Proposed Increase in VAT and its implications on Real Estate

In February 2025, South Africa’s Finance Minister, Enoch Godongwana, proposed increasing the Value-Added Tax (VAT) from 15% to 17% to address funding gaps in essential services such as health, education, transport, and security. This proposal, however, faced significant opposition within the coalition government, leading to the unprecedented postponement of the national budget presentation to March 12, 2025.
Potential Impact of a VAT Increase on Inflation
Implementing a VAT hike is anticipated to have several economic repercussions:

• Inflationary Pressures: A VAT increase would likely raise the prices of goods and services, as businesses pass on the additional tax burden to consumers. This could lead to an uptick in the overall inflation rate.
• Cost of Living: Higher prices would disproportionately affect low-income households, who spend a larger share of their income on consumables. The Pietermaritzburg Economic Justice and Dignity Group estimated that a 2% VAT hike could increase a basic household grocery basket by approximately R375.16, exacerbating food insecurity and poverty.
• Implications for Interest Rates
• The South African Reserve Bank (SARB) closely monitors inflation trends to inform its monetary policy decisions. An increase in VAT-induced inflation could prompt the SARB to consider adjusting interest rates:
• Economic Growth Concerns: Higher interest rates could dampen consumer spending and business investment, potentially slowing economic growth. This presents a challenging balance for policymakers aiming to control inflation without stifling economic activity.

Impact on Property Prices and Sales

• Increased Transaction Costs: A higher VAT rate would elevate the costs associated with property development and sales, particularly in the commercial sector where VAT is applicable. Developers may pass these additional expenses onto buyers, leading to higher property prices.
• Market Activity: The rise in property prices could deter potential buyers, especially in the commercial real estate market, potentially leading to a slowdown in property transactions.

Effect on Rental Market

• Operational Costs: For commercial property owners, the increased VAT would raise operational expenses, as VAT is charged on rental income if the landlord is VAT-registered. This could result in higher rents for tenants to offset the additional tax burden.
• Tenant Affordability: Higher rents may strain tenants’ finances, particularly small businesses, potentially leading to increased vacancy rates if tenants are unable to afford the escalated costs.

Influence of Potential Interest Rate Adjustments
The South African Reserve Bank (SARB) may respond to VAT-induced inflationary pressures by adjusting interest rates:

• Borrowing Costs: An increase in interest rates would raise the cost of mortgages and property financing, affecting both existing homeowners with variable-rate loans and prospective buyers.
• Investment Decisions: Higher interest rates could deter real estate investments, as the cost of financing projects becomes more expensive, potentially slowing down new developments.

Considerations for Stakeholders

• Developers and Investors: Should assess the feasibility of projects under the new tax regime and potential interest rate changes, considering strategies to mitigate increased costs.
• Property Owners: May need to evaluate rental pricing structures to balance covering additional expenses without disproportionately impacting tenant retention.
• Prospective Buyers: Should consider the long-term financial implications of purchasing property in a potentially higher interest rate environment.

In summary, the proposed VAT increase, coupled with possible adjustments in interest rates, is likely to introduce challenges to South Africa’s real estate market. Stakeholders are advised to stay informed and adapt their strategies accordingly to navigate this evolving landscape.