Sapoa on the warpath about proposed development surcharge – this time in eThekwini

The SA Property Owners Association (Sapoa) has voiced its concern about the development charges policy that has been touted by the eThekwini Municipality, which includes the introduction of a development surcharge on all property developments.

This follows plans by the City of Johannesburg (CoJ) to also implement a development contributions policy.

Sapoa has been at loggerheads with the CoJ for many months about the details and impact of this policy.

Sapoa CEO Neil Gopal said this week the CoJ still intends implementing this policy but has not yet released the calculator to give developers some idea of what the costs would be.

“They intend releasing the calculator the same day they want to implement the policy, which is rather bizarre,” said Gopal.

“We are conferring with our attorneys but have every intention of challenging it.”

Gopal said Sapoa is also opposing the implementation of a development contributions policy in eThekwini.

“It is our contention that the development charge policy is not based on the principles of ‘equity or fairness’,” he said.

Positive impact ignored

The draft eThekwini policy states that those who enjoy the benefits of the bulk services should pay for them.

However, Gopal said it completely ignores the positive impact of developments in the city.

“While the city continues to benefit from increased rates and taxes on an ongoing basis, as well as the positive impacts of job creation and economic growth, property developers are now unfairly requested to pay for infrastructure charges with no clarity on whether the development charge is earmarked or ring-fenced for the specific scope of the infrastructure linked to the development and related development charge.

“It is obvious this ‘development charge’ appears to be an additional ‘tax’ on land and property development.

“The developer derives a once-off benefit, and for this benefit significant risk is taken. The city takes no risk and enjoys all the benefits,” he said.

“This model is unworkable and will render Durban uninvestable. Developments will most likely decline as investors will look elsewhere.”

Gopal added that Sapoa is not in principle opposed to a surcharge, provided the law is complied with and developers know precisely what they will be getting in terms of tangible services, in return for the surcharge.

He said the policy is also silent on what happens once the development charge is paid, adding the inherent danger is that this money is not ring-fenced and is spent in other areas or for other purposes.

“The developer already takes the property, development and financial risk. The city does not,” said Gopal.

“The city benefits from service charges and mark-ups and rates income in perpetuity. The developer does not.

“The developer cannot absorb the cost of external infrastructure as well as take all of the business risk,” he added.

“This would render most projects unworkable, and it is more than likely developments will be difficult to implement as they are financially unfeasible.”

Calculation method ‘vague’

Gopal said the method used to calculate the development charge is so vague it has no meaning and is subject to guesswork and the whims of an official in any of the impacted departments.

This means it will be impossible for any developer to predict the true cost of development before such costs are determined by the municipality.

Sapoa has urged the eThekwini Municipality to suspend the current process and seriously understand the role the development community plays in the economy of the municipality.

The association believes that if the development charges are imposed on a blanket basis as an additional “charge” against development, regardless of the actual external infrastructure cost in that development, development in eThekwini will simply dry up.

Gopal added that the catastrophic riots in KwaZulu-Natal in 2021, the floods this year and regional instability have caused developers within the region to seriously reconsider eThekwini as an investment destination.

“The timing of the imposition of this development charges policy is thus extremely adverse and will add another reason why developers should tread carefully when considering investing in Durban,” he said.

Host of negatives

Malusi Mthuli, president of the South African Institute of Valuers and provincial head of FNB Commercial Property Finance in KwaZulu-Natal, said metros are desperately in need of development and he believes the introduction of a development charge will only dampen the extent to which development could potentially grow in South Africa and specifically in these municipalities.

Mthuli said the introduction of a development charge policy adds another layer of municipal approval, which adds to the level of uncertainty, increases the development period from inception to conclusion and therefore also the holding costs, thereby negatively impacting the feasibility of developments.

He said it would be much easier for developers if the municipality had a set development charge, such as value-added tax for instance, which would mean there is no argument about it and it is clear.

Mthuli does not believe there is a justification for development charges or levies on a site.

“Municipalities are supposed to create a passage for developers to develop real estate,” he said.

When they develop real estate, they enhance value and also enhance livelihoods.

“But over and above that, the rates base improves. The most transparent and easily controllable way for government to get taxes is through the rates base.

“If you have a property that was worth R10 million and, after being enhanced, is now worth R100 million, this [means] the municipality is going to increase the revenue from that one property tenfold – without even spending a cent,” he said.

Mthuli said the details around development levies are a bit sketchy at the moment but he believes they will be in addition to any contribution the developer makes towards other infrastructure around their development.

“Unless I am misinformed, and if you listen to the narrative, there is little around all the other charges being absorbed into one development levy,” he said.