ever look at Phoenix Industrial and maybe even Westmead, you'll see similar problems. Your verges aren't necessarily cut. The tar on your roads is not good. You've got potholes. And you even have problems with the sewerage lines, where you call the guys to come and try and sort something out and they just have one go at it and disappear, and it becomes your problem to sort out municipal things. So, yeah, we're not getting any value for it at all. And another point that needs to be made is just the disparity. In eight years, our property, for example, was up-valued 33%. But the rates, purely through the formula, went up 115%. And this will just carry on as we go further out along the chain. In time, you'll get even greater increases in the rates for a small increase in the municipal value.Patrick Kidd: And so when you do bring this up with the municipality, when you do object, what kind of responses do you get?Roy Tilley: Well, they've got a standard objection form, and that objection form only focuses on the municipal value of your property. So that's not even the issue. The municipal value of the property is not the problem. It's the formula that is applied to that municipal value. So it's like you must object like you're a boxer in a ring and now you must have your hands tied behind your back and try and fight with your head. It's impossible to win on the objection because you even might have a problem where the guy comes out because you've objected and he looks at it and says, well, you know what, I think this value could be higher or something. And then he applies the formula to it and now you end up paying even more. So you basically have no hope objecting because the objection is not based on the randage, it's not based on the formula, it's based purely on the municipal value.Patrick Kidd: And then you mentioned in your letter how the city sort of argued that the financial consequences of the 2021 riots, floods and other disasters that have happened in KZN have been factored into these higher rates, and you had an argument against that.Roy Tilley: Well, first of all, yes, there's been trouble here with floods and riots, and riots could have been controlled better if the police had been allowed to do their job. But obviously, I think that ultimately it was at the top of the government that sort of almost stopped the police doing their job in KZN. So in some ways, then, national government must actually put some money into KZN. It shouldn't be up to just the KZN ratepayers to foot the bill for what happened there. It's a problem throughout, where we're not getting the right service delivery. And, yeah, I actually call this particular formula problem the RRM — the Rates Randage Monster. And this thing will basically eat up all equity in your property over time. And you must realise too that the municipality ranks first in terms of securing equity in your assets. So if the municipalities are great, they will get first dibs at the equity in the property before even the banks. So even the banking sector will be affected ultimately, where their equity is taken away by the rates.Patrick Kidd: Another argument you made in your letter is essentially how these municipalities become a shareholder in your property in a way. Could you just explain that?Roy Tilley: Yeah, well, basically, by virtue of the fact that they're applying a percentage to the municipal value of your property, they become a shareholder in the value of your property. But first of all, they never paid for it. They never do any work for it. And they get a comfortable yield. Particularly now on industrial property, they're getting 5%. If you were able to buy a property and rent it out and pay all your bills, you'd be really happy to get 5% clear off your property after everything. And this is what these guys are getting. They're getting that without doing a damn thing.Patrick Kidd: And obviously we've looked at this in the context of your industrial property, but how could this affect residential properties — maybe older property owners across the country?Roy Tilley: Yeah, old people ultimately will be forced out of their homes because they'll be on a fixed, more or less fixed income from some pension or something. So ultimately they won't be able to pay their rates. It'll just keep creeping up, creeping up. And if they live long enough, their randage, their percentage applied to their property, will grow right up to some stupid level like where we are. Five percent — but 3% could finish most of them off, where they can't afford to service their properties anymore and then they're forced to sell at some stupid price. So the big thing here is that we have a freehold building. There's been a lot of work done over the years to pay it off. Now, like most people who've got industrial property, or even any kind of commercial property, because they had three cents in the rand in KZN, they are basically paying a bond that never goes away. It's a negative cash flow that never goes away and it has no limit. So that's just crazy. I mean, the whole idea of being an investor or building something up for the future is that you build up the tree so the tree can produce the fruit for you. But now these guys are coming along and stealing all your fruit.Patrick Kidd: So as these rates compound, you've mentioned that you've had to pause bonuses on some of your staff. Obviously, I'm sure your tenants' rents are going to increase. It seems completely untenable.Roy Tilley: Yeah, it is untenable long term. Mathematically, you can't beat the eighth wonder of the world, according to Einstein, which is the power of compounding. You can't apply an ever-increasing percentage to an ever-increasing number. Eventually, no matter what you do with any property, you won't be able to service that. And we are at the front line here because, like I said before, this municipality has got the highest randage in the country. And just to give you a good example, residential housing in KZN is at 1.5 cents. Okay, that's your randage — 1.5%. But in Cape Town, industrial property is at roughly 1.6 cents. So there's such a difference. So you've got 1.6 cents for industrial property in Cape Town, about two-and-a-half for Joburg, and five cents for Durban. And Durban is not the industrial heartland of the country — Johannesburg is. But why is Durban paying double Johannesburg? This is insane.Patrick Kidd: So when you raised this alarm, you reached out to Rob Hersov specifically, as well as Helen Zille. Have you gotten any response back from those avenues?Roy Tilley: I never got any feedback from there. I've talked briefly to one of the DA guys here, Hanif Hoosen, who is an assembly leader in the DA, but he hasn't seen the urgency of this yet. I have been speaking to Bruce Taylor of ActionSA and he has seen it, and we're trying to set up a meeting with Alan Beesley of ActionSA to also take this further up the chain. Because we basically need to put a cap on the percentage, like I said. Once you put a cap on the percentage, you can survive the thing. And then it becomes much fairer because if the property goes up after that by 30% or something, then your rates will go up 30%. That's fair. But you can't have your property going up 30% and your rates going up 115%.Patrick Kidd: And so what do you see as the remedy to this?Roy Tilley: The remedy is an amendment of the Municipal Property Rates Act of 2004. We need to put a cap on the maximum percentage that can be applied to any property. We are currently at 5%, or five cents in the rand, on industrial property from July. Now, that's really too high. I would like that cap to three cents in the rand. And then every four years they can get 3% of the new up-value of the property. But they can't, once it hits 3%, keep getting extra money every single year. And that's what they're doing. Because they can't run their budget properly, they go for the easiest target, which is a ratepayer. Because, as I mentioned earlier, you cannot switch this off. You can't escape it like a python slowly crushing you. You can't stop the rates. No service is given by rates. It's not water and electricity. So what do you do? You just slowly bleed to death while they get fatter.Patrick Kidd: Roy Tilley, an industrial property owner in Durban. I'm Patrick Kidd for BizNews.com.

Roy Tilley: The municipal "Rates Randage Monster" strangling South Africa's property owners

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