Buyers, here’s why you should avoid sectional title schemes with low levies
The sectional title property market is the fastest-growing housing type in the country. Reasons for this include the fact that a higher concentration of homes on a stand reduces pressure on municipal infrastructure and thus costs less to service than traditional suburban homes which each require their own utility connections and meters. Rates and taxes on sectional title property compared with those of suburban homes is also lower.
Sectional title developments compete against each other on a range of aspects, including location, property features and resident facilities, as well as levies. All things being equal, prospective buyers will be more inclined to purchase in developments where the levies are more affordable.
On face value this makes sense to first-time buyers trying to keep their monthly costs to a minimum, but in the long run and especially now, owners of sectional title property whose levies have remained unchanged for a number of years are very likely in for a nasty surprise come January 2017.
The Sectional Title Schemes Management Act (STSMA), which was Gazetted on 7 October this year, requires all share scheme – regardless of size – to have a reserve fund which has been implied by the regulations to be maintained equal to 25% of the scheme’s total annual levy budget.
As mentioned in a previous article, this could see sectional title owners’ levies increase by 15% per year (or almost triple the inflation rate).
Shaun Groves, Gauteng rental manager for Lew Geffen Sotheby’s International Realty, believes that many Johannesburg sectional title schemes have not used the time between the drafting of the regulations in 2011 and their gazetting last month (five years) to adequately make provisions so that owners are not crippled by exorbitant levy hikes.
And this will be the case for many sectional title owners as there has historically been a tendency for trustees to keep levy increases on hold for years on end, as confirmed by Coenie Oosthuizen, CEO of the National Association of Managing Agents (NAMA), whose organisation represents 80% of the managing agents active in the market.
The issue this presents is that many schemes’ current levies are insufficient to cover major maintenance projects. Sotheby’s Groves says many schemes are in this boat.
“I have no doubt that many owners are going to feel the pain of increased levies which will compound the struggle to realise yields in a notably subdued rental market,” says Groves. “This year has been particularly tough as yields have come under severe pressure and any increase in the operating cost of a property will have a direct impact on net profits. Landlords may look to offset this by increasing rentals, therefore pushing up prices and putting even more pressure on consumers.”
Cape Town landlords have adopted a different approach in anticipation of levies increasing beyond historical levels.
“I have seen a number of leases including clauses that if levies or rates increase the landlord may adjust the rental accordingly but I would advise against it as a blanket practice, especially if they risk losing stable and reliable tenants,” says Lorraine-Marie Dellbridge, rental manager for Lew Geffen Sotheby’s International Realty in Cape Town’s Southern Suburbs. “Not only will the landlord have to go through the onerous process of finding a suitable new tenant, it could be costly if the house stands empty which is a real possibility if the increase prices the property out of its current market.”
Prospective buyers need to insist on getting sight of a scheme’s financials to ensure levies being charged are complaint with the proper management and maintenance costs of the scheme.
“First-time buyers on a tight budget should look for low-maintenance schemes that are well run and maintained, and whose financial statements are in good order,” says Arnold Maritz, Cape Town Southern Suburbs co-principal for Lew Geffen Sotheby’s International Realty. “Request a copy of the financial statements, and look for the presence of a reserve fund as well as any adverse figures for non-payment by other owners in the complex.”