Cape Town – The potential increase in VAT could reduce consumer spending, particularly on non-essential items, negatively impacting property owners with retail exposure as tenants might struggle.
Ridwaan Loonat, a senior analyst for Property at Nedbank Corporate and Investment Banking, said VAT is charged on rental income from commercial properties if the landlord is VAT registered, but not on residential rental income.
“Higher VAT can also contribute to inflation as businesses pass on the increased costs to consumers. This could lead to higher development costs for new projects, with developers passing these costs onto buyers,” Loonat said.
Finance Minister Enoch Godongwana was scheduled to table the 2025 Budget on February 19.
However, in an unprecedented eleventh-hour announcement, the budget was postponed to March 12. Amongst other things, the budget that was to be presented showed potential VAT rate increase from 15% to 17%.
Ahead of the planned tabling, Treasury had shared budget documents – under embargo – with select media and economists. Despite the delay, the embargo has since been lifted.
In this week’s publication is a summary of the key elements contained in the budget document, keeping in mind that a new budget could be formally tabled next month.
Loonat said it is important to note that real estate often acts as a hedge against inflation, as property prices have the potential to rise.
“However, this must be considered in the context of current market conditions. Property prices tend to increase with the cost of raw materials and labour.
“However, if inflation is too high or the economy is fragile, this could affect the likelihood of further interest rate cuts and ultimately GDP growth.”
Dr Farai Nyika, an academic at the Management College of Southern Africa (MANCOSA), said the widely publicised budget had several proposals that have implications for the property sector and property owners.
“Since most South Africans earn less than R850 000 pa, these individuals would be cushioned a little from the annual rates and electricity tariff increases that kick in from April to July.
“About 70% of houses sold in South Africa cost less than R1m, thus the tax adjustments were particularly welcome,” Nyika said.
He said the proposed change to raise VAT from 15% to 17% has negative implications for property owners.
“Electricity purchases incur VAT in RSA, so that means one will receive fewer units of electricity for every rand spent. In addition, the fixed home user tariff/charge will also increase by 2% for homeowners to whom these apply.
“VAT is a flat tax and is therefore regressive as it impacts lower income households and property owners more than it does for higher income households. Remember that municipalities also charge VAT on water, so this basic human right becomes even more expensive per unit. Thus, the relief provided to homeowners from the adjusted tax brackets will be eroded by the VAT increases.”
