Introduction

One of the most important sources of revenue for South African local authorities is rates and taxes. Therefore, the dependency on rates and taxes revenue and collection cannot be understated.

It is common knowledge that the South African Municipal Property Rates Act (MPRA) provides for, amongst others, the fair and equitable valuation methods of properties. However, despite accepted valuation models being adopted by Municipalities, and rates and taxes being levied accordingly, scope exists for significant increased rates and taxes revenue generation and revenue loss reduction.

As French and Gabrielli (2015) note, since the global Financial Economic Crisis (FEC) hit the world markets in 2007/2008, therole ofproperty valuationhas been under greater and greater scrutiny (p. 1). As budgets become tighter, greater attention is turned towards balance sheets. Reducing revenue loss is a primary method of securing municipal stabilityand property valuation tactics are the main avenue towards such reduction.

Revenue loss reduction and the resulting increased revenue base will provide Municipalities with access to funding to advance Municipal service delivery. For example, R1bn increased revenue per annum could be leveraged to supply a R10bn loan, which is repaid over 10 years from the additional income received. There are obviously many benefits to a Municipality enhancing revenue collection.

1.1 Problem to be addressed

Municipalities in South Africa are required to value all properties in their jurisdiction every 4 years. Various valuation methodologies are applied. The South African Municipal Property Rates Act (MPRA) provides guidance on determining Market Related values. Whilst municipalities seek to ensure the determining of market value in the most cost effective manner possible, the private sector adopts sophisticated valuation methods to appraise property investments.

Currently, there are a number of methods for appraisal of property investments, which include:

1) the direct capitalization method

2) discounted cash flow method

3) replacement valuation

4) comparative sales

5) remunerative valuation methods

However, in recent years municipalities have adopted mass valuation methods which have proved to be more cost-effective but which have also yielded substantially inaccurate reflections of real property value (Levy, Dong, and Young, 2016.).

1.2 Purpose of this study

This study identifies areas of property valuation anomalies (municipal valuation roll property values are significantly lower than publicly available open market property values), which may be pointed to as a cause of Municipalities rates and taxes revenue loss.

This study also provides methods to increase revenue through revenue loss reduction by implementing methods developed by the researcher.

This study accomplishes these tasks through investigation of balance sheet enhancement methods of Municipalities in South Africa, not only by using the Municipal Valuation Roll and Supplementary Valuation Rolls but also by expanding the municipal property valuation process to consider property owner market valuations.

The purpose of the study is to develop a better method for South African Municipalities to enhance their balance sheet by improving revenue generation through more effective property valuations.

This purpose is achieved by:

1) Developing a strategy that municipalities can use to prevent abuse of the valuation objection process.

2) Recommending methods to increase municipal revenues and restrict claims for municipal value reductions relating to the Municipal Valuation Roll and Supplementary Valuation Rolls.

The basis for this pursuit is that large discrepancies in property values in annual reports of publicly traded companies vs. municipal valuation rolls are evident.

1.3 How this study contributes to existing literature

To more effectively address the issue of adequately reflecting actual property value, this study takes into consideration the valuation methods applied as outlined in annual reports of various publicly traded companies (REITs as well as other firms) and as advised during personal interviews and/or online surveys of private sector valuers, bank valuers, bank mortgage finance officials and municipal valuers.

This study examines a sample of properties in 5 of the largest metropolitan municipalities in South Africa and compares the municipal value to the annual report values of the publicly traded companies. In doing so, it outlines and evaluates the following points:

1) The Municipal methods of valuation for rates and taxes determination; and

2) A sample of private sector (not government owned properties) properties reflecting the municipal valuation of properties versus market values of properties; and

3) Property owners rights to object to municipal valuations and resulting impact of decreasing rates and taxes revenue through municipal rates and taxes reductions (when in fact many property owners object to get their property values decreased in order to benefit from lower rates and taxes WHEREAS in reality their properties are worth significantly more); and

4) Current revenue losses to municipalities through municipal undervaluation of properties thereby negatively impacting on rates and taxes revenues accruing to Municipalities; and

5) Publicly traded companies such as Corporations and REITS (Real Estate Investment Trusts) whose balance sheet values and revenues have a direct impact on share values; yet strangely, municipal values of such properties are significantly lower than publicly disclosed in annual reports and balance sheet values; and

6) Methods to reduce current rates and taxes revenue losses due to incorrect valuations and ultimately increase rates and taxes revenues through:

a. Implementation of improved valuation methodology (when compiling the Municipal Valuation Roll) at little or no cost to municipalities by way of ensuring valuers are advised to assess private valuations per financial statements and balance sheets of publicly traded companies at time of undertaking municipal valuation roll valuations;

b. Introducing a requirement for supporting documentation by companies, Trusts, etc., who wish to motivate for rates and taxes reductions, such supporting documentation to be provided by property owners seeking a decrease in municipal valuation roll value, should include the following:

i. Copy of property owners current years audited financial statements and annual report of company (property owner) wherein the most recent market value of the property is stated and reflected in the balance sheet and annual report; and

ii. Letter from the financial institution who financed the property confirming and acknowledging the proposed new lower market valuation proposed by the property owner;

This study proposes that the Municipalities and their appointed Municipal Valuers overseeing the Municipal Valuation Roll should use not only Mass Appraisal/Mass Valuation Methods but also the method of identifying market values as determined by referencing property values of properties as reflected in publicly available Annual Reports of publicly traded companies. Share prices are linked to company performance and therefore market value of real estate assets listed in annual reports of publicly traded companies should be used as a minimum value for municipal valuation roll purposes. In addition, whilst the Municipal Valuation Roll is only undertaken every 4 years we believe that the supplementar valuation roll should be updated annually to align with Publicly Traded Company increase in property values as disclosed in their annual financial statements. This paper will show the losses to the municipalities currently and the increases in revenue to the Municipality should this method of market value determination be adopted. The Rates Act makes mention that municipalities should determine market values for valuation rolls, on which rates and taxes are determined.

Those property owners who are benefitting from low municipal valuations are reducing the Municipalities ability to deliver services to clients, not to mention that the more rates and taxes collected could result in higher service delivery.

1.4 The methodology

There are two methodologies applied in this study. The first is the gathering of market value valuations from South African Publicly-Traded Companies to compare them to the valuations of the Municipality Valuation Roll. The second is the obtaining of qualitative data from questionnaires distributed to valuers in South African to better understand the methods they themselves utilize when valuing a property. This mixed-methods approach will be described in more detail in Chapter 3. For now a brief description will suffice:

In determining the methodologies utilized by valuers, two questionnaires have been developed and distributed:

1) One for professional valuers to determine the most commonly used valuation methods both in the private sector and by municipalities

2) A second for banks engaged in mortgage financing, to determine the importance of market value to banks and whether valuers are required to have professional indemnity insurance coverage andif sowhy.

The data collected from this diverse group of property owners, valuers, bank finance lenders and participants in the market were analyzed. An assessment of the data collected revealed that in the private sector the most commonly used methods of valuation are the direct capitalization of first years net income. However, from a Municipal Valuation perspective, the Mass Valuation Methodology was utilized.

A case study approach was undertaken involving real estate portfolio valuation methodologies together with an assessment of market values of properties (2016 annual reports of Publicly-Traded Companies) in respect of publicly traded entities. Market values were then compared with municipal values of properties (based on 2016 Municipal Value on record) to determine discrepancies.

Discrepancies were documented to illustrate impact on revenues to both Municipalities (loss of revenue due to incorrect valuation methodologies applied in instances of the Municipal Valuation Roll and Supplementary Valuation Roll) and property owners (lower rates and taxes based on lower municipal valuations, results in higher property values and share prices due to lower operating costs to property owners).

Ultimately, loss of revenue to Municipalities results in reduced Municipal ability to render services to inhabitants in Municipal areas. Conversely, those property owners benefitting from incorrect (lower) municipal valuations will benefit from lower operating costs (rates and taxes) applicable to properties in question thereby resulting in higher property values in the open market.

1.5 Importance of the findings: Outcomes of the study

The importance of the findings is that it is evident that municipalities could be generating more revenue by more effectively valuing properties. By more effectively valuing properties, municipalities could fill shortfalls in budgets that currently restrict the local governments ability to spend on infrastructure and other programs that are important to constituents. The benefits of increased rates and taxes revenue include the following:

Enhanced municipal balance sheet and credit rating;

Additional borrowing achieved by municipality based on future income;

Additional earnings contribute towards municipal service delivery, bulk services installations, economic growth, and job creation.

1.6 Assumptions

For the purposes of this study, it is assumed that the annual reports of the Publicly Traded Companies are correct. It is also assumed that the Municipal Valuation Rolls are correct for when comparisons are made between Municipal Valuations and Publicly-Traded Company valuations. A discussion of how these assumptions might impact the studys outcome is provided in more detail in Chapter 3. The limitations presented by these assumptions are provided in the following section.

1.7 Limitations

The limitations of this study are: 1) obtaining valuations of properties from Municipal Valuation Rolls is not always easy or even possible; different Municipalities have their own search methods, and in some cases no data is obtainable for a specific property. Thus, it was not always achievable to do a comparison of valuations for every property; 2) while this study proposes a method of valuing properties that could enhance the balance sheet of Municipalities and increase their revenue stream, it does not evaluate the effect that this valuation method might have on business or property owners; one concern is that property owners may find this method too constraining on their own portfolios, investments or budgets and thus seek to move to other more tax-friendly communities. To fully appreciate the findings of this study, future research will have to be conducted to evaluate and understand how this studys proposed method might be received by the business/property owning community. More will be said about this limitation in the Recommendations chapter.

1.8 The Following Chapters

Current methodologies used by valuers in South African Municipalities is evaluated in Chapter 2, which examines published literature relevant to the topic, and in Chapter 4, where valuer responses are provided. These responses are discussed in Chapter 5. Chapter 3 provides an examination of the methodology used to obtain data about property values, both from the Municipal Valuation Roll and from the publicly traded companies, which publish market values of properties in their annual reports. In Chapter 6 recommendations for valuation methodology and for answering valuation objections are provided so as to give Municipalities a better opportunity to enhance their balance sheets and increase their revenue streams. The chapter ends with a conclusion that also gives guidance for future research.

2 Literature Review

2.1 Current Status

The Municipal Property Rates Act (MPRA) signed into law by the President of the Republic of South Africa on 11 May 2004 provided the Municipality with the right:

To regulate the power of a municipality to impose rates on property; to exclude certain properties from rating in the national interest; to make provision for municipalities to implement a transparent and fair system of exemptions, reductions and rebates through their rating policies; to make provision for fair and equitable vaiuation methods of properties; to make provision for an objections and appeals process; to amend the Local Government: Municipal Systems Act, 2000, so as to make further provision for the serving of documents by municipalities; to amend or repeal certain legislation; and to provide for matters connected therewith (Local Government: Municipal Property Rates Act, 2004).

Those powers were substantially increased and defined with the 2014 Amendment, Act No. 29. Among the new insertions were the right:

To provide that a rates policy must determine criteria for not only the increase but also for the decrease of rates; to delete the provisions of section 3(4) and to provide for a rates policy to give effect to the regulations promulgated in terms of section 19(1)(b); to provide that bylaws giving effect to the rates policy must be adopted and published in terms of the Municipal Systems Act; to provide for the determination of categories of property in respect of which rates may be levied and to provide for a municipality to apply to the Minister for authorisation to sub-categorise property categories where it can show good cause to do so (Local Government: Municipal Property Rates Amendment Act, 2014).

Joburg, the Official Website of the City of Johannesburg, states that there are about 826 000 registered properties in the City, and the property rates levied by the City is the single most important basic revenue source for the City - about 20 percent of total income, says the City's director for rates and taxes, Erika Naude (Citys new General Valuation Roll, 2012).

There is a need for the MPRA in South Africa for numerous reasons, as the Cooperative Governance & Traditional Affairs Ministry (COGTA, 2017) states on its government website; COGTA summarizes the most essential aspects of the MPRA for the Republic of South Africa by highlighting the following pointsnamely that the Act is needed

To regulate the power of a municipality to impose rates on property (in accordance with section 229(2) of the Constitution);

To provide a uniform framework for regulating the rating of property throughout the country

To exclude certain properties from rating in the national interest;

To make provision for municipalities to implement a transparent and fair system of exemptions, reductions and rebates through rating policies;

To make provision for fair and equitable valuation methods of properties;

To make provision for a fair objections and appeal process regarding valuation of property (COGTA, 2017).

The emphasis on a transparent and fair system and on fair and equitable valuation methods, as pointed out both in the sections of the MPRA identified at the beginning of this chapter and by the COGTA (2017) in its summation of the Act, is important to note because in the Republic of South Africa, equitability, transparency and fairness are serious issues that have impacted the country for decades as it has struggled with a wide-ranging variety of local and national matters. As the country works towards bettering itself, its government, its communities, and its infrastructure, it stands to a reason that a system of valuation should also reflect the values and ideals the nation seeks to implement throughout the land. The literature discussed in this chapter focuses on providing an understanding of the current fair and equitable valuation methods so as to allow for an intellectual basis upon which further development can be conducted.

Indeed, provisions of the Municipal Properties Rates Act have specifically addressed the issues of the importance for valuations of property to be based on fairness and equality:

a. The Act also requires monitoring and there is a duty on the municipality to ensure that the valuation roll submitted is a fair reflection of Market Valueacross the entire spectrum of properties comprising the valuation roll; and

b. Section 3(3) of the Act specifically mentions the aspect of fairness and equality

For these reasons, the current study, which places its focus on arriving at a better understanding of market value and how a fairer and more equitable system can be devised, proceeds with an examination of the content that follows.

2.2. Current Valuations Methodology

2.21 How a Valuation is Conceived

Definitions and Terms to Know

The following list of terms is by no means exhaustive and does not include every important concept discussed in this paper. The following is merely provided to give some basic background information on valuations. The definitions are retrieved from UniqueCo Property Valuers (2017) and apply to Municipalities in South Africa.

Municipal Rates PolicyThe rates policy of a municipality must: 1) treat persons liable for rates equitably; 2) determine the criteria to be applied by a municipality if ita) levies different rates for different categories of properties, b) exempts or grants rebates or reductions, and c) increases rates; 3) provide for appropriate measures to alleviate rates burden on the poor; 4) take into account effect of rates on public service infrastructure; 5) take into account effect of rates on registered public benefit organizations; and 6) allow a municipality to promote local, social and economic development.

Valuation RollA valuation roll of a municipality 1) must list all rateable properties in the municipality; and 2) is valid for four financial years (but may be extended by one financial year

How a valuation is conceived is highly important when it comes to engaging in the process of valuing properties. This is true for countries the world overnot just for South Africa. The case of Freemont (Denbigh) v Knight Frank LLP [2014] EWHC 3347 (Ch) is an important case in global valuations history because it highlights the role that context plays in determining a propertys precise value at a given point in time. Context determines the parameters of the propertys value by identifying whether the property is planned for a particular use or function, whether any contracts are established upon the property, and so on. As Vigus and Crossingham (2016) explain, there is every reason for valuers themselves to value contextualization:

The case of Freemont (Denbigh) v Knight Frank LLP [2014] EWHC 3347 (Ch) is a good example of a valuer successfully relying on a narrow contractual definition of the services which it was retained to perform, and reminds us of the importance of controlling the scope of the services offered. In this case, the surveyor valued a property at 17m with outline planning permission, and 18.7m with detailed planning permission. After the purchasers acquisition of the property, it then took no steps to develop the site and the buildings became dilapidated. In the circumstances, the purchaser sought to dispose of the property and put it on the market, receiving a number of offers but rejecting them, it said, on the basis of the surveyors initial valuation which was given in the entirely different context of the purchasers initial acquisition. Ultimately, the purchaser sued the original valuer saying that, had the initial valuation been accurate, they would have accepted lower offers and that, having rejected a number of offers, they had lost the chance to dispose of the site on best terms. Having reviewed a number of the seminal cases in the area Smith v Eric S Bush [1990] 1 AC 831; Scullion v Bank of Scotland [2011] 1 WLR 3212; Caparo v Dickman [1990] 2 AC 605 the judge held that the valuer was not liable for the claim. The contract between the valuer and the purchaser was key: it narrowly defined the scope of services as relating to the security valuation only, there could be no suggestion that there was a wider or longer-tail liability in relation to any later or other reliance by the purchaser on the advice, and the advice could not be relied on by the purchaser in considering the subsequent disposal of the site. So, largely as a result of the clear and narrowly defined scope of the valuers contractual retainer, its advice could be relied on only for the purpose for which it was intended, and the circumstances of the claim were therefore outside the contractual and tortious scope of the valuers duty. The lesson for practitioners is to be as clear as possible about the scope and purpose of their advice and to limit this as far as possible.

As Vigus and Crossingham (2016) show, valuers must protect themselves from legal recourse by specificallyand accurately showing how and what facts their valuations are based upon. So much is dependent upon proper valuationsfor example, owners may make business or investment plans based on property value, and if that valuation is not correct or accurate those plans could suffer considerably. Therefore, valuers themselves are in need of a system that helps to protect them from lawsuits that could threaten their productivity, career, and livelihoodnot to mention the Municipalitys or banks reputation and own balance sheet, which is dependent also upon acquiring accurate valuations of properties.

Therefore, how a valuation process is conceived makes a great deal of difference in what type of outcomes may be expected. If the process is conceived in terms of maximizing the Municipalitys ability to tax and apply rates to service its own programs and policies provided to communities, then there should be a system of valuation in place that supports such a conception. If the process is conceived in terms of providing an easy, one-stop valuation method that can be applied using a mass valuation system, then the current set-up may be judged to be sufficient. The conception is what frames the end goaland in todays credit-crunched, debt-laden world, where countries are focusing more and more on enhancing balance sheets and increasing revenue streams to meet the demands of infrastructural growth and development, the former conception should be the primary focus of a Municipality engaged in valuations practices under the MPRA.

2.22 The Purchase Price Method of Establishing Value

As Mangioni (2016) notes, In the competitive residential mortgage market there is pressure on the valuer to suggest that the purchase price of property is ultimately the best evidence of value (p. 2). This pressure stems from both buyers and sellers and is reflective of a desire to attach more or less weight to a banks valuation as authoritative. The criteria of such a valuation, however, stems not from banks themselves but rather from laws and court-based rulings. Inez Investments Pty Ltd v. J.L. Dodd 1979 NSWSC established criteria for valuers in Australia, and Mangioni (2016) examined how this criteria impacted the concept of using purchase price of property as best evidence of value.

What Mangioni (2016) found was that one factor that goes into how valuations are utilized is loan insurance. Mortgage insurance covers the lender in case the borrower defaults, and the amount of mortgage insurance purchased depends on the valuation of the property given by the lender. Mangioni (2016) shows that using purchase price as a valuation method is problematic and not a precise way to determine the best valuation. What is a more evidential approach is that of the market valuation: The formulation of market value and deriving of the value of property is largely predicated on evidence that supports the market value assigned by the valuer. Without evidence, the valuers opinion is no better informed than another opinion of value. This is highlighted in Reading v. The Valuer General (1923), 6 L.G.R. 132 in which Pike, J. stated: Every expert is entitled, if he sees fit, to ascertain the market valueto rest on his own opinion apart entirely from any market transactions, but if he does so he is liable to be met by three things: a. The opinions of other people. b. Values based on sales; and c. Any previous opinion that he himself might have expressed as regard to values. Mr. X like all of us, was not born with an opinion of land values (Rost & Collins 1984:86) (Mangioni, 2016, p. 4). Why a market value valuation should be used instead of a purchase price becomes evident once the variables are considered: so many factors are based on purchase price to such a degree that it is often in the owners best interest to get that price as low as possible. In doing so, the owner is not interested in ensuring that price reflects actual market value: his aim is to reduce payments and fees that might be charged, based on the purchase price of the property. The lower the purchase price, the lower the fees. A valuer who bases valuation on this price may fail to accurately reflect the actual or market value of the property. How market value is determined, however, is a question that Mangioni (2016) asserts should receive more attention.

Mangioni further points out that in mortgage lending practices, valuation is determined differently: In mortgage lending valuations, valuers are provided with the property purchase details and asked to confirm the purchase price as value (p. 4). Yet, as Rooke (2002) notes, recent experience has shown that current major mortgage lending institutions are applying great pressure for valuers to place greater emphasis on the subject sale (p. 48) and so as a result valuers are impacted significantly in how they approach their properties. Mangioni (2016) goes on to find that valuers may inappropriately give greatest weight to the most recently considered information, which would place disproportionate emphasis on one set of materials (p. 5). Or, as happens, valuers set out with a preconceived notion of how a property should be valued and then seek evidence that will fit the pre-conception: even expert valuers indicated that they make early, preliminary judgements and then seek evidence in support of these opinions (Mangioni, 2016, p. 5). Thus, there is ample reason to conclude that valuations in Municipalities are likely to be impacted by variables that do not end in the accurate reflection of real market value. Mangioni (2016) adds that in contrast to this phenomenon in some circumstances it is difficult for the valuer to determine the value of the subject property due to a lack of sales evidence and that the valuation process is thus further compounded when the valuation being sought is for refinancing purposes and there is no sale over the subject property being valued. In these cases, the duty on the valuer is not lessened. It is the role of the valuer to look geographically further or outside the radius of sales that a valuer would ordinarily look at, as well as further back in time for sales (Mangioni, 2016, p. 5). In other words, there is no effective or systematic way that can be established to efficiently value a property based on sales records, as the prices are indeterminate of the way in which the market realizes that value.

Nonetheless, the Australian Prudential Regulation Authority (2000, p. 1) stipulates that all assets taken as security should be valued, wherever possible, at their net current market value. This indicates that regardless of how valuers go about their job, authorities would like to see valuations provide an accurate reflection of market value. Problems persist, however, in realizing market value for valuers. Various researchers and academics have attempted to solve these problems by extrapolating data from other valuation exercises (as in the valuation of publicly held companies, for instance, where shares are seen as a store of value to help appraisers identify the actual real market value of a companyan idea that is not too distant from what this study attempts to describe). More shall be said of how valuations can be conceived in later sections of this chapter. For now, net current asset value per share or NCAVPS is one such method that has been developed in this vein: it is a value that Benjamin Graham developed in the 20th century as a means of evaluating whether a company was trading at what could be called fair market value. Graham calculated NCAPVPS by subtracting total liabilities from a companys current roster of assets and dividing the total by the O/S (outstanding shares) of the firm in question (NCAVPS, 2017). In terms of applying this method to real estate, the same principles would still work: a propertys condition and contextual purpose/plans/contractual oligations and so on would be considered along with all other assets connected to the property; debts and other liabilities would be subtracted from the total and if shares of the property are sold to investors, their worth would be the divider by which that total is evaluated.

In Mangionis (2016) study on valuation methodology, he conducted a survey of valuers to determine their approaches to valuing properties and asked a series of questions that were primarily oriented towards understanding valuations as achieved through analysis of property sale prices. One critical question that is very useful to this study comes at number 7 in Mangionis (2016) survey. He asks: Is property transaction information available in an acceptable timeframe? and receives the following reply:

32 respondents said no, while only 11 said yes (p. 9). That means that nearly 75% of valuers feel that there is insufficient information available to them to make a timely valuation of a property. That finding alone has tremendous impact on the valuation process: it indicates that valuers may be making, in most cases, inadequately informed valuations on propertiesvaluations that impact municipalities considerably, since tax revenue is generated from the value assigned to real estate through this process. What this finding indicates is that even if Municipalities wanted to depend upon valuations or mass valuations for accurate assessments of property valuation, they would really be relying, in all likelihood, on inaccurate readings of the real estate in question. The facts show that professional valuers themselves find it exceedingly difficult to obtain enough data on the property they are valuing in order to offer a substantially supported and accurate assessment of the property. This leaves Municipalities depending on a weak system of appraisal to collect revenue. A better method can undoubtedly be obtained: it simply requires that more access to information be made available. However, this may not be as easy as it sounds. Valuers are limited in terms of what they are able to doand for Municipalities, this means attending to the Valuation Roll, according to the terms of section 33(1) of the Municipal Property Rates Act (MPRA).

2.23 The Municipal Valuation Roll

As the municipal valuer and director of the valuations department in the property unity of Johannesburg stated clearly: Values cannot be influenced or dictated by any party (Oxford, 2013). The director further explained that the main purpose of the valuations directorate is to compile valuation rolls and there are two types of these. The general valuation roll is where we value all the properties in the city. The supplementary valuation roll sees us assessing changes to a property that occur during the lifecycle of the general valuatios role. With the latter we revalue property that has changed, for example if a house has been built on a vacant piece of land. This also applies to changes in zoning, such as from residential to business (Oxford, 2013). What the SA Municipality does to compile its valuation is important to understand and Oxford (2013) provides some detail on how that process is accomplished: First is the physical assessment where the department uses pictometry aerial images taken of a property from five angles and photographs of the fronts of properties to glean valuable data about the value of a property. Then there is the date of valuation, possibly the most important point of reference in this process. As one can imagine, the process is quite detailed and reliant a number of channels of data. However, the date of valuation, as is noted, is extremely important because of the fact that market values will rise and fall over the course of a few years, and having that date as a reference enables valuers to see at what point in the valuation wave the property was pegged at a specific price.

Oxford (2013) states that the Municipal valuer of Johannesburg uses the property market values of a specific year when it comes to valuing all the properties for the new general valuation roll and that whenever we valued a property for this roll we used the prices from that specific year. For residential properties, house sale values from the four years prior are used to provide an accurate assessment of where market values currently are.

But what if there was a more accurate way to determine market values? What if the Municipality could turn to a source of information that published this data publicly in its annual reports? For instance, what if a Municipality like Johannesburg examined the annual reports of Publicly-Traded Companies in South Africa to determine where investment properties in a given portfolio were being valued by the market? Indeed, this study attempts to answer this very question.

Returning to current practices, however, it may be seen that there is ample room for improvement. Oxford (2013) notes that Johannesburgs director of valuations analyzes the sales of prior years to obtain a basis of valuation for residential properties in each suburb. For example, if you stay in Blairgowrie we published all the sales in that area on our website along with the selling date, the selling price, the physical address of the property and we explained how we valued this property. People were then able to look at those sales, compare them to their properties and make an informed decision. This is, in one sense, no different from turning to the annual reports of South African publicly-traded companies, which publish similar data on valuations. Where the sources do distinguish themselves is in the actual valuation applied by each. This study will have more to say on that later. For now, it is enough to know that there is a distinct difference between Municipal valuations and the valuations of properties provided to the public by investment companies.

Another important point to note about the Valuation Roll is that when it is compiled, all the property values are now fixed at this date of valuation until the next general roll and are assessed against this benchmark (Oxford, 2013). The reason this valuation procedure is problematic is self-evident in a simple examination of a 5-year chart of South African Housing Index from 2012-2017. What the chart shows is that a valuation applied in 2012 to properties in 2015, for instance, would substantially undercut the actual market value of the property by more than 100 pts.

By using the general roll as a principle benchmark, the Municipality is admitting that its values are cemented and not subject to change over a given period of time. But values do change and cementing is obviously not the case as far as the actual market is concerned. The market is never static but is always moving, as it is impacted by a number of complex and interlocking variables that stem from social, political and economic spheresand not only locally but also globally. Before external and global market factors are discussed, a closer examination of the valuation process according to the guidelines of the Republic of South Africa for Provincial and Local Government will now be provided.

2.24 Guidelines on Valuations for Municipalities (from Municipal Property Rates Act No. 6 2004)

The valuation process as proposed by the Republic of South Africa for local government has been outlined by the Director General.

It is worth noting that public awareness of valuations is very important to the Republic of South Africa, according to the Guidelines on Valuations, in which it is stated that:

Municipalities are encouraged to involve and educate the community in the valuation process. The Rates Policy specifically calls for public participation. It is important that the following persons be enlightened in regards to the valuation process:

Councilors and municipal officials;

Ratepayers;

Agricultural unions and farming associations;

Ratepayer associations;

Business associations; Civic associations.

It is suggested that the municipality as part of its tender conditions require the valuer to implement a programme of public awareness. This could include:

Call centres

Attendance by the valuer to ward committee meeting

Brochures

Workshops

Radio and television interviews (Guidelines on Valuations for Municipalities, 2016, pp. 4-5)

According to the Guidelines, the Valuation Process begins with the obtainment of data. For deeds-related data, this data can be obtained from the Registrar of Deeds relating to properties within the jurisdiction of the municipality (Guidelines on Valuations for Municipalities, 2016, p. 5). A Deeds Registrations System (DRS) is available through Deeds Weban Internet interfaceto allow registered users to obtain deeds registration online. For general data, a database is developed and compiled by Municipalities, who must ensure that the database is incrementally added or built upon in perpetuityi.e., the database must never be allowed to stagnate because property is always being added or subtracted from the Municipality and values are constantly shifting (Guidelines on Valuations for Municipalities, 2016, p. 5).

For specialized properties, the Guidelines (2016) indicate that municipalities may need to employ the services of private valuers. In such cases, the Guidelines (2016) stipulate that

Private valuers appointed by them have the necessary skills, expertise and knowledge to compile valuations of this nature. Examples could include, mining, forestry, substantial public infrastructure such as major harbours, airports etc. In these cases, municipalities must satisfy themselves that they have clearly identified these properties in their tender requirements and that the valuer has the necessary expertise or professional assistance to draw upon in the compilation of these highly specialised properties. In the case of mining land, municipalities and valuers must have a clear understanding of the definition of a mine and mineral as defined in the Act. Valuers must clearly understand what constitutes equipment and what is deemed to be buildings or improvements with regard to such land and the resultant implication on value. In the case where the freehold owner of land is not the mining title holder, it is essential that both the municipality and the municipal valuer fully understand that the freehold is encumbered by the mining title and that the value of the freehold in such circumstances is a residual land value (p. 7).

The Guidelines (2016) also recommend that a valuer may use a mass valuation system especially with regard to residential properties (p. 5). A mass valuation system commonly used today is CAMAa computer-assisted mass appraisal system, which is an automated system that maintains property data and performs property valuations, sends notifications to owners, and ensures tax equity through uniform valuations. South Africa uses a CAMA system. A basic CAMA system is described in the next section along with how the Johannesburg Municipality employs CAMA in its valuations process as an example of how the system works.

2.25 CAMA

Many governments utilize CAMA, which is best described in the following terms by the Massachusetts Department of Revenue Division of Local Services/Bureau of Assessment (2016):

In mass appraisal, valuation involves automated applications of the sales comparison, cost, and income approaches to value. A good system should support all three approaches. Some specific desirable features include the following:

(1) A replacement cost module tied to commercially available cost manuals, so that costs can be routinely updated.

(2) Flexibility in depreciation schedules, so that users can develop and modify the schedules by property type, building quality and neighborhood as appropriate.

(3) Cost trend capabilities that allow users to adjust cost values to the market by at least property type and neighborhood.

(4) A land valuation module that allows the user to determine units of comparison (acre, square feet, front feet, depth, site), standard unit values, and site, topographic or neighborhood adjustments.

(5) Standard statistical procedures, including measures of dispersion and graphics, that can be used to compute typical sales price per unit and help develop benchmark values, depreciation schedules, and market adjustments.

(6) A sales comparison module that will retrieve a desired number of the most comparable properties to a given subject property based on a mathematical algorithm. Optionally, the system may adjust the comparables to the subject.

(7) A multiple regression feature for use by jurisdictions with adequate sales. Adaptive estimation procedure (AEP or feedback) can also be used.

(8) A spreadsheet module for use in income and expense analysis (Massachusetts Department of Revenue Division of Local Services/Bureau of Assessment, 2016, p. 2).

CAMA has many benefits to Municipalities, as the above makes clear: it is a user-friendly system that reduces a lot of the pain and toil of obtaining and producing data to be used in a valuations process. The proposed method of this study should not be considered necessarily exclusive of CAMA. On the contrary, it could easily be incorporated into CAMA systems to allow for the benefits of mass valuation to still be applied in the valuation process. The problem with CAMA systems as they currently apply have more to do with the valuation method inherent to the system than to the system itself. An example of how the Municipality of Johannesburg uses CAMA shall now be described.

2.26 An Example of How a Metro Uses CAMA and Performs Valuations

The City of Johannesburg is one example of how a Metro uses CAMA. As such, the Municipality of Johannesburg answers frequently asked questions regarding its General Valuations Roll (as of the time of this writing, still as of yet not updated from 2013 on its government website). The following exchanges provide some illumination with respect to how a South African Municipality engages in the valuations process and how mass valuationi.e., specifically by means of CAMA systemis used to aid in that process. Joburgs Frequently Asked Questions (2013) provide the following by framing the information within a question-answer format; these questions and answers are taken directly from Joburgs Valuation Services website:

How does the City Value your property?

The purpose of the valuation project is to determine a market value of all properties, which implies the most probable price that a property would realise on the date of valuation, if sold on the open market by a willing seller to a willing buyer.

There are several types of properties in the municipality residential, sectional title, non- residential and agriculture. Each is valued on different basis, although they all relate to the market value. For example, residential property (including sectional titles) is valued on a comparable sales method. Most commercial property (including retail, offices, warehousing) are valued on an income basis, while institutional properties such as schools, hospitals and clinics are valued on a cost basis.

When valuing the properties, the Municipal Valuer establishes the market conditions, and this is based on recent sales and market information activity in the various areas. Therefore this will take into consideration areas where values have declined, increased or remained stagnant due to te current state of the economy as on the Valuation date.

Did You Inspect my property?

As this is a mass valuation, the Municipal Valuer uses a computer aided mass appraisal (CAMA) system to determine the values of all properties. This is based on statistical analysis and geographical information systems (GIS), and therefore requires reliable and accurate data.

For residential property, obtaining access to all properties is not possible, and as such, the Municipal Valuer makes use of advanced technology that allows the collection of data. This includes the use of building plans and Pictometry, which is the state of the art 3D aerial photography that allows the valuers to see the properties from all angles, and be able to measure the extents and heights of the buildings, as well as other information relating to quality, condition and other improvements. This is augmented by the used of street level video footage which is collected by driving down each street and recording the street frontages. This method is acceptable in terms of the MPRA, and endorsed by the International Association of Assessing Officers (IAAO) the international body that sets standards to mass appraisal importantly endorses more.

However, in cases where the aerial photography and other imagery is not useable, usually in the cases where properties have a lot of foliage, or high security walls, then physical inspection of the site is undertaken.

The data collection process is independently reviewed for quality assurance purposes to ensure the data collectors are consistent in their approach and the data they record is correct for the subject property.

For non-residential properties, field visits are undertaken to obtain data such as the property use, rentals and financial records of businesses (Frequently Asked Questions, 2013).

Issues do arise within the Johannesburg Municipality when it comes to the efficiency of mass valuations and CAMA. These issues are discussed in section 2.4 Issues and Objections, particularly with reference to a case that made headlines in 2013 regarding a Gupta property that saw its valuation decrease drastically by what the director of valuations in the Municipality described as a mix-up. The decrease shocked property owners, tax payers, estate agents, media outlets and government agents, as it indicated a serious flaw in the valuations systems as currently employed by the Municipality. Before getting into those details, it is helpful to further examine the nature of the valuations process as it described according to the Municipal code.

The valuations of other Municipalities are discussed in Chapter 5. For now a brief examination of the growth of rates and taxes across South Africa as compared to inflation will help to give an idea of how Property Owners feel towards Municipal valuations and valuer methods.

2.27 The South African Property Owners Association

The South African Property Owners Association (SAPOA) has noted that over the last decade rates and taxes have consistently increased at a faster rate than inflation and has increasingly come under the microscope as Property Owners focus on preserving their net income (SAPOA, 2016, p. 3). A look at how rates and taxes have grown, SAPOA states that in real (inflation-adjusted) terms, rates and taxes amounted to R2.2/sqm in 2000. By 2015, this had escalated to R4.1/sqmalmost doubling in real terms (p. 3). The following chart provides a graphic representation of this significant growth in rates and taxes.

Source: SAPOA, 2016.

As SAPOA notes, given its above-inflation growth and its higher growth relative to other operating costs, rates and taxes have increased as a % of total operating costs (p. 5). This puts businesses and property owners at a disadvantageand raises the specter of one of the main problems of raising rates and taxes on property owners: the threat that they might revolt and seek friendly regions in which to settle and do business. To this end, SAPOA asks, Has the growth in rates and taxes been consistent with the growth in property values? which is a question that strikes at the heart of this thesis: How can valuers provide fair and equitable valuations in South Africa in a manner that does not cause alarm to owners, who may have a different concept of what the term value constitutes?

SAPOA answers its own question by stating that during the early 2000s, municipal rates and taxes trended largely in line with the move in property values. The period 2005-2007 saw a significant increase in commercial property values underpinned by real economic growth of 5.5% which saw a gap between commercial property values and rates and taxes (bearing in mind that rates are based on municipal valuations rather than capital values) (p. 6). The fact that rates are based on municipal valuations rather than capital values is indicative, again, of the problem inherent in the valuation of properties among so many different stakeholders. Every stakeholder wishes to construct his own concept of value, with its own determinants. Without some universal standard of assessment or external third party that can offer a valuation that all can agree upon, there will continue to be discrepancies.

Following SAs recession, rates and taxes increased again, climbing even faster than commercial property values resulting in an over recovery of commercial property municipal rates (p. 6). This over recovery has since reversed and entered into a phase of under recoveryhowever, the correlation between the two over time has stayed fairly consistentor so it would seem. SAPOA takes a closer look at this consistency and expands the question to ask: Are rates and taxes consistent with property values across similar property types? and finds that consistency is indeed lacking, with the largest mispricing being found in the industrial sectors, a sector where properties have very unique characteristics which could affect its valuation (p. 7). See the chart below:

Source: SAPOA, 2016.

SAPOA further notes substantial variations across Municipalities with respect to valuations. For instance, on a municipal level, the EThekwini municipality has the highest rates and taxes per square meter and as a % of capital value for all three main property sectors being Retail, Office and Industrial. The City of Tshwane has the second highest rates and taxes relative to capital values across all three property sectors followed by the City of Johannesburg (p. 9).

SAPOAs May 2015 Rates and Taxes Report shows, moreover, the total municipal value of commercial and industrial properties in the large Municipalities. It also shows that the commercial and industrial properties account for 54% of all rates and taxes collected by Municipalities. This is a considerable percentage and indicates that Municipalities have a lot to lose by undervaluing commercial and industrial properties.

Source: SAPOA, 2016.

The discrepancy in rates and taxes and valuations among the various Municipalities is an indication of the need for more standardized valuation methods. To that end, researchers have studied the efficacy of some of the most common valuation systems to assess their effectiveness. Dr. Douw Boshoffis one such researcher. A discussion of his article on the effectiveness of Automated Valuation Models and other issues related to valuation standards can be found in the following section, 2.28 Dr. Boshoff, Valuation Standards and Accuracy Tests. For now, it is helpful to continue to examine some of the information that SAPOA has provided SA in recent years regarding the valuations problem that Municipalities face.

During the 4th SAPOA International Conference, Ben Espach delivered an important paper that was meant to address this very issue of valuations problems in South African Municipalities. The paper was titled Property Rates Making Cents of It. Espach outlined the challenges facing the property industry relating to municipal valuations and rating. He highlighted the curse of under valuations, the tedious process of lodging objections and appeals, the lack of quality control, inadequate monitoring, incorrect implementation of rates policies, incorrect implementation of effective dates and the resultant burden falling onto the property owners throughout the country. More importantly he stressed the fact that the majority of municipalities were under administrative collapse (Massel, 2014). What was Espachs solution? His solution was for property owners to take control of the valuation and rating process. He introduced the concept of Self Determined Municipal Valuations (SDMV). The principle of SDMV is for municipal valuations to be determined by representatives of the property owner and negotiated with the various municipal valuers prior to the publication of a valuation roll (Massel, 2014). SDMV is, in spirit, very similar to the proposal that this study makesexcept in the case of this study it not only calls for owners to take part in the valuations process but rather for qualified professional valuers employed by the owners to take part in the process. In other words, it calls for Municipalities to turn to Publicly-Traded Companies, which own and invest in properties and which have a team of valuers working for them, for their valuations. This would solve many of the problems that Municipal valuers faceand it would satisfy the demand that property owners have for fairer and more equitable valuations. The following information from various presenters was delivered at the 46th SAPOA International Conference:

Escalation in rates is causing value destruction he stated.He stressed that there was a need to have the municipal valuations negotiated well before the valuation was published and was of the view that the SDMV concept was a definite possibility.

Douw Boshoff of the Pretoria University stated that the current process of implementation was unfair. There is a need for property owners to manage the challenge of rating in conjunction with municipalities. Accurate and up to date data is the key factor to correct and accurate municipal valuations. Data must be owned by the municipality and a valuation process should be instigated that will result in objections being the exceptions rather than the norm.

Rob Kane of Vunani Property Fund advised that the ever increasing rates are having a major negative impact on the economy. This is causing value destruction and in reality the Rates Act is not working. He stressed the lack of municipal skills and concluded by saying that property owners should be focusing on their core business and not rating issues.

Izak Peterson of Dipula Income Fund stressed the need to avoid objections and to hasten the lead time to obtain a result. He said that municipalities require more competent teams and that the current turnaround time for objections and appeals is too long. He said that SDMV will assist in avoiding the current delays.

Veronica Mafoko representing Cogta stated that market value was here to stay. She emphasised the need to trust a municipal valuation roll. There is currently a lack of data integrity as well as unrealistic time frames given by municipalities to a municipal valuer to compile a valuation roll. She was aware of the general inconsistencies in municipal valuations and the need for valuations to be market related. Any fixed type formulas to determine municipal valuations would be in conflict with the current provisions of the Rates Act.

Werner Sarvari excelled himself in his role as the facilitator. He advised that the negotiation process was already happening but at the end rather than in the beginning. Negotiating and determining municipal values upfront would solve a lot of the difficulties currently being experienced by property owners across the country. Is SDMV not the solution he asked?

2.28 Dr. Boshoff, Valuation Standards and Accuracy Tests

Dr. Boshoff and Leane de Kock published an article in 2013 on the accuracy of Automated Valuation Models (AVMs). They found that the adoption of Automated Valuation Models (AVMs) in the field of property valuation is a trend, considered controversial and not readily accepted by the valuation profession (p. 1):

AVMs are a relatively new concept in South Africa; however, they have been operational in various countries for a number of years. In South Africa, these models are used for municipal valuation purposes for all types of properties and, in the mortgage sector, primarily for residential property valuations. Residential mortgage valuations are currently moving from traditional valuation approaches and are adopting AVMs. In both these fields, the correct property value needs to be determined. Incorrect values will lead to over- or undervalued properties, with a negative influence on the general property market and municipal property taxation bases.

The AVM is described as a mathematically based computer software programme that produces an estimate of market value based on analysis of location, market conditions, and real estate characteristics from information collected. The distinguishing feature of an AVM is that it produces a market valuation through mathematical modelling. The credibility of an AVM is dependent on the data used and the skills of the modeller or operator producing the AVM (Boshoff and Kock, 2013, p. 5). This issue of credibility is one that is also raised in Chapter 4 with respect to Municipal valuers who lack all of the necessary data to make an accurate reflection. Here, the issue is not the valuers themselves but rather the modeler. What is significant and similar about both the Municipal valuer and the AVM is that both rely upon and require data inputs in order to make effective valuations. If the data is not being collected efficiently or effectively, by either the valuer or the AVM, then the outputs will be over or under. The problem, therefore, is the same regardless of whether it is man or machine. (Once the findings of this study are examined in full and discussed, the only logical recommendation that can be made for Municipalities is provided in Chapter 6).

Returning to the issue of the AVM, the researchers purpose in evaluating the effectiveness of the AVMs was to determine whether the commercial property sector in South Africa is ready to accept and adopt or reject AVMs and to investigate the possibility of AVMs replacing professional valuation services for commercial property valuations (p. 1). What they found was that:

Limited research was available both nationally and internationally on commercial property AVMs. It was found that AVMs utilised for the valuation of commercial property are still in the development phase and cannot be considered feasible as yet. The major concerning factor is that commercial property markets are heterogeneous. AVMs offer various advantages over traditional methods, but there are also some disadvantages, which were identified in the study.

The general attitudes towards AVMS were negative and a small percentage of respondents indicated that there may be future potential. AVMs were also regarded as a threat to the valuation profession. It was established that there is scope for commercial property AVMS, however, on a limited basis, and the results could be improved by combining these with traditional valuation techniques. Commercial property AVMs will never replace traditional valuations and can be implemented as a usefu tool for verification and auditing of values (Boshoff and Kock, 2013, p. 1).

Boshoff and Kock (2013) described four main valuation standards are services currently in use in South Africathe Gold Standard, the Drive by and broker price options, the Desktop, and the AVM. They describe each respectively:

Gold standard After a physical internal and external inspection of the property, a qualified and registered valuer prepares the professional standard of valuation in writing, and supported by market information.

Drive by and broker price opinions The next service level down from the gold standard is a drive by or external valuation, which involves an external physical inspection in order to confirm the propertys existence and some of its physical characteristics.

Desktop A desktop valuation excludes any inspection of the property, and the valuer may use satellite photos, owner contact and market knowledge to establish information, as well as select and analyse appropriate comparables.

AVM An AVM, at its most basic, provides only a valuation output; however, some AVM systems supplement the figure with various features, the most important being a list of comparable transactions and a measure of the expected accuracy, expressed as a confidence score (Boshoff and Kock, 2013, p. 3).

As Boshoff and Kock (2013) point out, it is highly critical that a balance between among standards and services be achieved simply for cost-benefit purposes: In each case, there must be a balance between savings in time and cost versus the property risk factors. More automated models replace traditional valuation approaches. It is important to review the cost benefit relationship of replacing gold standard valuations with automated valuations or values. Gold standard valuations are referred to as high quality, comprehensive reports, which include a physical inspection and a detailed market analysis (Boshoff and Kock, 2013, p. 4). For Municipalities, the highest standard is the most desirablebut, as shall be shown in the following chapters, this standard is not always possible, especially when Municipalities struggle with the funding needed to acquire Gold Standard valuers.

Valuation methods have advanced over the years, but Boshoff and Kock (2013) identify the main components of the methods still used todayincluding both traditional and modern approaches: Traditional methods include the sales comparison method, the investment method or discounted cash flow analysis, the cost method, the profits method and the residual method. Advanced valuation or data-analysis methods developed from advanced technology and include hedonic pricing methods, artificial neural networks, spatial analysis methods, fuzzy logic, autoregressive integrated moving average, real options method and rough set method. Advanced valuation methods are mainly used for the construction of AVMs, and a better terminology includes data-analysis methods or decision support tools for values (p. 4). AVMs of course have their advantages and disadvantages. Advantages include lower cost, time-saving, consistency, transparency, easier data management, and the ability to combat fraud and valuer bias. Disadvantages include data limitations, public opinion, the lack of property inspections, financial regulation, risk acceptance, and transparency (Boshoff and Kock, 2013, p. 5).

However, one of the big problems of AVMs is when they are used to value commercial properties. As Boshoff and Kock (2013) point out, the use of AVMs is far more complex for commercial valuations than for residential valuations, as limited comparable data is generally availableScarcity of evidence makes the consideration of AVMs for commercial property much more complex. The complexity and the lack of recorded transactions require professional judgement to analyse the data. (p. 6). Other researchers have come to the same conclusion: Tretton (2007) also has pointed out that commercial AVMs have limited usefulness and that while some models have appeared, they require constant maintenance and work best in a supportive role rather than in a primary valuations method role. Municipalities in South Africa currently use variations on the AVM, such as CAMAthe computer assisted mass appraisal system. More shall be said on that in the following sections.

Boshoff and Kock (2013) note that the implementation of AVMs is not the solution for valuation problems and difficulties in South Africa: There is concern regarding AVM accuracy, and the expectation is that 30% of valuations will in future be done by AVM for easy-tovalue standard properties in the mid-range market. According to Seota (2011: personal communication), the South African Council for the Property Valuers Profession (SACPVP) does not favour the use of AVMs and no guideline has been formulated to date. The accelerated adoption of residential AVMs by the commercial banks, combined with the limited consultation held with the valuation profession regarding these models, are cause for concern. One should address this approach for future commercial property AVM use or implementation (p. 7).

Yet, while the problem of a lack or shortage of valuers in South Africa is admitted (Robson & Downie, 2007), the use of AVMs is not viewed as the answer that Municipalities need. AVMs will only further take jobs away from citizens by making the task automated. The automation of the task of valuations, however, is not suitable. Boshock and Kock (2013) explain: This is evident in South Africa where there is a shortage of valuers, as the majority of them are approaching retirement age. AVMs can alleviate this problem to some extent; however, they are also viewed as a threat to jobs. In addition, professional bodies initially regarded AVMs as a threat to valuers employment. In mature markets, guidance to members on using them is now incorporated in professional standards. Valuers are open to the notion of using AVMs as a supplement rather than a replacement for their traditional services (p. 7). One researcher even went so far as to assert that AVMs may constitute a threat to the very profession of valuers (Mooya, 2011).

As Boshoff and Kock (2013) assert, however, the greatest risk to the valuation profession is commoditisation and automation, which reluctant professional valuers ignore. There is no substitute for the skill of a competent and experienced valuer. As part of what is essentially a risk-management exercise, data and output analysis by appropriately trained valuers can avoid pitfalls (p. 8). This point about there being no substitute for skill and competency should be well-heeded, as it is one of the main points that this study makes in order to justify its proposed solution to the problems that plague Municipalities with regard to the valuations process.

Finding valuers who are skilled and competed, who are audited and trusted, sounds difficultespecially in todays South African climate. The reality, however, is that these valuers are working right under the noses of the Municipalitiesand their valuations are not even being regarded. This study is, of course, referring to the professional valuers of South Africas Publicly-Traded Companies. More shall be said on that in the following sections as well.

Boshoff also has shown that valuers need to be respected: When Municipalities choose to select tenders to do the valuations for their region, they should do so based on quality and not on the fact that the tender is the lowest cost. The problem, however, is that Municipalities simply do not have the budget to hire always the best valuers. In going for the cheapest option, Municipalities undermine their own credibilityand the case of Kouga Municipalities represents this fact well. See section 2.42 How the Municipality Attends to Valation Disputes for more information on that particular scandal.

Boshoff is not alone in decrying the state of valuation standards in the Municipalities of South Africa. Another valuer has experienced similar problems and his case is worth describing in order to better understand the environment in which valuations for Municipalities are being conducted and why there is such great and urgent need to amend this situation. The following information is supplied by Massel (2014):

Well known and highly experienced mass valuer, Niel de Klerk attended a tender briefing of the Matjhabeng (Welkom) Municipality relating to the award of a tender for their general valuation roll commencing 1stof July 2015. There are approximately 110,000 properties to be valued. The requirements of the tender are that the successful tenderer must supply new aerial photographs, draw up a geographical information system and supply a download of all properties from the deeds office. Tenders close on the 22ndof August 2014.

The valuation roll has to be submitted by the 1stof December 2014! This is humanly impossible and goes against every guideline set out by COGTA in their time line guideline issued to all municipalities. This must call for government intervention to avoid a pending financial disaster for this municipality. Readers will recall that Rates Watch stated that the completion of the Johannesburg and Ekurhuleni municipalities within the specified time period was mission impossible. We were certainly not wrong as is evident by the fact that Johannesburg has lodged 63,000 objections against their own valuation roll. Something is very wrong somewhere. A valuation roll needs to gain the trust and respect by all affected parties. If a municipality has no confidence in their own roll where does it leave the ratepayer?

This anecdote and the conclusive question gets straight to the heart of the matter. The Municipal valuers of South Africa need clear assistance in providing fair and equitable valuations of properties. That assistance is not forthcoming from the Municipalities. Thus, it stands to reason that an external source must be sought.

2.29 The Supplementary Valuation Roll

An explanation of the Supplementary Valuation Roll helps to complete this section on Valuations and the problems associated with them. (More shall be discussed in the coming sections to provide even greater depth and scope to the issuesbut for now it is important to move and cover other relevant topics). The Supplementary Valuation Roll is designed to address issues that arise over the year to impact the General Valuation Roll. The Supplementary Roll allows for changes to be made and the roll to be updated in a separate compilation.

In Johannesburg, the Municipality is compelled by legislation to reflect all changes on properties in a Supplementary Valuation Roll (Frequently Asked Questions, 2013). Thus, the Supplementary Valuation Roll is the index through which the City maintains updated records affecting existing properties and the existing General Roll. Additionally, the Supplementary Valuation Roll is updated annually as opposed to the General Roll which can go more than four years before being updated. Thus, one sees that in the Municipality, supplementary valuations are performed during each financial year, according to the relevant legislation, to supplement the current general valuation roll with any new properties and/or changes to property values contained in the current general valuation roll (Frequently Asked Questions, 2013)but if it is possible for the Municipality to provide annual updates to its Valuations Roll, using a public record of market valuations such as those made available through the annual reports of Publicly-Traded Companies, should not be an issue. More will be discussed on this in the following chapters.

2.291 Valuations according to Rates Watch

Rates Watch is a Monitoring Company based in Ekurhuleni and has had many successes representing clients in their disputes with appeal boards regarding property valuations. The company has issued the following declaration on its website as of 2017:

Rates Watch is proud to advise of their resounding success at the recent hearings of the Ekurhuleni Appeal Board. The Appeal Board hearings were in regard to Section 78 Applications submitted by Rates Watch on behalf of numerous clients. Many of the applications were reconsidered by the Municipal Valuer and reductions were then made by him. Eighteen appeal cases were handled by the Ekurhuleni Appeal Board. Rates Watch were the major appellants at this hearing. Reductions in value of over R23 million were upheld by the Appeal Board, with a resultant saving in rates and taxes of R1, 4 million being achieved!!Two appeals lodged by Rates Watch against incorrect category entries on the original general valuation roll resulted in rates savings of R175, 000 to the delight of the appellants. A significant reduction in a mining property from R22, 6 million to R12, 6 million brought about a rates saving to the property owner of approximately R800,000! Rates Watch are particularly proud of these results, as they related to properties against which no objections were lodged or alternatively were incorrectly categorised on the general valuation roll. A section 78 application relates to a property that was incorrectly valued and against which no objection was lodged when the general valuation roll was open for objections. Rates Watch compliments the Ekurhuleni Valuation Section for the expeditious way in which they handled the outcome of the cases heard at the Appeal Board.Within a few days, official notices were forwarded to Rates Watch.

Rates Watch has also provided a description of the valuation process as it understands it. It is important to note that the term market value is here defined as the price upon which a property is able to sell. This study uses the term market value in conjunction with the price at which an investor values the property (as in a Publicly-Traded Companys property portfolio). According to Rates Watch, the following information should be considered by all individuals interested in appealing a valuation by their Municipality:

Residential properties are valued on the Direct Comparison method of valuation.This means that the Municipal Valuer will obtain data relating to the property itself, the surrounding area and compare this data with sales in the immediate vicinity of the subject property. There are highly sophisticated tools available which enable the Municipal Valuer to predict Market Value. The most important aspect of any municipal valuation is the collection of correct and accurate data relating to a property. In suburbs that are mainly homogeneous the collection of accurate and meaningful data is a fairly easy task. The challenge is where properties differ in terms of location, views, aesthetic design etc. In these types of suburbs, it is far more difficult to compare properties on a mass basis and the municipal valuer has to adjust his norm valuations to allow for positive features such as: view, locality, special features, ambience and the physical design of the property. Conversely, negative features must also be taken into account. These may include:-proximity to a taxi rank, busy roads, flooding etc. Residential property owners should keep records of the following: Size of buildings. Description of buildings. Features such as swimming pools, landscaped gardens, boreholes, etc. Any aspect that may have a negative impact on the property. If the property has been offered for sale, copies of the advertisement showing the asking price. Length of time the property has been on the market. Documentation of any additions and photographs of the stage of completion as at the date of valuation. If a property owner can show that he was selling the property for R1million and the Municipal Valuer has valued the property at R1, 5million, the chances f success at an Appeal Board hearing will be very good.

Clearly, Rates Watch has succeeded in challenging Municipalities for better valuations for the firms clients. Considering the approach of Rates Watch will help a Municipality better establish its own defense of its valuation and valuation process in the future.

The CEO of Rates Watch, Clive Massel, has also written an evaluation of the current difficulties that Municipalities are experiencing in both the compilation and administration of their valuation rolls (Rates Watch, 2017). That article is worth assessing in its own right to assist in the understanding of the valuation process as it exists in South Africa at the moment.

Massel (2011) begins his assessment of the MPRA of 2004 by asking: What we need to establish is whether the MPRA has achieved the objectives envisaged by the legislators when the Act came into effect and whether the municipalities have been able to implement the Act fully. Massels full evaluation will be discussed in a later section of this chapter. For now, an examination of Rates Watchs success is helpful in seeing some of the shortcomings of the MPRA. Rates Watch (2017) reported in 2012 that:

It is exactly three years since Rates Watch commenced business and starting challenging municipal valuations. A key factor of the Rates Watch success story has been their ability to challenge municipalities and their municipal valuers regarding the correct interpretation of the MPRA. The results to date are nothing short of phenomenal. In Ekurhuleni alone, Rates Watch has achieved a 2,4 billion rand reduction in value, with a resultant saving of nearly R130 million in rates and taxes!! Nationally, we have obtained valuation reductions in excess of 3 billion rand. Rates Watch have been extremely innovative in challenging municipalities regarding incorrect and unjust implementation of the MPRA. Currently, Rates Watch are in the process of bringing about High Court declaratory orders against the Ekurhuleni Metro relating to the "no change" policy of their Municipal Valuer as well as a further order regarding the back dating of rates and taxes as a result of incorrect category entries in their general valuation roll - ab initio. These applications are time consuming, costly and require a very clear understanding of not only the MPRA, but also the Promotion of Administrative Justice Act (PAJA). Rates Watch has already successfully brought about a High Court mandamus application compelling the Municipal Valuer of Ekurhuleni to provide proper and adequate reasons for his objection decisions. Currently, Rates Watch is the only company in South Africa dedicated to monitoring and auditing of municipal valuations and rates accounts.

Recent National Results of Valuation Objections and Appeals

(1stApril 2009 to 7thMarch 2012)

Reduction

Objections

R1.502 Billion!

Appeals

R572.0 Million!

Section 78 Applications

R965.4 Million!

Total reduction in value

R3.039 Billion!

Total Rates savings

R151.7 Million!

2.292 Other Valuation Methods Studies and Considerations

The study by Awuah et al. (2017) focused on how valuers obtain market data to aid their valuations. Awuah et al. (2017) noted that adequate reliable property market data are critical to the production of professional and ethical valuations as well as better real estate transaction decision-making. However, the availability of reliable property market information represents a major barrier to improving valuation practices in Ghana and it is regarded as a key challenge (p. 448). In order to better understand how market data is obtained, the researchers study aimed to investigate the sources and reliability of property market information for valuation practice in Ghana. The aim is to provide input into initiatives to address the availability of reliable property market data challenges (p. 448).

Awuah et al. (2017) used a mixed methods approach, consisting of literature review, workshop and questionnaire survey of valuers. The researchers found that there are seven property market data sources used by valuers to obtain market data for valuation practice. These are: valuers own database; public institutions; professional colleagues; property owners; estate developers; estate agents; and the media. However, access to property market information for valuations is a challenge although valuers would like to use reliable market data for their valuations. This is due to incomplete and scattered nature of data often borne out of administrative lapses; non-disclosure of details of property transactions due to confidentiality arrangements and the quest to evade taxes; data integrity concerns; and lack of requisite training and experience especially for estate agents to collect and manage market data. Although professional colleagues is the most used market data source, valuers own databases, was regarded as the most reliable source compared to the media, which was considered as the least reliable source (p. 448). The implications of the study were that there existed a need for the development of a systematic approach to property market data collection and management (p. 448). Such a systematic approach is precisely what this present study sets out to provide for Municipal valuers. The study by Awuah et al. (2017) notes that the systematic approach should require practitioners to demonstrate care, consciousness and a set of data collection skills suggesting a need for valuers and estate agents to undergo regular relevant training to develop and enhance their knowledge, skills and capabilities. The establishment of a property market databank to help in the provision of reliable market data along with a suitable market data collection template to ensure effective and efficient data collection are considered essential steps (p. 448).

A study by Visser (2014) examined the impact of the MPRA on valuation techniques in South Africa. Visser (2014) found that the present Municipal Property Rates Act, particularly the above-mentioned sections, did not make allowance for the accommodation of unique property developments such as Midstream Estate (p. 1). This is important because valuing unique properties is something that Municipal valuers must do on a regular basis. If the MPRA does not accommodate such, it itself is faulty when it comes to allowing Municipalities to properly assess properties. Vissers (2014) study looked at the Municipal Property Rates Act to find out whether Midstream Estate and similar locations have sufficient reason to request that the present system be amended to address their concerns (p. 1). Visser (2014) showed that a study of relevant literature on the South African property tax assessment system supported the study of the Act though a further field study was done to contest the Municipal Property Rates Act and in this field study, various key words were used to conduct searches. Those key words included: need to participate; owners satisfaction; selfassessment; owners objection (p. 1). Visser (2014) concluded that the current system of valuation is inadequate to assess the unique properties situated in Midstream Estate and that there existed a need for the property owners to participate in their own property assessment process (p. 1). This study is useful because it shows how inherently inefficient the present valuations process still is and that there needs to be implemented a better and more trustworthy process that Municipalities can rely upon since property valuations are so important to their revenue streams and balance sheets.

Du Preez and Sale (2015) conducted a very technical study to examine whethr sales price was a good indicator of value when determining valuations. Their study is important because of their finding, which was that valuers must be careful in how they approach valuations when using specific models. The researchers noted that in most hedonic price model studies, the actual sales price of a property is employed as the dependent variable in the parametric regression analysis (p. 35). Du Preez and Sale (2015) also stated that although the use of this price is pervasive, alternatives to it do exist. One such alternative is the assessed property value, which is more readily available than the actual property price. The researchers then compared implicit price estimates of property characteristics (both structural and locational) based on actual sales price data and assessed property values. To this end, a seemingly unrelated regression with two hedonic price equations is used, one which employs actual market prices as the dependent variable and the other which employs assessed values. The results show that the hypothesised influence of structural and locational housing characteristics on residential property prices is the same for assessed values, and actual market prices cannot be accepted. This finding should act as a caution for hedonic practitioners not to base their conclusions and recommendations solely on the use of assessed values in hedonic price models. From this study can be ascertained the fact that basing valuations on a single set of data can bring about negative consequences for a Valuation Roll.

Du Plessis (2015) has also set out to understand how property valuations are conducted under the MPRA and whether a fair and equitable valuation is being given to properties. Du Plessis provides a good examination of the difficulties of identifying market value:

Section 12(1) of theExpropriation Actsets out how compensation should be calculated, namely through the determination of the value that property would fetch in the open market. This amount is commonly referred to as the market value. The determination of market value as the compensation norm is based on the assumption that in the property market there will always be a free interchange between supply and demand. The rationale is that the market price will be determined by the economic principles of supply and demand, thereby determining the equivalent in value ... of the property loss. This method of calculation was adopted in South African case law.

Yet, as Du Plessis (2015) notes, market value is a problematic concept, which is discussed elsewhere in this study. Du Plessis (2015) contends, nonetheless, that:

Market value is a problematic concept because in transactions of sale the market is a relatively unrestrained phenomenon where sellers and buyers bargain until they reach an acceptable price level, and such bargaining is usually done without many artificial constraints. The problem thus lies in the fact that one must imagine compensating a compulsory purchase in terms of exactly the opposite, namely a free market transaction where the price level is determined by the relatively free will of the buyer and the seller. The determination of market value is therefore an informed guess.

Further, market price is not static. Changes over time can influence the price, and inflation can play a big role. Events that lead to a sudden increase in the market price are often ignored, especially in cases where the comparative methodis used to determine the market value and the properties used in comparison were sold before such rapid fluctuations took place. Such a determination of market value does not attempt to consider or capture the value of the properties to the owners themselves.

Notwithstanding the problems with this approach, the courts have usually found a way to apply the open market test, even where it has been very difficult to do so.

The market value test plays a central role in South African expropriation law, and in order to determine the market value one has to hypothesise what the property would have realised if sold on an open market by a willing seller to a willing buyer.

But the willing buyer willing seller method of determining market value has also been described as illusory, since the bargaining process is constrained by a compulsory sale, and the seller is more often than not unwilling to sell.As King J stated inSouthern Transvaal Buildings (Pty) Ltd v Johannesburg City Council:

Notwithstanding, the law enjoins me to transport myself into a world of fiction and to don the mantle of a super valuator, overriding, if necessary, the views expressed by men experienced in the valuation of property and whose views are relied upon almost daily by willing purchasers and sellers. I must at one and the same time be the willing seller and the willing buyer, both well-informed, and I must arrive at a price in a market that did not exist at the time of expropriation. This is sobecause I must ignore any enhancement or diminution in value flowing from the expropriation or the scheme causing the expropriation. It is an Alice in Wonderland world in which the consideration of principles of valuation and the opinions expressed by experienced property valuators make the task of the super valuator seemingly curiouser and curiouser.

Despite theConstitutionrequiring just and equitable compensation, not much has changed.

This concise examination of the meaning and problems surrounding market value is very helpful in understanding more of the issues that plague Municipal valuations in South Africa. It also helps to illustrate why it is so important to rely upon publicly-published market values provided by professional valuersbut more will be said on that point in time. In a study by Babawale (2013), the researcher simply adds to the above conclusions that true market value is unattainable (p. 387). While this present study does not make any judgments about whether or not Babawales conclusion, as well as Du Plessis (2015) findings, are just or not, both do help to illustrate the finer point that valuations are extremely difficultand should be left to professionals who have the experience, the expertise, the first-hand knowledge of the property types, and the ability to operate in a workplace environment where auditing and oversight are routine. More shall be said on that in due time in the course of this study. With these points in mind, it is now important to examine the market place itself.

2.3 External and Internal Factors

2.31 External Factors: A Market Forever Changed by Unconventional Monetary Policy

The real estate market, currency markets, derivatives markets, PM markets, commodities markets, equities markets, and bond markets all impact one another daily all over the world. Nowhere is this more evident than in market evaluations from market modelers. Since 2008, when the central banks of the world responded with a united effort to buy up government and corporate bonds, chasing fund managers into a yield-depleted market environment, asset classes have been driven up. This artificial drive reflects the purchasing process of the CBs along with the devaluation of currencies (the more that CBs print, the less value each fiat note retains). Markets have been reacting to this phenomenon for nearly a decade nowand there is plenty of concern that normalization, at this point, is impossible. Durden (2017) has pointed out as much by echoing the findings of Goldman Sachs Global Investment Research:

The long economic cycle that we have been enjoying is, in part, a reflection of loose monetary conditins and low interest rates. Exhibit 17 is a simple but effective way to demonstrate this effect. Taking data back to 2009, the start of the period of extraordinary monetary policy, we can see a very big difference between prices in the real economy measures of wages, consumer price inflation, house prices, commodities and asset prices. Also shown here is the long-run average nominal GDP growth and nominal GDP growth over this period for the US and Europe (in red).Financial assets have significantly outstripped both nominal GDP growth and inflation in the real economy, largely as a result of rates staying low.

Source: Durden, 2017.

One can see that asset prices have been inflated by CBs unconventional or loose monetary policy since 2008. Markets have reacted accordinglyand by not taking this factor into consideration, Municipalities that are using old or outdated valuations (which do not contextualize in terms of real market valuewhich is determined by a considerable number of factors, not the least of which is monetary policy and currency devaluation) have failed to benefit from an appropriate reform of their own valuation methods.

Indeed, as United States Agency for International Development (USAID) shows in its report on Municipal Infrastructure Investment, Municipalities in South Africa are experiencing soaring debt as the chart below shows. This debt does not occur in a vacuum, but is rising alongside that of the developed world as well. The global marketplace is interlocked to such a degree that no nation exists totally free of interacting mechanisms. Yet South Africa alone must address the issues of debt that it faces. Still, it is necessary to understand how the global market forces work to impact it.

Source, USAID, 2016.

It is worth describing how substantial the spillover effect resulting from an era of quantitative easing has been on assets. Sakthivel, Bodke and Kamaiah (2012) show that as a result of globalization, the spillover effect has become far more commonplace than what once used to be the case. This directly impacts property valuations in South Africa because world financial markets and economics are increasingly integrated due to free flow capital and international trade (Sakthivel et al., 2012, p. 253).

Park and Um (2016) likewise highlight the spillover effect of unconventional monetary policy in the US on bond markets and note that a mere mention of news of unconventional monetary policy in the US is enough to trigger a short-term spillover in the bond market in Korea. Short-term hedges in gold during such swings have been found by Baur and Lucey (2010) to be effective in protecting a portfolio from headline-driven spillover between equities and bond markets. But for forecasting the spillover effects, todays GARCH models may need to take into consideration a rapidly changing market culturenamely, one that is driven by algorithms which have been blamed both for flash crashes and for melt-ups in recent years, along with the existence of pure contagion (Jayech, 2016, p. 631; Kirilenko, Kyle, Samadi and Tuzun, 2017). The velocity of volatility, the absence of liquidity (save for that provided by central banks), counter party risk, sovereign debt, risk parity, and overall fundamentals (Amazon is trading currently at a substantially elevated P/E of 250 and is one of a handful of stocks driving the U.S. stock market), are all signs of a market that has changed dynamically in just the past decade (Snider, 2014). In short, both QE and the rise of machines in trading have introduced new dynamics into the market that traditional GARCH models may not effectively factor into their equations. In such a climate, investors seek safe havens and safe havens become more expensivei.e., valuableas they do so. Municipalities that do not consider the overall market environment, market changes as considerable as those implemented by CBs in response to the 2008 global economic crisis, and how those changes will impact their own economies are failing to take advantage of indicators that are there for everyone to see.

In order for Municipalities to enhance their balance sheets, adopting the right business model is necessary. Just like a successful business, a successful Municipality must be able to have effective and efficient teams in place that are able to work towards achieving the organizational aim of the City. USAID (2016) provides the following model for how this should look:

2.32 Internal Factors: Political and Social Instability

This is not to suggest that all value is determined by CBs or market movements related to QE. South Africa has had its own internal issues that have impacted property values: political and social instability, for example, have ravaged some regions and caused depreciation in parts of the country (Cilliers & Aucoin, 2016). This has resulted in a decline in the overall effectiveness of governmental agencies as a whole, as the chart below indicates.

Source: Cilliers & Aucoin, 2016

To the extent that it is a cycle which can be discontinued through economic stability, the problem of social unrest may be mediated: as Cilliers and Aucoin (2016) point out, social instability affects economic growth, while economic growth impacts societies vulnerability to social instability (p. 6). To contain the problem, a Municipality in South Africa should focus on ways to maximize revenue streams, enhance its balance sheet, and provide more aid to social programs and social stability whenever and however possible. Under its current valuation system, such a strategy is not entirely feasible, as it obliges the City to rely upon old or outdated valuations that do not correspond with real market value, which is impacted by external factors such as globalization and unconventional monetary policy in developed markets. The spillover effect from developed markets to emerging markets is particularly important to note because South Africa is on the receiving end of this spillover.

2.33 When the Two Collide: The Need for a Stable but Efficient System

For Publicly-Traded Companies which require an up-to-date market valuation of their properties in order to know the value of their investments at any given time, such a valuation method as applied by the Municipality is unacceptable. It is bad from a business-investment perspective and bad from an accounting perspective. Mark-to-market accounting is an accounting process used by firms that helps them to always recognize current market value. This process is not, however, always recognized as a best practice policyespecially by governments that value transparency. In the U.S. for instance, the Governmental Accounting Standards Board (GASB) exists as the independent, private-sector organization based in Norwalk, Connecticut, that establishes accounting and financial reporting standards for U.S. state and local governmnts that follow Generally Accepted Accounting Principles (GAAP) (GASB, 2017). Yet, when it comes to accounting, the federal government in the U.S. has shown itself to be woefully neglectful (as in the case of the whopping 2.3 trillion USD gone missing from the Pentagons coffers as reported by Donald Rumsfeld on the eve of 9/11). What publicly traded companies have in their favor is the fact that they must exercise solid accountingor else the same thing will happen to them that happened to Enron in the early 21st century: they will implode. For government offices, accounting and accountability are equally important but when it comes to the public holding elected officials and their offices to higher standards, the bar typically does fall short by the very nature of the bureaucratic beast that it is.

For this reason, it is understandable that the Municipal valuations director of Johannesburg would turn to the Roll for data. But as Oxford (2013) shows, doing so will in turn, affect the rates and taxes issued by the City for the next four years. What is revealing is the fact that Municipalities will hesitate to update their Rolls if they perceive the market to be in a less than ideal state. For example, Johannesburg put off committing new valuations to the 2012 Roll because it expected a shortfall that year: We felt that to go through the process of re-valuing all the properties, looking at the market and financial implications, it would not have been an effective measure to do a valuation at that period, explained the Municipal valuations director, as Oxford (2013) shows. This raises questions about the validity of the valuations process and why the Municipality does not look to an alternate source or method for accomplishing a task that is so critical and important to its balance sheet and revenue streams.

Oxford (2013) relates that the value of a property is assessed against strict and exacting criteria to ensure that the market value is as accurate as possible. The city requires a certain amount of money to set its budgets and by careful data modelling a suitable tariff is determined for each property category. This is then applied to the calculation of assessment rates for each property in that category. The values of properties form the rates basis for the city and so, based on your value, you pay your assessment rates. Yet if the value assigned to a property is low compared to actual market value as published by investors, the Municipality could be undercutting its own balance sheet. This is a considerable problem because in todays cash-strapped global society, there is little margin of error, and valuations should be taken as seriously by the City as they are by investors. After all, the City is really as much of an investor in the people and properties of its Municipality as the people are in the City. For this reason, the City needs to be able to accommodate programs that benefit the peopleand to do this it must have an adequate source of income.

Determining the depth of that income stream, however, is not easy. The Municipality, to some degree, is willing to increase taxes to offset fluctuations or crashes in the property market, which renders its valuations somewhat useless. The City has benchmarks that it seeks to maintain. Raising tariffs is one to do thatbut if valuations can be set more effectively in the first place, crashes might not become as much of an issue in the future. Oxford (2013) states that the City needs a certain amount of money so if there happens to be a crash in the property market while we are busy with the valuation process and the values are much lower than previously, then the City may increase the tariff to ensure they maintain the same income.

However, in the lifespan of a valuation roll, market fluctuations dont affect the values, because we always go back to the market of the date of valuation to keep things fair and equitable. In other words, the Valuation Roll acts as a peg, and actual market value as it currently stands is ignored. Market value is gauged at precise point in time that the Municipality believes will be adequately beneficial to its aims and then records that value and uses it as an index or benchmark for a stated period of time. Over that period, however, is the possibility that lost revenue is being wasted as there is ample opportunity for values to increasemuch more opportunity in fact than for them to fall. In an age in which fiat money is burning holes in the pockets of so many, investment property appears as a way for investors to get out of cash and place their wealth in real assets. The rising prices of everything from precious metals to equities to real estate is a sign of an underlying inflation occurring all across the globe, which has been primarily spawned by the worlds central banks intervening in the marketplace by purchasing bonds and assets.

One need only analyze the books of entities like the Federal Reserve, the European Central Bank, the Bank of Japan or the Swiss National Bank to obtain an understanding of just who is buying in todays market. Knowing that central banks use fiat systems to make their purchases means that ultimately the currencies in which they participate are being devalued year after year through excessive printingprinting to the tune of trillions. That devaluation prompts investors to flee cash and find safe havens for their wealth. Just over the past four years, property values have climbed substantially. The South Africa Housing Index chart tells all. A Municipality that valued properties in 2012 and adhered to that Roll for four straight years would have missed out more than 100 points of increased revenue from a valuation that had been determined by current market value determined by investors.

Source: Trading Economics, 2017.

2.4 Issues and Objections

2.41 Accidental Devaluations?

While the Municipal valuations director in Johannesburg views his role as one that should ensure that the valuations are fair, so that areas with lower values pay lower tax and vice versa, the question remains: What if there is a valuation that causes consternation? (Oxford, 2013).

The answer to that question is evident in the Municipalitys valuation methodology: After compiling the valuation roll we hand the roll over to the municipal manager and the City sends out a notice to each and every property owner notifying them of the value of their property. The owners then have a specific time period to object to the valuation. In the case of the 2013 general valuation roll it was from February 20 2013 to May 3 2013, 73 days during which we allowed people to look at their valuations and object (Oxford, 2013). Thus, dealing with objections to valuations is thus yet another issue that valuers must attend to lest the Municipalitys revenue stream be further antagonized by owners and investors.

Of course, there is a delicate balance to the proceedings. A property valuer that does not consider an appeal of a property owner risks marginalizing investors in the Municipality, which would further erode the balance sheet by way of lost tax revenue as owners and investors flee for more favorable regions. However, it stands to reason that upgrades in how Municipalities address objections may be developed and implemented. This study aims to assist in that process. But first it is helpful to understand the process as it currently exists: The process that property owners can follow to raise their concerns about the valuation of their property is simple. There is, of course, the obligatory form to fill. It provides the department with the deails of your property and the reasons you disagree with their valuation. The department then examines the evidence and makes a decision about whether or not it will change the value (Oxford, 2013). According to Oxford (2013), the best way to convince the municipal valuer to change the value of your property is to show a reference to similar properties that were sold in the same area and use this to prove the property is over or under valued. Based on the evidence the municipal valuer will consider the objection and make an assesment. In other words, the owner will utilize the same methods of the valuerlooking at sale pricesto find a basis for why a rate should be lowered.

In some cases, the Municipality may decline to rectify a valuation according to an owners objection. Other times, the Municipality itself may make a mistake and be required to object to one of its own valuationsespecially if there is public pressure to do so. A case in point is that of the Gupta properties, as identified by Oxford (2013): a highly valued property in Johannesburg owned by Gupta saw a significant decrease in value, according to the Municipalitys Valuation Roll: The property dropped in value on this general valuation roll from R16.8-million to R490 000, a staggering fall that would have far-reaching impact on more than just the Gupta bank account. Indeed, it would mean less income for the City. Such an immense fall in valuation would result in a much lower tax revenue for the Municipalityand the drop in valuation did not go unnoticed by the news networks in South Africa or by estate agents, who called the valuation laughable and outrageous, indicating that no property in the area was even heard of for such a low valuation (Sapa, 2013). Thus, this one case had all the characteristics of a scandal and served as yet another indication that stability within the country is questionable at best. As News24 reported in 2013, The property, one of four adjacent stands bought by brothers Arti, Atul, Chetali, and Rajesh, was valued at R16.8m in the 2008 valuation but plummeted to R490 000 in the last valuation. The decrease in the municipal value meant the rates would drop from about R7 844 a month to about R157.90. According to the Saturday Star this drop went against the tide which saw increases of up to 48% in adjacent neighbourhoods. How could such a poor valuation occurfor such a property that was obviously worth considerably much more?

The Municipality valuations director stated that weve got more than 812?000 property records in the general valuation roll. Thats just in the Johannesburg municipalityresidential, business, sectional title units, parks, museums and hospitals. In valuing that number of properties, errors do slip in and thats why weve got review processes and audits to find them, and why we ask the public to step up and object if they feel that their assessment is incorrect (Oxford, 2013). With that said, having a methodology that values properties by a public catalogue of market valuations as determined by investors could make the process that much easier and less susceptible to fraud and corruption. As Oxford (2013) states, its a continuous process as we look at the factors that contribute to the value of a property, such as the size, where it is located, the finishes, the security and the attributes. We take our sales and then we apply mass valuation principles. Throughout the next four years, we need to update the new additions, the building plans and the new properties in this model. It then takes the information and calculates the value. We need to keep up to date with changes in economic factors and shifts in areas. It is a three-year process to maintain and build the property database. A three-year process, however, puts the Municipality well behind the curve of the kind of economic factors that are most impactful on property prices in this day and age.

2.42 How the Municipality Attends to Valuation Disputes

Valuation disputes are a major part of tending to the Valuation Roll. As SA Valuer shows in its May 2014 edition, the City of Johannesburg alone lodged 64 000 objections to its own roll for its Valuation Roll (Gladwin, 2014).

In Kouga Municipality, a recent dispute over the Valuation Roll erupted into a full-blown scandal in 2014. As reported by The Herald (South Africa), Kouga Municipality received a complaint laid with the public protector accusing the municipalitys new general valuation roll of being incorrect, flawed and containing haphazard valuations. The complaint was compiled by the municipalitys former valuation company, Kouga Consortium of Valuers, which tendered to compile the valuations roll but did not get the contract, losing out to DDP Valuers. Kouga Consortium of Valuers head John Boshoff then filed a complaint with the public protector dated April 8. As a result of the Municipality tendering the contract to DDP Valuers, many disputes arose and many property owners complained: valuations dropped significantly, which had an adverse effect on the property market. The complaint put forward by Boshoff held that the general public is directly affected by haphazard valuations that are being submitted by certain valuers in compiling valuation rolls for the municipality. As a result the Kouga Consortium of Valuers conducted research analysis of the accuracy of the valuation roll. The analysis revealed the valuation of property should not vary by more than 10%. [Yet] in Jeffreys Bay, which has the largest number of properties in the area, 99.65% had values that varied more than 10% from the purchase price which was very concerning for Jeffreys Bay resident Armand Bezuidenhout. If what you are telling me is true then my lifes work has been for nothing. My wife and I owe nothing on this house because we have worked hard to pay it off. Now if I sell I wont get close to its valuethats ridiculous, Bezuidenhout said. Of the 35 464 properties valued in Kouga, 1 200 objections were raised. The Herald also noted that discrepancies were also found in the valuation of farms, with some of the 145 farms on which valuations were done, showing variance of more than 70% from the purchase price. It is no wonder that Municipalities are in such arrears as a result of poor valuations. This one example is enough to show that a solution to the problem is sorely needed.

It is also interesting to note that DDP Valuers, according to the firms own 2016 publication has completed 35 GV rolls in the past 8 years which amounts to an average of 733 141 properties valued every year for rating by the municipal department (p. 2). DDP Valuers, excoriated by Boshoff in the complaint to Kouga, has evidently been utilized by numerous Municipalities, which most likely means that the same problems experienced in Kouga Municipality is also happening elsewhere. In fact, DDP Valuers lists over a dozen Municipalities that it has provided valuations for of all types of properties. In short, the situation is endemic and systemic.

However, there is also another issue that requires attentionand that is the issue of how Municipalities respond to valuations. Currently there are significant backlogs in valuation dispute hearings, which further exacerbates the situation for Municipalities with respect to getting Valuation Rolls published so that revenue streams can be initiated. How Municipalities conduct valuations must, of course, be addressed and improved. But how Municipalities handle disputes also has to be addressed, lest the Cities be taken advantage of when they do perform fair and equitable valuations. For examplenot all property owners want fair and equitable valuations because they do not want to pay the rates and taxes that go along with such valuations. So how do Municipalities deal with this issue? A look at the Municipality of Johannesburg will be sufficient to understand the process as it is fairly representative of the whole of South Africa in this respect.

The Municipality of Joannesburg has addressed the issue of disputes and property owners making objections to valuations, with reference to how property owners should go about the process. From the same governmental website that addresses procedural policies in a question and answer format, the following information is derived (Frequently Asked Questions, 2013):

What do I do if I disagree with my property valuation?

Legislation makes ample provision for any person to object to an entry in a General Valuation roll, provided that such objection takes place in the prescribed manner and within the prescribed objection period. An objection will be considered by the Municipal Valuer and a Valuation Appeal Board, should a property owner wish to appeal against the findings of the former. Each new valuation roll must be advertised in a prescribed manner, and such roll must be made available to the public for inspection and objection. Once the inspection period has closed no more objections will be accepted.

Specific details on the objection dates and venues will be advised in the individual notices to owners regarding their property valuations (sect 49 notices).

What cant I object against?

Legislation allows you to object to any entry or omission from the General Valuation Roll but not the roll in total. A property owner can also not object to the rates that you are paying or are due to pay; The Valuation Services directorate does not determine rates. We are responsible for the determination of property values, which are used as the City's rates base by the Rates & Taxes directorate to calculate your rates.

Do I need a Lawyer to represent me at the Appeal Board?

The Appeal Board is not a court of law, and you do not need to bring a lawyer, unless you wish to do so. You may also bring any other expert to assist you during your appeal hearing. However this will be for your own account.

The Valuation Appeal Board will consist of a Chairperson with legal qualifications and sufficient experience in the administration of justice. The remaining members will be made up of not fewer than two and not more than four other members with sufficient knowledge of, or experience in, the valuation of property. At least one must be a professional valuer registered in terms of the Property Valuers Profession Act 47 of 2000.

The Appeal Board is an independent Body appointed by the MEC Local Government.

How long will an objection take to be resolved?

The number of objection received will have an effect on the process period. The Municipal Valuer will review the objections taking in consideration the information that was provided on the objection form.

The outcome of the Municipal Valuer decisions will be mailed to objectors in phases as per completion.

To what extent is the Municipal decision final?

Section 52(2) of the MPRA states that if the Municipal Valuer changes the value of a property that was objected to by more than 10% upwards or downwards the Appeal Board must review the objection, confirm, amend or revoke the decision of the Municipal Valuer.

I have objected to the new value of my property. Must I continue to pay my rates even though I think I am paying too much?

The MPRA Section 50 (6) states:

The lodging of an objection does not defer liability for payment of rates beyond the date determined for payment.

Therefore the account must still be paid until the objection process has been finalised.

The MPRA Section 55 (2) states:

If an adjustment in the valuation of a property affects the amount due for rates payable on that property, the municipal manager must:

(a) calculate -

(i) the amount actually paid on the property since the effective date; and

(ii) the amount payable in terms of the adjustment on the property since the effective date ; and

(b) recover from, or repay to, the person liable for the payment of the rate the difference determined in terms of paragraph

(c) plus interest at a prescribed rates (Frequently Asked Questions, 2013).

As can be seen from the Municipalitys procedural policy for handling valuation disputes, there is a clear-cut process that the City adheres to. However, as shall be addressed in more detail in the following chapters, there are several ways the Municipality could enhance this process and shore up its own revenue stream and balance sheet as a result.

South African Property Valuations (SAPV) is a BEE Status Verified Level 3 Contributor with 110% Procurement Recognition issued by Empowerdex, a SANAS accredited verification agency. It is helpful to this project to understand how BEE Status can be used by tenderers to award contract jobs to firms that might otherwise not be qualified to perform the necessary appraisals. The importance given to companies that are BEE Status and can show this in their bids to obtain contracts from Municipalities indicates that the qualities that local governments are looking for in bidders may be skewed by the politics of the environment in which they are located. For example, the state-owned company Transnet has a policy in place, which follows government regulations, regarding giving special preference to contract tenders who can show BEE Status verification. The following is just an example of how this preference is illustrated in formal contract negotiations and is taken from Transnets (2016) Request for Proposals to bidders:

As described in more detail in the attached BBBEE Claim Form and as prescribed in terms of the Preferential Procurement Policy Framework Act (PPPFA), Act 5 of 2000 and its Regulations, Respondents are to note that Transnet will allow a preference to companies who provide a valid B-BBEE Verification Certificate. Respondents are required to complete Section 7 [the B-BBEE Preference Point Claim Form] and submit it together with proof of their B-BBEE Status as stipulated in the Claim Form in order to obtain preference points for their B-BBEE status.

B-BBEE Joint Ventures or Consortiums Respondents who would wish to respond to this RFP as a Joint Venture [JV] or consortium with B-BBEE entities, must state their intention to do so in their RFP submission. Such Respondents must also submit a signed JV or consortium agreement between the parties clearly stating the percentage [%] split of business and the associated responsibilities of each party. If such a JV or consortium agreement is unavailable, the partners must submit confirmation in writing of their intention to enter into a JV or consortium agreement should they be awarded business by Transnet through this RFP process. This written confirmation must clearly indicate the percentage [%] split of business and the responsibilities of each party. In such cases, award of business will only take place once a signed copy of a JV or consortium agreement is submitted to Transnet. Respondents are to note the requirements for B-BBEE compliance of JVs or consortiums as required by Section 7 [the B-BBEE Preference Point Claim Form] and submit it together with proof of their B-BBEE Status as stipulated in the Claim Form in order to obtain preference points for their B-BBEE status. Note: Failure to submit a valid and original B-BBEE certificate for the JV or a certified copy thereof at the Closing Date of this RFP will result in a score of zero being allocated for B-BBEE.

Subcontracting Transnet fully endorses Governments transformation and empowerment objectives and when contemplating subcontracting Respondents are requested to give preference to companies which are Black Owned, Black Women Owned, Black Youth Owned, owned by Black People with Disabilities, EMEs and QSEs including any companies designated as B-BBEE Facilitators1 . If contemplating subcontracting, please note that a Respondent will not be awarded points for B-BBEE if it is indicated in its Proposal that such Respondent intends subcontracting more than 25% [twentyfive percent] of the value of the contract to an entity/entities that do not qualify for at least the same points that the Respondent qualifies for, unless the intended subcontractor is an EME with the capability to execute the contract.

A person awarded a contract may not subcontract more than 25% [twenty-five percent] of the value of the contract to any other enterprise that does not have an equal or higher B-BBEE status level than the person concerned, unless the contract is subcontracted to an EME that has the capability and ability to execute the subcontract. In terms of Section 7 of this RFP [the B-BBEE Preference Point Claim Form] Respondents are required to indicate the percentage of the contract that will be sub-contracted as well as the B-BBEE status of the sub-contractors.

One of the most important passages to note in this RFP is the following line: A person awarded a contract may not subcontract more than 25% [twenty-five percent] of the value of the contract to any other enterprise that does not have an equal or higher B-BBEE status level than the person concernedand it is important to note because the condition for subcontracting is not based on skill or merit or experience or reputation or professional certification but rather on the arbitrary and socio-political condition of the enterprise being B-BBEE certified. This shows where the Municipalities focus is and where its priorities are. They are not necessarily focused on obtaining the best worker for the job but rather in fulfilling a mandate placed upon them by the government that restricts their hands in terms of managing affairs appropriately. This condition can have significant ramifications when it comes to valuers and valuations. As is seen elsewhere in this study, when Municipalities award contracts to valuation firms (because they are the lowest bidders and meet the government stipulated requirements), the end result is typically catastrophic for the Valuation Roll. This is shown in Chapter 4 in the findings obtained when Municipal Values are compared to Market Values obtained from the annual reports of Publicly-Traded Companies. BBEEE Status is so important to Transnet, in this example, that it further states: Transnet encourages its Service Providers to constantly strive to improve their B-BBEE rating. Whereas Respondents will be allocated points in terms of a preference point system based on its B-BBEE scorecard to be assessed as detailed in paragraph 5.1 above, in addition to such scoring, Transnet also requests that Respondents submit a B-BBEE improvement plan. Respondents are therefore requested to indicate the extent to which they will maintain or improve their B-BBEE status over the contract period (Transnet, 2016).

The problem with placing so much emphasis on B-BBEE is that Dzonzi (2017) shows, the certification itself is suspect and is not even trustworthy when it comes to delivering the type of equality the certification is supposed to deliver. Dzonzi (2017) states that benchmarks for measuring whether listed South African companies have adequate black ownership need to be reconsidered, according to a report prepared for the National Treasury and submitted to lawmakers discussing transformation in the economy. What is important is that the measurement process is inadequate for establishing whether B-BBEE companies are even really benefiting the black communityand if not, one might well ask what the purpose of the certification is and why it is being used as a distinguishing feature in choosing a firm to conduct valuations, when there are clearly much more important features that a firm should showsuch as expertise and experience in dealing with the valuations of properties like those that are described in the contract. Dzonzi (2017) states: Black economic empowerment codes have failed to fix inequalities, partly because of the focus on shareholdings rather than on black management of companies, according to the report, prepared for Treasury by Lynne Thomas, an independent researcher and consultant. BEE deals tend to favor direct owners over indirect owners, who hold their stakes through vehicles like pension funds, according to the report. The reason for pointing this out is simply to show that Municipalities are regarding the wrong criteria when it comes to assessing the worthiness of valuers tendering for contracts. Indeed, a study by Akinsomi et al. (2016) examined the utility of using B-BBEE as an efficient way to assess the merits of individual firms. Their study set out explicitly to measure the impact of Broad-Based Black Economic Empowerment (BBBEE) on the risk and returns of listed and delisted property firms on the Johannesburg Stock Exchange (JSE). The study was investigated to understand the impact of Black Economic Empowerment (BEE) property sector charter and effect of government intervention on property listed markets (p. 3). The study found that BEE-compliant firms had better returns than non-BEE-compliant firms but that fact there have been few assessments of this type indicates that there is a great deal more acceptance about BEE-compliancy being taken at face value than may necessarily be the case for all sectors.

With that said, it is also necessary to examine the role that the MPRA plays in directing the valuations process and how its recommendations factor into the methods used to collect valuations of properties.

SAPV (2013) provides its own recommendations to property owners when objecting to Municipal valuations. Posted to its website in 2013, this list of recommended actions provides a comprehensive examination of what owners are thinking when they seek to have valuations overturned. Understanding this perspective can better help Municipalities prepare their own rebuttal. To that end, it is helpful to obtain a grasp of how the public is being advised when it comes to objecting to a property valuation. As SAPV (2013) notes:

The Municipal Property Rates Act (MPRA) stipulates that all properties in each municipal district need to be valued every four years. Mass appraisal techniques based on comparable sales are necessarily used by the Municipal Valuer to fulfill this function. Mistakes will inevitably happen. Values could be incorrect due to differences in quality and characteristics of properties, incorrect comparables being used, incorrect sizes of structures or land (though this is improving due to the use of aerial photography) and even simple typing mistakes in calculations can lead to gross over- or undervaluing.

The MPRA is structured so that these errors can be corrected through public notification of valuations, followed by objections, re-valuations, notification, and then appeal should the objector not agree with the outcome. If your property value is incorrect, you should object and the municipal valuer will adjust it. There are a few things to remember when objecting:

Only object to a specific property, not to the valuation roll in general or in part.

You cannot object based on the value of other property values in the valuation roll (they may also be incorrect).

Do not object based on rates increases. Municipal valuations are based entirely on current market value at the date ofvaluation and are entirely independent of rates. Taxes are calculated by taking the budget of the municipality and dividing it by the total value of all ratable property in the municipality to arrive at a rate in the Rand figure, which is then multiplied by your property value to arrive at the amount due for each property. Though the valuation amount is used to calculate the rates it is the budget that determnes the fee you pay and the annual increase.

Use recent comparable sales (that are genuinely comparable) in the area.

If your property is currently for sale or has recently been on the market, this information should be provided, together with any offers received.

You can also object based on quality, size, restrictions, servitudes or other things that materially affect the valueof your property in relation to the comparable sales in the area. Bear in mind that these may already have been taken into account. As mentioned, there could be errors, and there will obviously be issues that theMunicipal Valuer is not aware of due to the nature of mass valuations.

Be sure to provide details and all relevant documentation, without which your value cannot be changed. Remember there is often a different Municipal Valuer for each four year valuation cycle, so information you provided for a previous objection will not necessarilybe known to the new valuer.

Do not object to the category or zoning of your property to the Municipal Valuer. If you need a category change, this must be applied for directly with the municipality. There are specific forms for this and requirements that need to be met (e.g. for a change to agricultural proof of being abonefidefarmer is required).

A change from Vacant to Improved is an exception to this, as it is an obvious change if a new structure has been built or if a property is incorrectly categorized as vacant.

A valuation by a professional valuer or from an estate agent may be attached, but ensure that comparable sales are included in the valuation.

Be sure to provide accurate information. If your property is on the market at a lower price than the municipal valuation, there is clearly an error. However, beware if your house is being marketedat double the price mentioned in your objection.

Do not object if your valuation is correct. There are cases where on closer inspection an increase in the value is justified. Also if taken on appeal and it is found that the objection is frivolous, the objector may be liable for costs.

If your value is too low, you should object. It is up to each individuals conscience, but remember when you want to sellor need a bond, the municipal valuation will be considered.

For commercial properties provide financialinformation (rentals and expenses), but bear in mind that the valuer willuse market related rentals if the rentals are too low (e.g. owner occupier with artificially low rentals).

Finally, object even if you miss the deadline. Your objection will go onto the next supplementary valuation roll.

These recommendations are for the whole of South Africa, as they take into consideration the Republic of South Africas MPRA. While the Municipality is bound by the same MPRA, it may take note of how the public is interpreting it and what methods the public is utilizing in order to work within the Acts framework to obtain an overturning of a valuation it disagrees with. By studying this strategy of the public, the Municipality can formulate a response or counter-strategy that will protect itself and prevent the public from taking advantage of weaknesses in its own procedural policy in terms of how disputes and objections are addressed by the City. More on this will be discussed in the following chapters as this study seeks to develop a strategy that Municipalities may utilize to strengthen and fortify their own systems so that weakness is not a disadvantage and a liability to maintaining revenue streams and a healthy balance sheet.

An example of how the public is given the opportunity to inspect the Valuation Roll and object to a valuation contained therein is supplied by the Cape Town Municipality, with regard to its 2015 Valuation Roll. The public was informed of the following:

2015 General Valuation Roll for the City of Cape Town Notice is hereby given in terms of section 49 (1) (a) (i) of the Municipal Property Rates…

Introduction

One of the most important sources of revenue for South African local authorities is rates and taxes. Therefore, the dependency on rates and taxes revenue and collection cannot be understated.

It is common knowledge that the South African Municipal Property Rates Act (MPRA) provides for, amongst others, the fair and equitable valuation methods of properties. However, despite accepted valuation models being adopted by Municipalities, and rates and taxes being levied accordingly, scope exists for significant increased rates and taxes revenue generation and revenue loss reduction.

As French and Gabrielli (2015) note, since the global Financial Economic Crisis (FEC) hit the world markets in 2007/2008, therole ofproperty valuationhas been under greater and greater scrutiny (p. 1). As budgets become tighter, greater attention is turned towards balance sheets. Reducing revenue loss is a primary method of securing municipal stabilityand property valuation tactics are the main avenue towards such reduction.

Revenue loss reduction and the resulting increased revenue base will provide Municipalities with access to funding to advance Municipal service delivery. For example, R1bn increased revenue per annum could be leveraged to supply a R10bn loan, which is repaid over 10 years from the additional income received. There are obviously many benefits to a Municipality enhancing revenue collection.

1.1 Problem to be addressed

Municipalities in South Africa are required to value all properties in their jurisdiction every 4 years. Various valuation methodologies are applied. The South African Municipal Property Rates Act (MPRA) provides guidance on determining Market Related values. Whilst municipalities seek to ensure the determining of market value in the most cost effective manner possible, the private sector adopts sophisticated valuation methods to appraise property investments.

Currently, there are a number of methods for appraisal of property investments, which include:

1) the direct capitalization method

2) discounted cash flow method

3) replacement valuation

4) comparative sales

5) remunerative valuation methods

However, in recent years municipalities have adopted mass valuation methods which have proved to be more cost-effective but which have also yielded substantially inaccurate reflections of real property value (Levy, Dong, and Young, 2016.).

1.2 Purpose of this study

This study identifies areas of property valuation anomalies (municipal valuation roll property values are significantly lower than publicly available open market property values), which may be pointed to as a cause of Municipalities rates and taxes revenue loss.

This study also provides methods to increase revenue through revenue loss reduction by implementing methods developed by the researcher.

This study accomplishes these tasks through investigation of balance sheet enhancement methods of Municipalities in South Africa, not only by using the Municipal Valuation Roll and Supplementary Valuation Rolls but also by expanding the municipal property valuation process to consider property owner market valuations.

The purpose of the study is to develop a better method for South African Municipalities to enhance their balance sheet by improving revenue generation through more effective property valuations.

This purpose is achieved by:

1) Developing a strategy that municipalities can use to prevent abuse of the valuation objection process.

2) Recommending methods to increase municipal revenues and restrict claims for municipal value reductions relating to the Municipal Valuation Roll and Supplementary Valuation Rolls.

The basis for this pursuit s that large discrepancies in property values in annual reports of publicly traded companies vs. municipal valuation rolls are evident.

1.3 How this study contributes to existing literature

To more effectively address the issue of adequately reflecting actual property value, this study takes into consideration the valuation methods applied as outlined in annual reports of various publicly traded companies (REITs as well as other firms) and as advised during personal interviews and/or online surveys of private sector valuers, bank valuers, bank mortgage finance officials and municipal valuers.

This study examines a sample of properties in 5 of the largest metropolitan municipalities in South Africa and compares the municipal value to the annual report values of the publicly traded companies. In doing so, it outlines and evaluates the following points:

1) The Municipal methods of valuation for rates and taxes determination; and

2) A sample of private sector (not government owned properties) properties reflecting the municipal valuation of properties versus market values of properties; and

3) Property owners rights to object to municipal valuations and resulting impact of decreasing rates and taxes revenue through municipal rates and taxes reductions (when in fact many property owners object to get their property values decreased in order to benefit from lower rates and taxes WHEREAS in reality their properties are worth significantly more); and

4) Current revenue losses to municipalities through municipal undervaluation of properties thereby negatively impacting on rates and taxes revenues accruing to Municipalities; and

5) Publicly traded companies such as Corporations and REITS (Real Estate Investment Trusts) whose balance sheet values and revenues have a direct impact on share values; yet strangely, municipal values of such properties are significantly lower than publicly disclosed in annual reports and balance sheet values; and

6) Methods to reduce current rates and taxes revenue losses due to incorrect valuations and ultimately increase rates and taxes revenues through:

a. Implementation of improved valuation methodology (when compiling the Municipal Valuation Roll) at little or no cost to municipalities by way of ensuring valuers are advised to assess private valuations per financial statements and balance sheets of publicly traded companies at time of undertaking municipal valuation roll valuations;

b. Introducing a requirement for supporting documentation by companies, Trusts, etc., who wish to motivate for rates and taxes reductions, such supporting documentation to be provided by property owners seeking a decrease in municipal valuation roll value, should include the following:

i. Copy of property owners current years audited financial statements and annual report of company (property owner) wherein the most recent market value of the property is stated and reflected in the balance sheet and annual report; and

ii. Letter from the financial institution who financed the property confirming and acknowledging the proposed new lower market valuation proposed by the property owner;

This study proposes that the Municipalities and their appointed Municipal Valuers overseeing the Municipal Valuation Roll should use not only Mass Appraisal/Mass Valuation Methods but also the method of identifying market values as determined by referencing property values of properties as reflected in publicly available Annual Reports of publicly traded companies. Share prices are linked to company performance and therefore market value of real estate assets listed in annual reports of publicly traded companies should be used as a minimum value for municipal valuation roll purposes. In addition, whilst the Municipal Valuation Roll is only undertaken every 4 years we believe that the supplementary valuation roll should be updated annually to align with Publicly Traded Company increase in property values as disclosed in their annual financial statements. This paper will show the losses to the municipalities currently and the increases in revenue to the Municipality should this method of market value determination be adopted. The Rates Act makes mention that municipalities should determine market values for valuation rolls, on which rates and taxes are determined.

Those property owners who are benefitting from low municipal valuations are reducing the Municipalities ability to deliver services to clients, not to mention that the more rates and taxes collected could result in higher service delivery.

1.4 The methodology

There are two methodologies applied in this study. The first is the gathering of market value valuations from South African Publicly-Traded Companies to compare them to the valuations of the Municipality Valuation Roll. The second is the obtaining of qualitative data from questionnaires distributed to valuers in South African to better understand the methods they themselves utilize when valuing a property. This mixed-methods approach will be described in more detail in Chapter 3. For now a brief description will suffice:

In determining the methodologies utilized by valuers, two questionnaires have been developed and distributed:

1) One for professional valuers to determine the most commonly used valuation methods both in the private sector and by municipalities

2) A second for banks engaged in mortgage financing, to determine the importance of market value to banks and whether valuers are required to have professional indemnity insurance coverage andif sowhy.

The data collected from this diverse group of property owners, valuers, bank finance lenders and participants in the market were analyzed. An assessment of the data collected revealed that in the private sector the most commonly used methods of valuation are the direct capitalization of first years net income. However, from a Municipal Valuation perspective, the Mass Valuation Methodology was utilized.

A case study approach was undertaken involving real estate portfolio valuation methodologies together with an assessment of market values of properties (2016 annual reports of Publicly-Traded Companies) in respect of publicly traded entities. Market values were then compared with municipal values of properties (based on 2016 Municipal Value on record) to determine discrepancies.

Discrepancies were documented to illustrate impact on revenues to both Municipalities (loss of revenue due to incorrect valuation methodologies applied in instances of the Municipal Valuation Roll and Supplementary Valuation Roll) and property owners (lower rates and taxes based on lower municipal valuations, results in higher property values and share prices due to lower operating costs to property owners).

Ultimately, loss of revenue to Municipalities results in reduced Municipal ability to render services to inhabitants in Municipal areas. Conversely, those property owners benefitting from incorrect (lower) municipal valuations will benefit from lower operating costs (rates and taxes) applicable to properties in question thereby resulting in higher property values in the open market.

1.5 Importance of the findings: Outcomes of the study

The importance of the findings is that it is evident that municipalities could be generating more revenue by more effectively valuing properties. By more effectively valuing properties, municipalities could fill shortfalls in budgets that currently restrict the local governments ability to spend on infrastructure and other programs that are important to constituents. The benefits of increased rates and taxes revenue include the following:

Enhanced municipal balance sheet and credit rating;

Additional borrowing achieved by municipality based on future income;

Additional arnings contribute towards municipal service delivery, bulk services installations, economic growth, and job creation.

1.6 Assumptions

For the purposes of this study, it is assumed that the annual reports of the Publicly Traded Companies are correct. It is also assumed that the Municipal Valuation Rolls are correct for when comparisons are made between Municipal Valuations and Publicly-Traded Company valuations. A discussion of how these assumptions might impact the studys outcome is provided in more detail in Chapter 3. The limitations presented by these assumptions are provided in the following section.

1.7 Limitations

The limitations of this study are: 1) obtaining valuations of properties from Municipal Valuation Rolls is not always easy or even possible; different Municipalities have their own search methods, and in some cases no data is obtainable for a specific property. Thus, it was not always achievable to do a comparison of valuations for every property; 2) while this study proposes a method of valuing properties that could enhance the balance sheet of Municipalities and increase their revenue stream, it does not evaluate the effect that this valuation method might have on business or property owners; one concern is that property owners may find this method too constraining on their own portfolios, investments or budgets and thus seek to move to other more tax-friendly communities. To fully appreciate the findings of this study, future research will have to be conducted to evaluate and understand how this studys proposed method might be received by the business/property owning community. More will be said about this limitation in the Recommendations chapter.

1.8 The Following Chapters

Current methodologies used by valuers in South African Municipalities is evaluated in Chapter 2, which examines published literature relevant to the topic, and in Chapter 4, where valuer responses are provided. These responses are discussed in Chapter 5. Chapter 3 provides an examination of the methodology used to obtain data about property values, both from the Municipal Valuation Roll and from the publicly traded companies, which publish market values of properties in their annual reports. In Chapter 6 recommendations for valuation methodology and for answering valuation objections are provided so as to give Municipalities a better opportunity to enhance their balance sheets and increase their revenue streams. The chapter ends with a conclusion that also gives guidance for future research.

2 Literature Review

2.1 Current Status

The Municipal Property Rates Act (MPRA) signed into law by the President of the Republic of South Africa on 11 May 2004 provided the Municipality with the right:

To regulate the power of a municipality to impose rates on property; to exclude certain properties from rating in the national interest; to make provision for municipalities to implement a transparent and fair system of exemptions, reductions and rebates through their rating policies; to make provision for fair and equitable vaiuation methods of properties; to make provision for an objections and appeals process; to amend the Local Government: Municipal Systems Act, 2000, so as to make further provision for the serving of documents by municipalities; to amend or repeal certain legislation; and to provide for matters connected therewith (Local Government: Municipal Property Rates Act, 2004).

Those powers were substantially increased and defined with the 2014 Amendment, Act No. 29. Among the new insertions were the right:

To provide that a rates policy must determine criteria for not only the increase but also for the decrease of rates; to delete the provisions of section 3(4) and to provide for a rates policy to give effect to the regulations promulgated in terms of section 19(1)(b); to provide that by-laws giving effect to the rates policy must be adopted and published in terms of the Municipal Systems Act; to provide for the determination of categories of property in respect of which rates may be levied and to provide for a municipality to apply to the Minister for authorisation to sub-categorise property categories where it can show good cause to do so (Local Government: Municipal Property Rates Amendment Act, 2014).

Joburg, the Official Website of the City of Johannesburg, states that there are about 826 000 registered properties in the City, and the property rates levied by the City is the single most important basic revenue source for the City - about 20 percent of total income, says the City's director for rates and taxes, Erika Naude (Citys new General Valuation Roll, 2012).

There is a need for the MPRA in South Africa for numerous reasons, as the Cooperative Governance & Traditional Affairs Ministry (COGTA, 2017) states on its government website; COGTA summarizes the most essential aspects of the MPRA for the Republic of South Africa by highlighting the following pointsnamely that the Act is needed

To regulate the power of a municipality to impose rates on property (in accordance with section 229(2) of the Constitution);

To provide a uniform framework for regulating the rating of property throughout the country

To exclude certain properties from rating in the national interest;

To make provision for municipalities to implement a transparent and fair system of exemptions, reductions and rebates through rating policies;

To make provision for fair and equitable valuation methods of properties;

To make provision for a fair objections and appeal process regarding valuation of property (COGTA, 2017).

The emphasis on a transparent and fair system and on fair and equitable valuation methods, as pointed out both in the sections of the MPRA identified at the beginning of this chapter and by the COGTA (2017) in its summation of the Act, is important to note because in the Republic of South Africa, equitability, transparency and fairness are serious issues that have impacted the country for decades as it has struggled with a wide-ranging variety of local and national matters. As the country works towards bettering itself, its government, its communities, and its infrastructure, it stands to a reason that a system of valuation should also reflect the values and ideals the nation seeks to implement throughout the land. The literature discussed in this chapter focuses on providing an understanding of the current fair and equitable valuation methods so as to allow for an intellectual basis upon which further development can be conducted.

Indeed, provisions of the Municipal Properties Rates Act have specifically addressed the issues of the importance for valuations of property to be based on fairness and equality:

a. The Act also requires monitoring and there is a duty on the municipality to ensure that the valuation roll submitted is a fair reflection of Market Valueacross the entire spectrum of properties comprising the valuation roll; and

b. Section 3(3) of the Act specifically mentions the aspect of fairness and equality

For these reasons, the current study, which places its focus on arriving at a better understanding of market value and how a fairer and more equitable system can be devised, proceeds with an examination of the content that follows.

2.2. Current Valuations Methodology

2.21 How a Valuation is Conceived

Definitions and Terms to Know

The following list of terms is by no means exhaustive and does not include every important concept discussed in this paper. The following is merely provided to give some basic background information on valuations. The definitions are retrieved from UniqueCo Property Valuers (2017) and apply to Municipalities in South Africa.

Municipal Rates PolicyThe rates plicy of a municipality must: 1) treat persons liable for rates equitably; 2) determine the criteria to be applied by a municipality if ita) levies different rates for different categories of properties, b) exempts or grants rebates or reductions, and c) increases rates; 3) provide for appropriate measures to alleviate rates burden on the poor; 4) take into account effect of rates on public service infrastructure; 5) take into account effect of rates on registered public benefit organizations; and 6) allow a municipality to promote local, social and economic development.

Valuation RollA valuation roll of a municipality 1) must list all rateable properties in the municipality; and 2) is valid for four financial years (but may be extended by one financial year

How a valuation is conceived is highly important when it comes to engaging in the process of valuing properties. This is true for countries the world overnot just for South Africa. The case of Freemont (Denbigh) v Knight Frank LLP [2014] EWHC 3347 (Ch) is an important case in global valuations history because it highlights the role that context plays in determining a propertys precise value at a given point in time. Context determines the parameters of the propertys value by identifying whether the property is planned for a particular use or function, whether any contracts are established upon the property, and so on. As Vigus and Crossingham (2016) explain, there is every reason for valuers themselves to value contextualization:

The case of Freemont (Denbigh) v Knight Frank LLP [2014] EWHC 3347 (Ch) is a good example of a valuer successfully relying on a narrow contractual definition of the services which it was retained to perform, and reminds us of the importance of controlling the scope of the services offered. In this case, the surveyor valued a property at 17m with outline planning permission, and 18.7m with detailed planning permission. After the purchasers acquisition of the property, it then took no steps to develop the site and the buildings became dilapidated. In the circumstances, the purchaser sought to dispose of the property and put it on the market, receiving a number of offers but rejecting them, it said, on the basis of the surveyors initial valuation which was given in the entirely different context of the purchasers initial acquisition. Ultimately, the purchaser sued the original valuer saying that, had the initial valuation been accurate, they would have accepted lower offers and that, having rejected a number of offers, they had lost the chance to dispose of the site on best terms. Having reviewed a number of the seminal cases in the area Smith v Eric S Bush [1990] 1 AC 831; Scullion v Bank of Scotland [2011] 1 WLR 3212; Caparo v Dickman [1990] 2 AC 605 the judge held that the valuer was not liable for the claim. The contract between the valuer and the purchaser was key: it narrowly defined the scope of services as relating to the security valuation only, there could be no suggestion that there was a wider or longer-tail liability in relation to any later or other reliance by the purchaser on the advice, and the advice could not be relied on by the purchaser in considering the subsequent disposal of the site. So, largely as a result of the clear and narrowly defined scope of the valuers contractual retainer, its advice could be relied on only for the purpose for which it was intended, and the circumstances of the claim were therefore outside the contractual and tortious scope of the valuers duty. The lesson for practitioners is to be as clear as possible about the scope and purpose of their advice and to limit this as far as possible.

As Vigus and Crossingham (2016) show, valuers must protect themselves from legal recourse by specifically and accurately showing how and what facts their valuations are based upon. So much is dependent upon proper valuationsfor example, owners may make business or investment plans based on property value, and if that valuation is not correct or accurate those plans could suffer considerably. Therefore, valuers themselves are in need of a system that helps to protect them from lawsuits that could threaten their productivity, career, and livelihoodnot to mention the Municipalitys or banks reputation and own balance sheet, which is dependent also upon acquiring accurate valuations of properties.

Therefore, how a valuation process is conceived makes a great deal of difference in what type of outcomes may be expected. If the process is conceived in terms of maximizing the Municipalitys ability to tax and apply rates to service its own programs and policies provided to communities, then there should be a system of valuation in place that supports such a conception. If the process is conceived in terms of providing an easy, one-stop valuation method that can be applied using a mass valuation system, then the current set-up may be judged to be sufficient. The conception is what frames the end goaland in todays credit-crunched, debt-laden world, where countries are focusing more and more on enhancing balance sheets and increasing revenue streams to meet the demands of infrastructural growth and development, the former conception should be the primary focus of a Municipality engaged in valuations practices under the MPRA.

2.22 The Purchase Price Method of Establishing Value

As Mangioni (2016) notes, In the competitive residential mortgage market there is pressure on the valuer to suggest that the purchase price of property is ultimately the best evidence of value (p. 2). This pressure stems from both buyers and sellers and is reflective of a desire to attach more or less weight to a banks valuation as authoritative. The criteria of such a valuation, however, stems not from banks themselves but rather from laws and court-based rulings. Inez Investments Pty Ltd v. J.L. Dodd 1979 NSWSC established criteria for valuers in Australia, and Mangioni (2016) examined how this criteria impacted the concept of using purchase price of property as best evidence of value.

What Mangioni (2016) found was that one factor that goes into how valuations are utilized is loan insurance. Mortgage insurance covers the lender in case the borrower defaults, and the amount of mortgage insurance purchased depends on the valuation of the property given by the lender. Mangioni (2016) shows that using purchase price as a valuation method is problematic and not a precise way to determine the best valuation. What is a more evidential approach is that of the market valuation: The formulation of market value and deriving of the value of property is largely predicated on evidence that supports the market value assigned by the valuer. Without evidence, the valuers opinion is no better informed than another opinion of value. This is highlighted in Reading v. The Valuer General (1923), 6 L.G.R. 132 in which Pike, J. stated: Every expert is entitled, if he sees fit, to ascertain the market valueto rest on his own opinion apart entirely from any market transactions, but if he does so he is liable to be met by three things: a. The opinions of other people. b. Values based on sales; and c. Any previous opinion that he himself might have expressed as regard to values. Mr. X like all of us, was not born with an opinion of land values (Rost & Collins 1984:86) (Mangioni, 2016, p. 4). Why a market value valuation should be used instead of a purchase price becomes evident once the variables are considered: so many factors are based on purchase price to such a degree that it is often in the owners best interest to get that price as low as possible. In doing so, the owner is not interested in ensuring that price reflects actual market value: his aim is to reduce payments and fees that might be charged, based on the purchase price of the property. The lower the purchase price, the lower the fees. A valuer who bases valuation on this price may fail to accurately reflect the actual or market value of the propety. How market value is determined, however, is a question that Mangioni (2016) asserts should receive more attention.

Mangioni further points out that in mortgage lending practices, valuation is determined differently: In mortgage lending valuations, valuers are provided with the property purchase details and asked to confirm the purchase price as value (p. 4). Yet, as Rooke (2002) notes, recent experience has shown that current major mortgage lending institutions are applying great pressure for valuers to place greater emphasis on the subject sale (p. 48) and so as a result valuers are impacted significantly in how they approach their properties. Mangioni (2016) goes on to find that valuers may inappropriately give greatest weight to the most recently considered information, which would place disproportionate emphasis on one set of materials (p. 5). Or, as happens, valuers set out with a preconceived notion of how a property should be valued and then seek evidence that will fit the pre-conception: even expert valuers indicated that they make early, preliminary judgements and then seek evidence in support of these opinions (Mangioni, 2016, p. 5). Thus, there is ample reason to conclude that valuations in Municipalities are likely to be impacted by variables that do not end in the accurate reflection of real market value. Mangioni (2016) adds that in contrast to this phenomenon in some circumstances it is difficult for the valuer to determine the value of the subject property due to a lack of sales evidence and that the valuation process is thus further compounded when the valuation being sought is for refinancing purposes and there is no sale over the subject property being valued. In these cases, the duty on the valuer is not lessened. It is the role of the valuer to look geographically further or outside the radius of sales that a valuer would ordinarily look at, as well as further back in time for sales (Mangioni, 2016, p. 5). In other words, there is no effective or systematic way that can be established to efficiently value a property based on sales records, as the prices are indeterminate of the way in which the market realizes that value.

Nonetheless, the Australian Prudential Regulation Authority (2000, p. 1) stipulates that all assets taken as security should be valued, wherever possible, at their net current market value. This indicates that regardless of how valuers go about their job, authorities would like to see valuations provide an accurate reflection of market value. Problems persist, however, in realizing market value for valuers. Various researchers and academics have attempted to solve these problems by extrapolating data from other valuation exercises (as in the valuation of publicly held companies, for instance, where shares are seen as a store of value to help appraisers identify the actual real market value of a companyan idea that is not too distant from what this study attempts to describe). More shall be said of how valuations can be conceived in later sections of this chapter. For now, net current asset value per share or NCAVPS is one such method that has been developed in this vein: it is a value that Benjamin Graham developed in the 20th century as a means of evaluating whether a company was trading at what could be called fair market value. Graham calculated NCAPVPS by subtracting total liabilities from a companys current roster of assets and dividing the total by the O/S (outstanding shares) of the firm in question (NCAVPS, 2017). In terms of applying this method to real estate, the same principles would still work: a propertys condition and contextual purpose/plans/contractual obligations and so on would be considered along with all other assets connected to the property; debts and other liabilities would be subtracted from the total and if shares of the property are sold to investors, their worth would be the divider by which that total is evaluated.

In Mangionis (2016) study on valuation methodology, he conducted a survey of valuers to determine their approaches to valuing properties and asked a series of questions that were primarily oriented towards understanding valuations as achieved through analysis of property sale prices. One critical question that is very useful to this study comes at number 7 in Mangionis (2016) survey. He asks: Is property transaction information available in an acceptable timeframe? and receives the following reply:

32 respondents said no, while only 11 said yes (p. 9). That means that nearly 75% of valuers feel that there is insufficient information available to them to make a timely valuation of a property. That finding alone has tremendous impact on the valuation process: it indicates that valuers may be making, in most cases, inadequately informed valuations on propertiesvaluations that impact municipalities considerably, since tax revenue is generated from the value assigned to real estate through this process. What this finding indicates is that even if Municipalities wanted to depend upon valuations or mass valuations for accurate assessments of property valuation, they would really be relying, in all likelihood, on inaccurate readings of the real estate in question. The facts show that professional valuers themselves find it exceedingly difficult to obtain enough data on the property they are valuing in order to offer a substantially supported and accurate assessment of the property. This leaves Municipalities depending on a weak system of appraisal to collect revenue. A better method can undoubtedly be obtained: it simply requires that more access to information be made available. However, this may not be as easy as it sounds. Valuers are limited in terms of what they are able to doand for Municipalities, this means attending to the Valuation Roll, according to the terms of section 33(1) of the Municipal Property Rates Act (MPRA).

2.23 The Municipal Valuation Roll

As the municipal valuer and director of the valuations department in the property unity of Johannesburg stated clearly: Values cannot be influenced or dictated by any party (Oxford, 2013). The director further explained that the main purpose of the valuations directorate is to compile valuation rolls and there are two types of these. The general valuation roll is where we value all the properties in the city. The supplementary valuation roll sees us assessing changes to a property that occur during the lifecycle of the general valuatios role. With the latter we revalue property that has changed, for example if a house has been built on a vacant piece of land. This also applies to changes in zoning, such as from residential to business (Oxford, 2013). What the SA Municipality does to compile its valuation is important to understand and Oxford (2013) provides some detail on how that process is accomplished: First is the physical assessment where the department uses pictometry aerial images taken of a property from five angles and photographs of the fronts of properties to glean valuable data about the value of a property. Then there is the date of valuation, possibly the most important point of reference in this process. As one can imagine, the process is quite detailed and reliant a number of channels of data. However, the date of valuation, as is noted, is extremely important because of the fact that market values will rise and fall over the course of a few years, and having that date as a reference enables valuers to see at what point in the valuation wave the property was pegged at a specific price.

Oxford (2013) states that the Municipal valuer of Johannesburg uses the property market values of a specific year when it comes to valuing all the properties for the new general valuation roll and that whenever we valued a property for this roll we used the prices from that specific year. For residential properties, house sale values from the four years prior are used to provide an accurate assessment of where market values currently are.

But wht if there was a more accurate way to determine market values? What if the Municipality could turn to a source of information that published this data publicly in its annual reports? For instance, what if a Municipality like Johannesburg examined the annual reports of Publicly-Traded Companies in South Africa to determine where investment properties in a given portfolio were being valued by the market? Indeed, this study attempts to answer this very question.

Returning to current practices, however, it may be seen that there is ample room for improvement. Oxford (2013) notes that Johannesburgs director of valuations analyzes the sales of prior years to obtain a basis of valuation for residential properties in each suburb. For example, if you stay in Blairgowrie we published all the sales in that area on our website along with the selling date, the selling price, the physical address of the property and we explained how we valued this property. People were then able to look at those sales, compare them to their properties and make an informed decision. This is, in one sense, no different from turning to the annual reports of South African publicly-traded companies, which publish similar data on valuations. Where the sources do distinguish themselves is in the actual valuation applied by each. This study will have more to say on that later. For now, it is enough to know that there is a distinct difference between Municipal valuations and the valuations of properties provided to the public by investment companies.

Another important point to note about the Valuation Roll is that when it is compiled, all the property values are now fixed at this date of valuation until the next general roll and are assessed against this benchmark (Oxford, 2013). The reason this valuation procedure is problematic is self-evident in a simple examination of a 5-year chart of South African Housing Index from 2012-2017. What the chart shows is that a valuation applied in 2012 to properties in 2015, for instance, would substantially undercut the actual market value of the property by more than 100 pts.

By using the general roll as a principle benchmark, the Municipality is admitting that its values are cemented and not subject to change over a given period of time. But values do change and cementing is obviously not the case as far as the actual market is concerned. The market is never static but is always moving, as it is impacted by a number of complex and interlocking variables that stem from social, political and economic spheresand not only locally but also globally. Before external and global market factors are discussed, a closer examination of the valuation process according to the guidelines of the Republic of South Africa for Provincial and Local Government will now be provided.

2.24 Guidelines on Valuations for Municipalities (from Municipal Property Rates Act No. 6 2004)

The valuation process as proposed by the Republic of South Africa for local government has been outlined by the Director General.

It is worth noting that public awareness of valuations is very important to the Republic of South Africa, according to the Guidelines on Valuations, in which it is stated that:

Municipalities are encouraged to involve and educate the community in the valuation process. The Rates Policy specifically calls for public participation. It is important that the following persons be enlightened in regards to the valuation process:

Councillors and municipal officials;

Ratepayers;

Agricultural unions and farming associations;

Ratepayer associations;

Business associations; Civic associations.

It is suggested that the municipality as part of its tender conditions require the valuer to implement a programme of public awareness. This could include:

Call centres

Attendance by the valuer to ward committee meeting

Brochures

Workshops

Radio and television interviews (Guidelines on Valuations for Municipalities, 2016, pp. 4-5)

According to the Guidelines, the Valuation Process begins with the obtainment of data. For deeds-related data, this data can be obtained from the Registrar of Deeds relating to properties within the jurisdiction of the municipality (Guidelines on Valuations for Municipalities, 2016, p. 5). A Deeds Registrations System (DRS) is available through Deeds Weban Internet interfaceto allow registered users to obtain deeds registration online. For general data, a database is developed and compiled by Municipalities, who must ensure that the database is incrementally added or built upon in perpetuityi.e., the database must never be allowed to stagnate because property is always being added or subtracted from the Municipality and values are constantly shifting (Guidelines on Valuations for Municipalities, 2016, p. 5).

For specialized properties, the Guidelines (2016) indicate that municipalities may need to employ the services of private valuers. In such cases, the Guidelines (2016) stipulate that

Private valuers appointed by them have the necessary skills, expertise and knowledge to compile valuations of this nature. Examples could include, mining, forestry, substantial public infrastructure such as major harbours, airports etc. In these cases, municipalities must satisfy themselves that they have clearly identified these properties in their tender requirements and that the valuer has the necessary expertise or professional assistance to draw upon in the compilation of these highly specialised properties. In the case of mining land, municipalities and valuers must have a clear understanding of the definition of a mine and mineral as defined in the Act. Valuers must clearly understand what constitutes equipment and what is deemed to be buildings or improvements with regard to such land and the resultant implication on value. In the case where the freehold owner of land is not the mining title holder, it is essential that both the municipality and the municipal valuer fully understand that the freehold is encumbered by the mining title and that the value of the freehold in such circumstances is a residual land value (p. 7).

The Guidelines (2016) also recommend that a valuer may use a mass valuation system especially with regard to residential properties (p. 5). A mass valuation system commonly used today is CAMAa computer-assisted mass appraisal system, which is an automated system that maintains property data and performs property valuations, sends notifications to owners, and ensures tax equity through uniform valuations. South Africa uses a CAMA system. A basic CAMA system is described in the next section along with how the Johannesburg Municipality employs CAMA in its valuations process as an example of how the system works.

2.25 CAMA

Many governments utilize CAMA, which is best described in the following terms by the Massachusetts Department of Revenue Division of Local Services/Bureau of Assessment (2016):

In mass appraisal, valuation involves automated applications of the sales comparison, cost, and income approaches to value. A good system should support all three approaches. Some specific desirable features include the following:

(1) A replacement cost module tied to commercially available cost manuals, so that costs can be routinely updated.

(2) Flexibility in depreciation schedules, so that users can develop and modify the schedules by property type, building quality and neighborhood as appropriate.

(3) Cost trend capabilities that allow users to adjust cost values to the market by at least property type and neighborhood.

(4) A land valuation module that allows the user to determine units of comparison (acre, square feet, front feet, depth, site), standard unit values, and site, topographic or neighborhood adjustments.

(5) Standad statistical procedures, including measures of dispersion and graphics, that can be used to compute typical sales price per unit and help develop benchmark values, depreciation schedules, and market adjustments.

(6) A sales comparison module that will retrieve a desired number of the most comparable properties to a given subject property based on a mathematical algorithm. Optionally, the system may adjust the comparables to the subject.

(7) A multiple regression feature for use by jurisdictions with adequate sales. Adaptive estimation procedure (AEP or feedback) can also be used.

(8) A spreadsheet module for use in income and expense analysis (Massachusetts Department of Revenue Division of Local Services/Bureau of Assessment, 2016, p. 2).

CAMA has many benefits to Municipalities, as the above makes clear: it is a user-friendly system that reduces a lot of the pain and toil of obtaining and producing data to be used in a valuations process. The proposed method of this study should not be considered necessarily exclusive of CAMA. On the contrary, it could easily be incorporated into CAMA systems to allow for the benefits of mass valuation to still be applied in the valuation process. The problem with CAMA systems as they currently apply have more to do with the valuation method inherent to the system than to the system itself. An example of how the Municipality of Johannesburg uses CAMA shall now be described.

2.26 An Example of How a Metro Uses CAMA and Performs Valuations

The City of Johannesburg is one example of how a Metro uses CAMA. As such, the Municipality of Johannesburg answers frequently asked questions regarding its General Valuations Roll (as of the time of this writing, still as of yet not updated from 2013 on its government website). The following exchanges provide some illumination with respect to how a South African Municipality engages in the valuations process and how mass valuationi.e., specifically by means of CAMA systemis used to aid in that process. Joburgs Frequently Asked Questions (2013) provide the following by framing the information within a question-answer format; these questions and answers are taken directly from Joburgs Valuation Services website:

How does the City Value your property?

The purpose of the valuation project is to determine a market value of all properties, which implies the most probable price that a property would realise on the date of valuation, if sold on the open market by a willing seller to a willing buyer.

There are several types of properties in the municipality residential, sectional title, non- residential and agriculture. Each is valued on different basis, although they all relate to the market value. For example, residential property (including sectional titles) is valued on a comparable sales method. Most commercial property (including retail, offices, warehousing) are valued on an income basis, while institutional properties such as schools, hospitals and clinics are valued on a cost basis.

When valuing the properties, the Municipal Valuer establishes the market conditions, and this is based on recent sales and market information activity in the various areas. Therefore this will take into consideration areas where values have declined, increased or remained stagnant due to the current state of the economy as on the Valuation date.

Did You Inspect my property?

As this is a mass valuation, the Municipal Valuer uses a computer aided mass appraisal (CAMA) system to determine the values of all properties. This is based on statistical analysis and geographical information systems (GIS), and therefore requires reliable and accurate data.

For residential property, obtaining access to all properties is not possible, and as such, the Municipal Valuer makes use of advanced technology that allows the collection of data. This includes the use of building plans and Pictometry, which is the state of the art 3D aerial photography that allows the valuers to see the properties from all angles, and be able to measure the extents and heights of the buildings, as well as other information relating to quality, condition and other improvements. This is augmented by the used of street level video footage which is collected by driving down each street and recording the street frontages. This method is acceptable in terms of the MPRA, and endorsed by the International Association of Assessing Officers (IAAO) the international body that sets standards to mass appraisal importantly endorses more.

However, in cases where the aerial photography and other imagery is not useable, usually in the cases where properties have a lot of foliage, or high security walls, then physical inspection of the site is undertaken.

The data collection process is independently reviewed for quality assurance purposes to ensure the data collectors are consistent in their approach and the data they record is correct for the subject property.

For non-residential properties, field visits are undertaken to obtain data such as the property use, rentals and financial records of businesses (Frequently Asked Questions, 2013).

Issues do arise within the Johannesburg Municipality when it comes to the efficiency of mass valuations and CAMA. These issues are discussed in section 2.4 Issues and Objections, particularly with reference to a case that made headlines in 2013 regarding a Gupta property that saw its valuation decrease drastically by what the director of valuations in the Municipality described as a mix-up. The decrease shocked property owners, tax payers, estate agents, media outlets and government agents, as it indicated a serious flaw in the valuations systems as currently employed by the Municipality. Before getting into those details, it is helpful to further examine the nature of the valuations process as it described according to the Municipal code.

The valuations of other Municipalities are discussed in Chapter 5. For now a brief examination of the growth of rates and taxes across South Africa as compared to inflation will help to give an idea of how Property Owners feel towards Municipal valuations and valuer methods.

2.27 The South African Property Owners Association

The South African Property Owners Association (SAPOA) has noted that over the last decade rates and taxes have consistently increased at a faster rate than inflation and has increasingly come under the microscope as Property Owners focus on preserving their net income (SAPOA, 2016, p. 3). A look at how rates and taxes have grown, SAPOA states that in real (inflation-adjusted) terms, rates and taxes amounted to R2.2/sqm in 2000. By 2015, this had escalated to R4.1/sqmalmost doubling in real terms (p. 3). The following chart provides a graphic representation of this significant growth in rates and taxes.

Source: SAPOA, 2016.

As SAPOA notes, given its above-inflation growth and its higher growth relative to other operating costs, rates and taxes have increased as a % of total operating costs (p. 5). This puts businesses and property owners at a disadvantageand raises the specter of one of the main problems of raising rates and taxes on property owners: the threat that they might revolt and seek friendly regions in which to settle and do business. To this end, SAPOA asks, Has the growth in rates and taxes been consistent with the growth in property values? which is a question that strikes at the heart of this thesis: How can valuers provide fair and equitable valuations in South Africa in a manner that does not cause alarm to owners, who may have a different concept of what the term value constitutes?

SAPOA answers its own question by stating that during the early 2000s, municipal rates and taxes trended largely in line with the move in property values. The period 2005-2007 saw a significant increase in commerial property values underpinned by real economic growth of 5.5% which saw a gap between commercial property values and rates and taxes (bearing in mind that rates are based on municipal valuations rather than capital values) (p. 6). The fact that rates are based on municipal valuations rather than capital values is indicative, again, of the problem inherent in the valuation of properties among so many different stakeholders. Every stakeholder wishes to construct his own concept of value, with its own determinants. Without some universal standard of assessment or external third party that can offer a valuation that all can agree upon, there will continue to be discrepancies.

Following SAs recession, rates and taxes increased again, climbing even faster than commercial property values resulting in an over recovery of commercial property municipal rates (p. 6). This over recovery has since reversed and entered into a phase of under recoveryhowever, the correlation between the two over time has stayed fairly consistentor so it would seem. SAPOA takes a closer look at this consistency and expands the question to ask: Are rates and taxes consistent with property values across similar property types? and finds that consistency is indeed lacking, with the largest mispricing being found in the industrial sectors, a sector where properties have very unique characteristics which could affect its valuation (p. 7). See the chart below:

Source: SAPOA, 2016.

SAPOA further notes substantial variations across Municipalities with respect to valuations. For instance, on a municipal level, the EThekwini municipality has the highest rates and taxes per square meter and as a % of capital value for all three main property sectors being Retail, Office and Industrial. The City of Tshwane has the second highest rates and taxes relative to capital values across all three property sectors followed by the City of Johannesburg (p. 9).

SAPOAs May 2015 Rates and Taxes Report shows, moreover, the total municipal value of commercial and industrial properties in the large Municipalities. It also shows that the commercial and industrial properties account for 54% of all rates and taxes collected by Municipalities. This is a considerable percentage and indicates that Municipalities have a lot to lose by undervaluing commercial and industrial properties.

Source: SAPOA, 2016.

The discrepancy in rates and taxes and valuations among the various Municipalities is an indication of the need for more standardized valuation methods. To that end, researchers have studied the efficacy of some of the most common valuation systems to assess their effectiveness. Dr. Douw Boshoffis one such researcher. A discussion of his article on the effectiveness of Automated Valuation Models and other issues related to valuation standards can be found in the following section, 2.28 Dr. Boshoff, Valuation Standards and Accuracy Tests. For now, it is helpful to continue to examine some of the information that SAPOA has provided SA in recent years regarding the valuations problem that Municipalities face.

During the 46th SAPOA International Conference, Ben Espach delivered an important paper that was meant to address this very issue of valuations problems in South African Municipalities. The paper was titled Property Rates Making Cents of It. Espach outlined the challenges facing the property industry relating to municipal valuations and rating. He highlighted the curse of under valuations, the tedious process of lodging objections and appeals, the lack of quality control, inadequate monitoring, incorrect implementation of rates policies, incorrect implementation of effective dates and the resultant burden falling onto the property owners throughout the country. More importantly he stressed the fact that the majority of municipalities were under administrative collapse (Massel, 2014). What was Espachs solution? His solution was for property owners to take control of the valuation and rating process. He introduced the concept of Self Determined Municipal Valuations (SDMV). The principle of SDMV is for municipal valuations to be determined by representatives of the property owner and negotiated with the various municipal valuers prior to the publication of a valuation roll (Massel, 2014). SDMV is, in spirit, very similar to the proposal that this study makesexcept in the case of this study it not only calls for owners to take part in the valuations process but rather for qualified professional valuers employed by the owners to take part in the process. In other words, it calls for Municipalities to turn to Publicly-Traded Companies, which own and invest in properties and which have a team of valuers working for them, for their valuations. This would solve many of the problems that Municipal valuers faceand it would satisfy the demand that property owners have for fairer and more equitable valuations. The following information from various presenters was delivered at the 46th SAPOA International Conference:

Escalation in rates is causing value destruction he stated.He stressed that there was a need to have the municipal valuations negotiated well before the valuation was published and was of the view that the SDMV concept was a definite possibility.

Douw Boshoff of the Pretoria University stated that the current process of implementation was unfair. There is a need for property owners to manage the challenge of rating in conjunction with municipalities. Accurate and up to date data is the key factor to correct and accurate municipal valuations. Data must be owned by the municipality and a valuation process should be instigated that will result in objections being the exceptions rather than the norm.

Rob Kane of Vunani Property Fund advised that the ever increasing rates are having a major negative impact on the economy. This is causing value destruction and in reality the Rates Act is not working. He stressed the lack of municipal skills and concluded by saying that property owners should be focusing on their core business and not rating issues.

Izak Peterson of Dipula Income Fund stressed the need to avoid objections and to hasten the lead time to obtain a result. He said that municipalities require more competent teams and that the current turnaround time for objections and appeals is too long. He said that SDMV will assist in avoiding the current delays.

Veronica Mafoko representing Cogta stated that market value was here to stay. She emphasised the need to trust a municipal valuation roll. There is currently a lack of data integrity as well as unrealistic time frames given by municipalities to a municipal valuer to compile a valuation roll. She was aware of the general inconsistencies in municipal valuations and the need for valuations to be market related. Any fixed type formulas to determine municipal valuations would be in conflict with the current provisions of the Rates Act.

Werner Sarvari excelled himself in his role as the facilitator. He advised that the negotiation process was already happening but at the end rather than in the beginning. Negotiating and determining municipal values upfront would solve a lot of the difficulties currently being experienced by property owners across the country. Is SDMV not the solution he asked?

2.28 Dr. Boshoff, Valuation Standards and Accuracy Tests

Dr. Boshoff and Leane de Kock published an article in 2013 on the accuracy of Automated Valuation Models (AVMs). They found that the adoption of Automated Valuation Models (AVMs) in the field of property valuation is a trend, considered controversial and not readily accepted by the valuation profession (p. 1):

AVMs are a relatively new concept in South Africa; however, they have been operational in various countries for a number of years. In South Africa, these models are used for mnicipal valuation purposes for all types of properties and, in the mortgage sector, primarily for residential property valuations. Residential mortgage valuations are currently moving from traditional valuation approaches and are adopting AVMs. In both these fields, the correct property value needs to be determined. Incorrect values will lead to over- or undervalued properties, with a negative influence on the general property market and municipal property taxation bases.

The AVM is described as a mathematically based computer software programme that produces an estimate of market value based on analysis of location, market conditions, and real estate characteristics from information collected. The distinguishing feature of an AVM is that it produces a market valuation through mathematical modelling. The credibility of an AVM is dependent on the data used and the skills of the modeller or operator producing the AVM (Boshoff and Kock, 2013, p. 5). This issue of credibility is one that is also raised in Chapter 4 with respect to Municipal valuers who lack all of the necessary data to make an accurate reflection. Here, the issue is not the valuers themselves but rather the modeler. What is significant and similar about both the Municipal valuer and the AVM is that both rely upon and require data inputs in order to make effective valuations. If the data is not being collected efficiently or effectively, by either the valuer or the AVM, then the outputs will be over or under. The problem, therefore, is the same regardless of whether it is man or machine. (Once the findings of this study are examined in full and discussed, the only logical recommendation that can be made for Municipalities is provided in Chapter 6).

Returning to the issue of the AVM, the researchers purpose in evaluating the effectiveness of the AVMs was to determine whether the commercial property sector in South Africa is ready to accept and adopt or reject AVMs and to investigate the possibility of AVMs replacing professional valuation services for commercial property valuations (p. 1). What they found was that:

Limited research was available both nationally and internationally on commercial property AVMs. It was found that AVMs utilised for the valuation of commercial property are still in the development phase and cannot be considered feasible as yet. The major concerning factor is that commercial property markets are heterogeneous. AVMs offer various advantages over traditional methods, but there are also some disadvantages, which were identified in the study.

The general attitudes towards AVMS were negative and a small percentage of respondents indicated that there may be future potential. AVMs were also regarded as a threat to the valuation profession. It was established that there is scope for commercial property AVMS, however, on a limited basis, and the results could be improved by combining these with traditional valuation techniques. Commercial property AVMs will never replace traditional valuations and can be implemented as a useful tool for verification and auditing of values (Boshoff and Kock, 2013, p. 1).

Boshoff and Kock (2013) described four main valuation standards are services currently in use in South Africathe Gold Standard, the Drive by and broker price options, the Desktop, and the AVM. They describe each respectively:

Gold standard After a physical internal and external inspection of the property, a qualified and registered valuer prepares the professional standard of valuation in writing, and supported by market information.

Drive by and broker price opinions The next service level down from the gold standard is a drive by or external valuation, which involves an external physical inspection in order to confirm the propertys existence and some of its physical characteristics.

Desktop A desktop valuation excludes any inspection of the property, and the valuer may use satellite photos, owner contact and market knowledge to establish information, as well as select and analyse appropriate comparables.

AVM An AVM, at its most basic, provides only a valuation output; however, some AVM systems supplement the figure with various features, the most important being a list of comparable transactions and a measure of the expected accuracy, expressed as a confidence score (Boshoff and Kock, 2013, p. 3).

As Boshoff and Kock (2013) point out, it is highly critical that a balance between among standards and services be achieved simply for cost-benefit purposes: In each case, there must be a balance between savings in time and cost versus the property risk factors. More automated models replace traditional valuation approaches. It is important to review the cost benefit relationship of replacing gold standard valuations with automated valuations or values. Gold standard valuations are referred to as high quality, comprehensive reports, which include a physical inspection and a detailed market analysis (Boshoff and Kock, 2013, p. 4). For Municipalities, the highest standard is the most desirablebut, as shall be shown in the following chapters, this standard is not always possible, especially when Municipalities struggle with the funding needed to acquire Gold Standard valuers.

Valuation methods have advanced over the years, but Boshoff and Kock (2013) identify the main components of the methods still used todayincluding both traditional and modern approaches: Traditional methods include the sales comparison method, the investment method or discounted cash flow analysis, the cost method, the profits method and the residual method. Advanced valuation or data-analysis methods developed from advanced technology and include hedonic pricing methods, artificial neural networks, spatial analysis methods, fuzzy logic, autoregressive integrated moving average, real options method and rough set method. Advanced valuation methods are mainly used for the construction of AVMs, and a better terminology includes data-analysis methods or decision support tools for values (p. 4). AVMs of course have their advantages and disadvantages. Advantages include lower cost, time-saving, consistency, transparency, easier data management, and the ability to combat fraud and valuer bias. Disadvantages include data limitations, public opinion, the lack of property inspections, financial regulation, risk acceptance, and transparency (Boshoff and Kock, 2013, p. 5).

However, one of the big problems of AVMs is when they are used to value commercial properties. As Boshoff and Kock (2013) point out, the use of AVMs is far more complex for commercial valuations than for residential valuations, as limited comparable data is generally availableScarcity of evidence makes the consideration of AVMs for commercial property much more complex. The complexity and the lack of recorded transactions require professional judgement to analyse the data. (p. 6). Other researchers have come to the same conclusion: Tretton (2007) also has pointed out that commercial AVMs have limited usefulness and that while some models have appeared, they require constant maintenance and work best in a supportive role rather than in a primary valuations method role. Municipalities in South Africa currently use variations on the AVM, such as CAMAthe computer assisted mass appraisal system. More shall be said on that in the following sections.

Boshoff and Kock (2013) note that the implementation of AVMs is not the solution for valuation problems and difficulties in South Africa: There is concern regarding AVM accuracy, and the expectation is that 30% of valuations will in future be done by AVM for easy-tovalue standard properties in the mid-range market. According to Seota (2011: personal communication), the South African Council for the Property Valuers Profession (SACPVP) does not favour the use of AVMs and no guideline has been formulated to date. The accelerated adoption of residential AVMs by the commercial banks, ombined with the limited consultation held with the valuation profession regarding these models, are cause for concern. One should address this approach for future commercial property AVM use or implementation (p. 7).

Yet, while the problem of a lack or shortage of valuers in South Africa is admitted (Robson & Downie, 2007), the use of AVMs is not viewed as the answer that Municipalities need. AVMs will only further take jobs away from citizens by making the task automated. The automation of the task of valuations, however, is not suitable. Boshock and Kock (2013) explain: This is evident in South Africa where there is a shortage of valuers, as the majority of them are approaching retirement age. AVMs can alleviate this problem to some extent; however, they are also viewed as a threat to jobs. In addition, professional bodies initially regarded AVMs as a threat to valuers employment. In mature markets, guidance to members on using them is now incorporated in professional standards. Valuers are open to the notion of using AVMs as a supplement rather than a replacement for their traditional services (p. 7). One researcher even went so far as to assert that AVMs may constitute a threat to the very profession of valuers (Mooya, 2011).

As Boshoff and Kock (2013) assert, however, the greatest risk to the valuation profession is commoditisation and automation, which reluctant professional valuers ignore. There is no substitute for the skill of a competent and experienced valuer. As part of what is essentially a risk-management exercise, data and output analysis by appropriately trained valuers can avoid pitfalls (p. 8). This point about there being no substitute for skill and competency should be well-heeded, as it is one of the main points that this study makes in order to…

Introduction

One of the most important sources of revenue for South African local authorities is rates and taxes. Therefore, the dependency on rates and taxes revenue and collection cannot be understated.

It is common knowledge that the South African Municipal Property Rates Act (MPRA) provides for, amongst others, the fair and equitable valuation methods of properties. However, despite accepted valuation models being adopted by Municipalities, and rates and taxes being levied accordingly, scope exists for significant increased rates and taxes revenue generation and revenue loss reduction.

As French and Gabrielli (2015) note, since the global Financial Economic Crisis (FEC) hit the world markets in 2007/2008, therole ofproperty valuationhas been under greater and greater scrutiny (p. 1). As budgets become tighter, greater attention is turned towards balance sheets. Reducing revenue loss is a primary method of securing municipal stabilityand property valuation tactics are the main avenue towards such reduction.

Revenue loss reduction and the resulting increased revenue base will provide Municipalities with access to funding to advance Municipal service delivery. For example, R1bn increased revenue per annum could be leveraged to supply a R10bn loan, which is repaid over 10 years from the additional income received. There are obviously many benefits to a Municipality enhancing revenue collection.

1.1 Problem to be addressed

Municipalities in South Africa are required to value all properties in their jurisdiction every 4 years. Various valuation methodologies are applied. The South African Municipal Property Rates Act (MPRA) provides guidance on determining Market Related values. Whilst municipalities seek to ensure the determining of market value in the most cost effective manner possible, the private sector adopts sophisticated valuation methods to appraise property investments.

Currently, there are a number of methods for appraisal of property investments, which include:

1) the direct capitalization method

2) discounted cash flow method

3) replacement valuation

4) comparative sales

5) remunerative valuation methods

However, in recent years municipalities have adopted mass valuation methods which have proved to be more cost-effective but which have also yielded substantially inaccurate reflections of real property value (Levy, Dong, and Young, 2016.).

1.2 Purpose of this study

This study identifies areas of property valuation anomalies (municipal valuation roll property values are significantly lower than publicly available open market property values), which may be pointed to as a cause of Municipalities rates and taxes revenue loss.

This study also provides methods to increase revenue through revenue loss reduction by implementing methods developed by the researcher.

This study accomplishes these tasks through investigation of balance sheet enhancement methods of Municipalities in South Africa, not only by using the Municipal Valuation Roll and Supplementary Valuation Rolls but also by expanding the municipal property valuation process to consider property owner market valuations.

The purpose of the study is to develop a better method for South African Municipalities to enhance their balance sheet by improving revenue generation through more effective property valuations.

This purpose is achieved by:

1) Developing a strategy that municipalities can use to prevent abuse of the valuation objection process.

2) Recommending methods to increase municipal revenues and restrict claims for municipal value reductions relating to the Municipal Valuation Roll and Supplementary Valuation Rolls.

The basis for this pursuit is that large discrepancies in property values in annual reports of publicly traded companies vs. municipal valuation rolls are evident.

1.3 How this study contributes to existing literature

To more effectively address the issue of adequately reflecting actual property value, this study takes into consideration the valuation methods applied as outlined in annual reports of various publicly traded companies (REITs as well as other firms) and as advised during personal interviews and/or online surveys of private sector valuers, bank valuers, bank mortgage finance officials and municipal valuers.

This study examines a sample of properties in 5 of the largest metropolitan municipalities in South Africa and compares the municipal value to the annual report values of the publicly traded companies. In doing so, it outlines and evaluates the following points:

1) The Municipal methods of valuation for rates and taxes determination; and

2) A sample of private sector (not government owned properties) properties reflecting the municipal valuation of properties versus market values of properties; and

3) Property owners rights to object to municipal valuations and resulting impact of decreasing rates and taxes revenue through municipal rates and taxes reductions (when in fact many property owners object to get their property values decreased in order to benefit from lower rates and taxes WHEREAS in reality their properties are worth significantly more); and

4) Current revenue losses to municipalities through municipal undervaluation of properties thereby negatively impacting on rates and taxes revenues accruing to Municipalities; and

5) Publicly traded companies such as Corporations and REITS (Real Estate Investment Trusts) whose balance sheet values and revenues have a direct impact on share values; yet strangely, municipal values of such properties are significantly lower than publicly disclosed in annual reports and balance sheet values; and

6) Methods to reduce current rates and taxes revenue losses due to incorrect valuations and ultimately increase rates and taxes revenues through:

a. Implementation of improved valuation methodology (when compiling the Municipal Valuation Roll) at little or no cost to muncipalities by way of ensuring valuers are advised to assess private valuations per financial statements and balance sheets of publicly traded companies at time of undertaking municipal valuation roll valuations;

b. Introducing a requirement for supporting documentation by companies, Trusts, etc., who wish to motivate for rates and taxes reductions, such supporting documentation to be provided by property owners seeking a decrease in municipal valuation roll value, should include the following:

i. Copy of property owners current years audited financial statements and annual report of company (property owner) wherein the most recent market value of the property is stated and reflected in the balance sheet and annual report; and

ii. Letter from the financial institution who financed the property confirming and acknowledging the proposed new lower market valuation proposed by the property owner;

This study proposes that the Municipalities and their appointed Municipal Valuers overseeing the Municipal Valuation Roll should use not only Mass Appraisal/Mass Valuation Methods but also the method of identifying market values as determined by referencing property values of properties as reflected in publicly available Annual Reports of publicly traded companies. Share prices are linked to company performance and therefore market value of real estate assets listed in annual reports of publicly traded companies should be used as a minimum value for municipal valuation roll purposes. In addition, whilst the Municipal Valuation Roll is only undertaken every 4 years we believe that the supplementary valuation roll should be updated annually to align with Publicly Traded Company increase in property values as disclosed in their annual financial statements. This paper will show the losses to the municipalities currently and the increases in revenue to the Municipality should this method of market value determination be adopted. The Rates Act makes mention that municipalities should determine market values for valuation rolls, on which rates and taxes are determined.

Those property owners who are benefitting from low municipal valuations are reducing the Municipalities ability to deliver services to clients, not to mention that the more rates and taxes collected could result in higher service delivery.

1.4 The methodology

There are two methodologies applied in this study. The first is the gathering of market value valuations from South African Publicly-Traded Companies to compare them to the valuations of the Municipality Valuation Roll. The second is the obtaining of qualitative data from questionnaires distributed to valuers in South African to better understand the methods they themselves utilize when valuing a property. This mixed-methods approach will be described in more detail in Chapter 3. For now a brief description will suffice:

In determining the methodologies utilized by valuers, two questionnaires have been developed and distributed:

1) One for professional valuers to determine the most commonly used valuation methods both in the private sector and by municipalities

2) A second for banks engaged in mortgage financing, to determine the importance of market value to banks and whether valuers are required to have professional indemnity insurance coverage andif sowhy.

The data collected from this diverse group of property owners, valuers, bank finance lenders and participants in the market were analyzed. An assessment of the data collected revealed that in the private sector the most commonly used methods of valuation are the direct capitalization of first years net income. However, from a Municipal Valuation perspective, the Mass Valuation Methodology was utilized.

A case study approach was undertaken involving real estate portfolio valuation methodologies together with an assessment of market values of properties (2016 annual reports of Publicly-Traded Companies) in respect of publicly traded entities. Market values were then compared with municipal values of properties (based on 2016 Municipal Value on record) to determine discrepancies.

Discrepancies were documented to illustrate impact on revenues to both Municipalities (loss of revenue due to incorrect valuation methodologies applied in instances of the Municipal Valuation Roll and Supplementary Valuation Roll) and property owners (lower rates and taxes based on lower municipal valuations, results in higher property values and share prices due to lower operating costs to property owners).

Ultimately, loss of revenue to Municipalities results in reduced Municipal ability to render services to inhabitants in Municipal areas. Conversely, those property owners benefitting from incorrect (lower) municipal valuations will benefit from lower operating costs (rates and taxes) applicable to properties in question thereby resulting in higher property values in the open market.

1.5 Importance of the findings: Outcomes of the study

The importance of the findings is that it is evident that municipalities could be generating more revenue by more effectively valuing properties. By more effectively valuing properties, municipalities could fill shortfalls in budgets that currently restrict the local governments ability to spend on infrastructure and other programs that are important to constituents. The benefits of increased rates and taxes revenue include the following:

Enhanced municipal balance sheet and credit rating;

Additional borrowing achieved by municipality based on future income;

Additional earnings contribute towards municipal service delivery, bulk services installations, economic growth, and job creation.

1.6 Assumptions

For the purposes of this study, it is assumed that the annual reports of the Publicly Traded Companies are correct. It is also assumed that the Municipal Valuation Rolls are correct for when comparisons are made between Municipal Valuations and Publicly-Traded Company valuations. A discussion of how these assumptions might impact the studys outcome is provided in more detail in Chapter 3. The limitations presented by these assumptions are provided in the following section.

1.7 Limitations

The limitations of this study are: 1) obtaining valuations of properties from Municipal Valuation Rolls is not always easy or even possible; different Municipalities have their own search methods, and in some cases no data is obtainable for a specific property. Thus, it was not always achievable to do a comparison of valuations for every property; 2) while this study proposes a method of valuing properties that could enhance the balance sheet of Municipalities and increase their revenue stream, it does not evaluate the effect that this valuation method might have on business or property owners; one concern is that property owners may find this method too constraining on their own portfolios, investments or budgets and thus seek to move to other more tax-friendly communities. To fully appreciate the findings of this study, future research will have to be conducted to evaluate and understand how this studys proposed method might be received by the business/property owning community. More will be said about this limitation in the Recommendations chapter.

1.8 The Following Chapters

Current methodologies used by valuers in South African Municipalities is evaluated in Chapter 2, which examines published literature relevant to the topic, and in Chapter 4, where valuer responses are provided. These responses are discussed in Chapter 5. Chapter 3 provides an examination of the methodology used to obtain data about property values, both from the Municipal Valuation Roll and from the publicly traded companies, which publish market values of properties in their annual reports. In Chapter 6 recommendations for valuation methodology and fr answering valuation objections are provided so as to give Municipalities a better opportunity to enhance their balance sheets and increase their revenue streams. The chapter ends with a conclusion that also gives guidance for future research.

2 Literature Review

2.1 Current Status

The Municipal Property Rates Act (MPRA) signed into law by the President of the Republic of South Africa on 11 May 2004 provided the Municipality with the right:

To regulate the power of a municipality to impose rates on property; to exclude certain properties from rating in the national interest; to make provision for municipalities to implement a transparent and fair system of exemptions, reductions and rebates through their rating policies; to make provision for fair and equitable vaiuation methods of properties; to make provision for an objections and appeals process; to amend the Local Government: Municipal Systems Act, 2000, so as to make further provision for the serving of documents by municipalities; to amend or repeal certain legislation; and to provide for matters connected therewith (Local Government: Municipal Property Rates Act, 2004).

Those powers were substantially increased and defined with the 2014 Amendment, Act No. 29. Among the new insertions were the right:

To provide that a rates policy must determine criteria for not only the increase but also for the decrease of rates; to delete the provisions of section 3(4) and to provide for a rates policy to give effect to the regulations promulgated in terms of section 19(1)(b); to provide that by-laws giving effect to the rates policy must be adopted and published in terms of the Municipal Systems Act; to provide for the determination of categories of property in respect of which rates may be levied and to provide for a municipality to apply to the Minister for authorisation to sub-categorise property categories where it can show good cause to do so (Local Government: Municipal Property Rates Amendment Act, 2014).

Joburg, the Official Website of the City of Johannesburg, states that there are about 826 000 registered properties in the City, and the property rates levied by the City is the single most important basic revenue source for the City - about 20 percent of total income, says the City's director for rates and taxes, Erika Naude (Citys new General Valuation Roll, 2012).

There is a need for the MPRA in South Africa for numerous reasons, as the Cooperative Governance & Traditional Affairs Ministry (COGTA, 2017) states on its government website; COGTA summarizes the most essential aspects of the MPRA for the Republic of South Africa by highlighting the following pointsnamely that the Act is needed

To regulate the power of a municipality to impose rates on property (in accordance with section 229(2) of the Constitution);

To provide a uniform framework for regulating the rating of property throughout the country

To exclude certain properties from rating in the national interest;

To make provision for municipalities to implement a transparent and fair system of exemptions, reductions and rebates through rating policies;

To make provision for fair and equitable valuation methods of properties;

To make provision for a fair objections and appeal process regarding valuation of property (COGTA, 2017).

The emphasis on a transparent and fair system and on fair and equitable valuation methods, as pointed out both in the sections of the MPRA identified at the beginning of this chapter and by the COGTA (2017) in its summation of the Act, is important to note because in the Republic of South Africa, equitability, transparency and fairness are serious issues that have impacted the country for decades as it has struggled with a wide-ranging variety of local and national matters. As the country works towards bettering itself, its government, its communities, and its infrastructure, it stands to a reason that a system of valuation should also reflect the values and ideals the nation seeks to implement throughout the land. The literature discussed in this chapter focuses on providing an understanding of the current fair and equitable valuation methods so as to allow for an intellectual basis upon which further development can be conducted.

Indeed, provisions of the Municipal Properties Rates Act have specifically addressed the issues of the importance for valuations of property to be based on fairness and equality:

a. The Act also requires monitoring and there is a duty on the municipality to ensure that the valuation roll submitted is a fair reflection of Market Valueacross the entire spectrum of properties comprising the valuation roll; and

b. Section 3(3) of the Act specifically mentions the aspect of fairness and equality

For these reasons, the current study, which places its focus on arriving at a better understanding of market value and how a fairer and more equitable system can be devised, proceeds with an examination of the content that follows.

2.2. Current Valuations Methodology

2.21 How a Valuation is Conceived

Definitions and Terms to Know

The following list of terms is by no means exhaustive and does not include every important concept discussed in this paper. The following is merely provided to give some basic background information on valuations. The definitions are retrieved from UniqueCo Property Valuers (2017) and apply to Municipalities in South Africa.

Municipal Rates PolicyThe rates policy of a municipality must: 1) treat persons liable for rates equitably; 2) determine the criteria to be applied by a municipality if ita) levies different rates for different categories of properties, b) exempts or grants rebates or reductions, and c) increases rates; 3) provide for appropriate measures to alleviate rates burden on the poor; 4) take into account effect of rates on public service infrastructure; 5) take into account effect of rates on registered public benefit organizations; and 6) allow a municipality to promote local, social and economic development.

Valuation RollA valuation roll of a municipality 1) must list all rateable properties in the municipality; and 2) is valid for four financial years (but may be extended by one financial year

How a valuation is conceived is highly important when it comes to engaging in the process of valuing properties. This is true for countries the world overnot just for South Africa. The case of Freemont (Denbigh) v Knight Frank LLP [2014] EWHC 3347 (Ch) is an important case in global valuations history because it highlights the role that context plays in determining a propertys precise value at a given point in time. Context determines the parameters of the propertys value by identifying whether the property is planned for a particular use or function, whether any contracts are established upon the property, and so on. As Vigus and Crossingham (2016) explain, there is every reason for valuers themselves to value contextualization:

The case of Freemont (Denbigh) v Knight Frank LLP [2014] EWHC 3347 (Ch) is a good example of a valuer successfully relying on a narrow contractual definition of the services which it was retained to perform, and reminds us of the importance of controlling the scope of the services offered. In this case, the surveyor valued a property at 17m with outline planning permission, and 18.7m with detailed planning permission. After the purchasers acquisition of the property, it then took no steps to develop the site and the buildings became dilapidated. In the circumstances, the purchaser sought to dispose of the property and put it on the market, receiving a number of offers but rejecting them, it said, on the basis of the surveyors initial valuation which was given in theentirely different context of the purchasers initial acquisition. Ultimately, the purchaser sued the original valuer saying that, had the initial valuation been accurate, they would have accepted lower offers and that, having rejected a number of offers, they had lost the chance to dispose of the site on best terms. Having reviewed a number of the seminal cases in the area Smith v Eric S Bush [1990] 1 AC 831; Scullion v Bank of Scotland [2011] 1 WLR 3212; Caparo v Dickman [1990] 2 AC 605 the judge held that the valuer was not liable for the claim. The contract between the valuer and the purchaser was key: it narrowly defined the scope of services as relating to the security valuation only, there could be no suggestion that there was a wider or longer-tail liability in relation to any later or other reliance by the purchaser on the advice, and the advice could not be relied on by the purchaser in considering the subsequent disposal of the site. So, largely as a result of the clear and narrowly defined scope of the valuers contractual retainer, its advice could be relied on only for the purpose for which it was intended, and the circumstances of the claim were therefore outside the contractual and tortious scope of the valuers duty. The lesson for practitioners is to be as clear as possible about the scope and purpose of their advice and to limit this as far as possible.

As Vigus and Crossingham (2016) show, valuers must protect themselves from legal recourse by specifically and accurately showing how and what facts their valuations are based upon. So much is dependent upon proper valuationsfor example, owners may make business or investment plans based on property value, and if that valuation is not correct or accurate those plans could suffer considerably. Therefore, valuers themselves are in need of a system that helps to protect them from lawsuits that could threaten their productivity, career, and livelihoodnot to mention the Municipalitys or banks reputation and own balance sheet, which is dependent also upon acquiring accurate valuations of properties.

Therefore, how a valuation process is conceived makes a great deal of difference in what type of outcomes may be expected. If the process is conceived in terms of maximizing the Municipalitys ability to tax and apply rates to service its own programs and policies provided to communities, then there should be a system of valuation in place that supports such a conception. If the process is conceived in terms of providing an easy, one-stop valuation method that can be applied using a mass valuation system, then the current set-up may be judged to be sufficient. The conception is what frames the end goaland in todays credit-crunched, debt-laden world, where countries are focusing more and more on enhancing balance sheets and increasing revenue streams to meet the demands of infrastructural growth and development, the former conception should be the primary focus of a Municipality engaged in valuations practices under the MPRA.

2.22 The Purchase Price Method of Establishing Value

As Mangioni (2016) notes, In the competitive residential mortgage market there is pressure on the valuer to suggest that the purchase price of property is ultimately the best evidence of value (p. 2). This pressure stems from both buyers and sellers and is reflective of a desire to attach more or less weight to a banks valuation as authoritative. The criteria of such a valuation, however, stems not from banks themselves but rather from laws and court-based rulings. Inez Investments Pty Ltd v. J.L. Dodd 1979 NSWSC established criteria for valuers in Australia, and Mangioni (2016) examined how this criteria impacted the concept of using purchase price of property as best evidence of value.

What Mangioni (2016) found was that one factor that goes into how valuations are utilized is loan insurance. Mortgage insurance covers the lender in case the borrower defaults, and the amount of mortgage insurance purchased depends on the valuation of the property given by the lender. Mangioni (2016) shows that using purchase price as a valuation method is problematic and not a precise way to determine the best valuation. What is a more evidential approach is that of the market valuation: The formulation of market value and deriving of the value of property is largely predicated on evidence that supports the market value assigned by the valuer. Without evidence, the valuers opinion is no better informed than another opinion of value. This is highlighted in Reading v. The Valuer General (1923), 6 L.G.R. 132 in which Pike, J. stated: Every expert is entitled, if he sees fit, to ascertain the market valueto rest on his own opinion apart entirely from any market transactions, but if he does so he is liable to be met by three things: a. The opinions of other people. b. Values based on sales; and c. Any previous opinion that he himself might have expressed as regard to values. Mr. X like all of us, was not born with an opinion of land values (Rost & Collins 1984:86) (Mangioni, 2016, p. 4). Why a market val.......dered: so many factors are based on purchase price to such a degree that it is often in the owners best interest to get that price as low as possible. In doing so, the owner is not interested in ensuring that price reflects actual market value: his aim is to reduce payments and fees that might be charged, based on the purchase price of the property. The lower the purchase price, the lower the fees. A valuer who bases valuation on this price may fail to accurately reflect the actual or market value of the property. How market value is determined, however, is a question that Mangioni (2016) asserts should receive more attention.

Mangioni further points out that in mortgage lending practices, valuation is determined differently: In mortgage lending valuations, valuers are provided with the property purchase details and asked to confirm the purchase price as value (p. 4). Yet, as Rooke (2002) notes, recent experience has shown that current major mortgage lending institutions are applying great pressure for valuers to place greater emphasis on the subject sale (p. 48) and so as a result valuers are impacted significantly in how they approach their properties. Mangioni (2016) goes on to find that valuers may inappropriately give greatest weight to the most recently considered information, which would place disproportionate emphasis on one set of materials (p. 5). Or, as happens, valuers set out with a preconceived notion of how a property should be valued and then seek evidence that will fit the pre-conception: even expert valuers indicated that they make early, preliminary judgements and then seek evidence in support of these opinions (Mangioni, 2016, p. 5). Thus, there is ample reason to conclude that valuations in Municipalities are likely to be impacted by variables that do not end in the accurate reflection of real market value. Mangioni (2016) adds that in contrast to this phenomenon in some circumstances it is difficult for the valuer to determine the value of the subject property due to a lack of sales evidence and that the valuation process is thus further compounded when the valuation being sought is for refinancing purposes and there is no sale over the subject property being valued. In these cases, the duty on the valuer is not lessened. It is the role of the valuer to look geographically further or outside the radius of sales that a valuer would ordinarily look at, as well as further back in time for sales (Mangioni, 2016, p. 5). In other words, there is no effective or systematic way that can be established to efficiently value a property based on sales records, as the prices are indeterminate of the way in which the market realizes that value.

Nonetheless, the Australian Prudential Regulation Authority (2000, p. 1) stipulates that all assets taken as security should be valued, wherever possible, at their net current market value. This inicates that regardless of how valuers go about their job, authorities would like to see valuations provide an accurate reflection of market value. Problems persist, however, in realizing market value for valuers. Various researchers and academics have attempted to solve these problems by extrapolating data from other valuation exercises (as in the valuation of publicly held companies, for instance, where shares are seen as a store of value to help appraisers identify the actual real market value of a companyan idea that is not too distant from what this study attempts to describe). More shall be said of how valuations can be conceived in later sections of this chapter. For now, net current asset value per share or NCAVPS is one such method that has been developed in this vein: it is a value that Benjamin Graham developed in the 20th century as a means of evaluating whether a company was trading at what could be called fair market value. Graham calculated NCAPVPS by subtracting total liabilities from a companys current roster of assets and dividing the total by the O/S (outstanding shares) of the firm in question (NCAVPS, 2017). In terms of applying this method to real estate, the same principles would still work: a propertys condition and contextual purpose/plans/contractual obligations and so on would be considered along with all other assets connected to the property; debts and other liabilities would be subtracted from the total and if shares of the property are sold to investors, their worth would be the divider by which that total is evaluated.

In Mangionis (2016) study on valuation methodology, he conducted a survey of valuers to determine their approaches to valuing properties and asked a series of questions that were primarily oriented towards understanding valuations as achieved through analysis of property sale prices. One critical question that is very useful to this study comes at number 7 in Mangionis (2016) survey. He asks: Is property transaction information available in an acceptable timeframe? and receives the following reply:

32 respondents said no, while only 11 said yes (p. 9). That means that nearly 75% of valuers feel that there is insufficient information available to them to make a timely valuation of a property. That finding alone has tremendous impact on the valuation process: it indicates that valuers may be making, in most cases, inadequately informed valuations on propertiesvaluations that impact municipalities considerably, since tax revenue is generated from the value assigned to real estate through this process. What this finding indicates is that even if Municipalities wanted to depend upon valuations or mass valuations for accurate assessments of property valuation, they would really be relying, in all likelihood, on inaccurate readings of the real estate in question. The facts show that professional valuers themselves find it exceedingly difficult to obtain enough data on the property they are valuing in order to offer a substantially supported and accurate assessment of the property. This leaves Municipalities depending on a weak system of appraisal to collect revenue. A better method can undoubtedly be obtained: it simply requires that more access to information be made available. However, this may not be as easy as it sounds. Valuers are limited in terms of what they are able to doand for Municipalities, this means attending to the Valuation Roll, according to the terms of section 33(1) of the Municipal Property Rates Act (MPRA).

2.23 The Municipal Valuation Roll

As the municipal valuer and director of the valuations department in the property unity of Johannesburg stated clearly: Values cannot be influenced or dictated by any party (Oxford, 2013). The director further explained that the main purpose of the valuations directorate is to compile valuation rolls and there are two types of these. The general valuation roll is where we value all the properties in the city. The supplementary valuation roll sees us assessing changes to a property that occur during the lifecycle of the general valuatios role. With the latter we revalue property that has changed, for example if a house has been built on a vacant piece of land. This also applies to changes in zoning, such as from residential to business (Oxford, 2013). What the SA Municipality does to compile its valuation is important to understand and Oxford (2013) provides some detail on how that process is accomplished: First is the physical assessment where the department uses pictometry aerial images taken of a property from five angles and photographs of the fronts of properties to glean valuable data about the value of a property. Then there is the date of valuation, possibly the most important point of reference in this process. As one can imagine, the process is quite detailed and reliant a number of channels of data. However, the date of valuation, as is noted, is extremely important because of the fact that market values will rise and fall over the course of a few years, and having that date as a reference enables valuers to see at what point in the valuation wave the property was pegged at a specific price.

Oxford (2013) states that the Municipal valuer of Johannesburg uses the property market values of a specific year when it comes to valuing all the properties for the new general valuation roll and that whenever we valued a property for this roll we used the prices from that specific year. For residential properties, house sale values from the four years prior are used to provide an accurate assessment of where market values currently are.

But what if there was a more accurate way to determine market values? What if the Municipality could turn to a source of information that published this data publicly in its annual reports? For instance, what if a Municipality like Johannesburg examined the annual reports of Publicly-Traded Companies in South Africa to determine where investment properties in a given portfolio were being valued by the market? Indeed, this study attempts to answer this very question.

Returning to current practices, however, it may be seen that there is ample room for improvement. Oxford (2013) notes that Johannesburgs director of valuations analyzes the sales of prior years to obtain a basis of valuation for residential properties in each suburb. For example, if you stay in Blairgowrie we published all the sales in that area on our website along with the selling date, the selling price, the physical address of the property and we explained how we valued this property. People were then able to look at those sales, compare them to their properties and make an informed decision. This is, in one sense, no different from turning to the annual reports of South African publicly-traded companies, which publish similar data on valuations. Where the sources do distinguish themselves is in the actual valuation applied by each. This study will have more to say on that later. For now, it is enough to know that there is a distinct difference between Municipal valuations and the valuations of properties provided to the public by investment companies.

Another important point to note about the Valuation Roll is that when it is compiled, all the property values are now fixed at this date of valuation until the next general roll and are assessed against this benchmark (Oxford, 2013). The reason this valuation procedure is problematic is self-evident in a simple examination of a 5-year chart of South African Housing Index from 2012-2017. What the chart shows is that a valuation applied in 2012 to properties in 2015, for instance, would substantially undercut the actual market value of the property by more than 100 pts.

By using the general roll as a principle benchmark, the Municipality is admitting that its values are cemented and not subject to change over a given period of time. But values do change and cementing is obviously not the case as far as the actual market is concerned The market is never static but is always moving, as it is impacted by a number of complex and interlocking variables that stem from social, political and economic spheresand not only locally but also globally. Before external and global market factors are discussed, a closer examination of the valuation process according to the guidelines of the Republic of South Africa for Provincial and Local Government will now be provided.

2.24 Guidelines on Valuations for Municipalities (from Municipal Property Rates Act No. 6 2004)

The valuation process as proposed by the Republic of South Africa for local government has been outlined by the Director General.

It is worth noting that public awareness of valuations is very important to the Republic of South Africa, according to the Guidelines on Valuations, in which it is stated that:

Municipalities are encouraged to involve and educate the community in the valuation process. The Rates Policy specifically calls for public participation. It is important that the following persons be enlightened in regards to the valuation process:

Councillors and municipal officials;

Ratepayers;

Agricultural unions and farming associations;

Ratepayer associations;

Business associations; Civic associations.

It is suggested that the municipality as part of its tender conditions require the valuer to implement a programme of public awareness. This could include:

Call centres

Attendance by the valuer to ward committee meeting

Brochures

Workshops

Radio and television interviews (Guidelines on Valuations for Municipalities, 2016, pp. 4-5)

According to the Guidelines, the Valuation Process begins with the obtainment of data. For deeds-related data, this data can be obtained from the Registrar of Deeds relating to properties within the jurisdiction of the municipality (Guidelines on Valuations for Municipalities, 2016, p. 5). A Deeds Registrations System (DRS) is available through Deeds Weban Internet interfaceto allow registered users to obtain deeds registration online. For general data, a database is developed and compiled by Municipalities, who must ensure that the database is incrementally added or built upon in perpetuityi.e., the database must never be allowed to stagnate because property is always being added or subtracted from the Municipality and values are constantly shifting (Guidelines on Valuations for Municipalities, 2016, p. 5).

For specialized properties, the Guidelines (2016) indicate that municipalities may need to employ the services of private valuers. In such cases, the Guidelines (2016) stipulate that

Private valuers appointed by them have the necessary skills, expertise and knowledge to compile valuations of this nature. Examples could include, mining, forestry, substantial public infrastructure such as major harbours, airports etc. In these cases, municipalities must satisfy themselves that they have clearly identified these properties in their tender requirements and that the valuer has the necessary expertise or professional assistance to draw upon in the compilation of these highly specialised properties. In the case of mining land, municipalities and valuers must have a clear understanding of the definition of a mine and mineral as defined in the Act. Valuers must clearly understand what constitutes equipment and what is deemed to be buildings or improvements with regard to such land and the resultant implication on value. In the case where the freehold owner of land is not the mining title holder, it is essential that both the municipality and the municipal valuer fully understand that the freehold is encumbered by the mining title and that the value of the freehold in such circumstances is a residual land value (p. 7).

The Guidelines (2016) also recommend that a valuer may use a mass valuation system especially with regard to residential properties (p. 5). A mass valuation system commonly used today is CAMAa computer-assisted mass appraisal system, which is an automated system that maintains property data and performs property valuations, sends notifications to owners, and ensures tax equity through uniform valuations. South Africa uses a CAMA system. A basic CAMA system is described in the next section along with how the Johannesburg Municipality employs CAMA in its valuations process as an example of how the system works.

2.25 CAMA

Many governments utilize CAMA, which is best described in the following terms by the Massachusetts Department of Revenue Division of Local Services/Bureau of Assessment (2016):

In mass appraisal, valuation involves automated applications of the sales comparison, cost, and income approaches to value. A good system should support all three approaches. Some specific desirable features include the following:

(1) A replacement cost module tied to commercially available cost manuals, so that costs can be routinely updated.

(2) Flexibility in depreciation schedules, so that users can develop and modify the schedules by property type, building quality and neighborhood as appropriate.

(3) Cost trend capabilities that allow users to adjust cost values to the market by at least property type and neighborhood.

(4) A land valuation module that allows the user to determine units of comparison (acre, square feet, front feet, depth, site), standard unit values, and site, topographic or neighborhood adjustments.

(5) Standard statistical procedures, including measures of dispersion and graphics, that can be used to compute typical sales price per unit and help develop benchmark values, depreciation schedules, and market adjustments.

(6) A sales comparison module that will retrieve a desired number of the most comparable properties to a given subject property based on a mathematical algorithm. Optionally, the system may adjust the comparables to the subject.

(7) A multiple regression feature for use by jurisdictions with adequate sales. Adaptive estimation procedure (AEP or feedback) can also be used.

(8) A spreadsheet module for use in income and expense analysis (Massachusetts Department of Revenue Division of Local Services/Bureau of Assessment, 2016, p. 2).

CAMA has many benefits to Municipalities, as the above makes clear: it is a user-friendly system that reduces a lot of the pain and toil of obtaining and producing data to be used in a valuations process. The proposed method of this study should not be considered necessarily exclusive of CAMA. On the contrary, it could easily be incorporated into CAMA systems to allow for the benefits of mass valuation to still be applied in the valuation process. The problem with CAMA systems as they currently apply have more to do with the valuation method inherent to the system than to the system itself. An example of how the Municipality of Johannesburg uses CAMA shall now be described.

2.26 An Example of How a Metro Uses CAMA and Performs Valuations

The City of Johannesburg is one example of how a Metro uses CAMA. As such, the Municipality of Johannesburg answers frequently asked questions regarding its General Valuations Roll (as of the time of this writing, still as of yet not updated from 2013 on its government website). The following exchanges provide some illumination with respect to how a South African Municipality engages in the valuations process and how mass valuationi.e., specifically by means of CAMA systemis used to aid in that process. Joburgs Frequently Asked Questions (2013) provide the following by framing the information within a question-answer format; these questions and answers are taken directly from Joburgs Valuation Services website:

How does the City Value your property?

The purpose of the valuation project is to determine a maret value of all properties, which implies the most probable price that a property would realise on the date of valuation, if sold on the open market by a willing seller to a willing buyer.

There are several types of properties in the municipality residential, sectional title, non- residential and agriculture. Each is valued on different basis, although they all relate to the market value. For example, residential property (including sectional titles) is valued on a comparable sales method. Most commercial property (including retail, offices, warehousing) are valued on an income basis, while institutional properties such as schools, hospitals and clinics are valued on a cost basis.

When valuing the properties, the Municipal Valuer establishes the market conditions, and this is based on recent sales and market information activity in the various areas. Therefore this will take into consideration areas where values have declined, increased or remained stagnant due to the current state of the economy as on the Valuation date.

Did You Inspect my property?

As this is a mass valuation, the Municipal Valuer uses a computer aided mass appraisal (CAMA) system to determine the values of all properties. This is based on statistical analysis and geographical information systems (GIS), and therefore requires reliable and accurate data.

For residential property, obtaining access to all properties is not possible, and as such, the Municipal Valuer makes use of advanced technology that allows the collection of data. This includes the use of building plans and Pictometry, which is the state of the art 3D aerial photography that allows the valuers to see the properties from all angles, and be able to measure the extents and heights of the buildings, as well as other information relating to quality, condition and other improvements. This is augmented by the used of street level video footage which is collected by driving down each street and recording the street frontages. This method is acceptable in terms of the MPRA, and endorsed by the International Association of Assessing Officers (IAAO) the international body that sets standards to mass appraisal importantly endorses more.

However, in cases where the aerial photography and other imagery is not useable, usually in the cases where properties have a lot of foliage, or high security walls, then physical inspection of the site is undertaken.

The data collection process is independently reviewed for quality assurance purposes to ensure the data collectors are consistent in their approach and the data they record is correct for the subject property.

For non-residential properties, field visits are undertaken to obtain data such as the property use, rentals and financial records of businesses (Frequently Asked Questions, 2013).

Issues do arise within the Johannesburg Municipality when it comes to the efficiency of mass valuations and CAMA. These issues are discussed in section 2.4 Issues and Objections, particularly with reference to a case that made headlines in 2013 regarding a Gupta property that saw its valuation decrease drastically by what the director of valuations in the Municipality described as a mix-up. The decrease shocked property owners, tax payers, estate agents, media outlets and government agents, as it indicated a serious flaw in the valuations systems as currently employed by the Municipality. Before getting into those details, it is helpful to further examine the nature of the valuations process as it described according to the Municipal code.

The valuations of other Municipalities are discussed in Chapter 5. For now a brief examination of the growth of rates and taxes across South Africa as compared to inflation will help to give an idea of how Property Owners feel towards Municipal valuations and valuer methods.

2.27 The South African Property Owners Association

The South African Property Owners Association (SAPOA) has noted that over the last decade rates and taxes have consistently increased at a faster rate than inflation and has increasingly come under the microscope as Property Owners focus on preserving their net income (SAPOA, 2016, p. 3). A look at how rates and taxes have grown, SAPOA states that in real (inflation-adjusted) terms, rates and taxes amounted to R2.2/sqm in 2000. By 2015, this had escalated to R4.1/sqmalmost doubling in real terms (p. 3). The following chart provides a graphic representation of this significant growth in rates and taxes.

Source: SAPOA, 2016.

As SAPOA notes, given its above-inflation growth and its higher growth relative to other operating costs, rates and taxes have increased as a % of total operating costs (p. 5). This puts businesses and property owners at a disadvantageand raises the specter of one of the main problems of raising rates and taxes on property owners: the threat that they might revolt and seek friendly regions in which to settle and do business. To this end, SAPOA asks, Has the growth in rates and taxes been consistent with the growth in property values? which is a question that strikes at the heart of this thesis: How can valuers provide fair and equitable valuations in South Africa in a manner that does not cause alarm to owners, who may have a different concept of what the term value constitutes?

SAPOA answers its own question by stating that during the early 2000s, municipal rates and taxes trended largely in line with the move in property values. The period 2005-2007 saw a significant increase in commercial property values underpinned by real economic growth of 5.5% which saw a gap between commercial property values and rates and taxes (bearing in mind that rates are based on municipal valuations rather than capital values) (p. 6). The fact that rates are based on municipal valuations rather than capital values is indicative, again, of the problem inherent in the valuation of properties among so many different stakeholders. Every stakeholder wishes to construct his own concept of value, with its own determinants. Without some universal standard of assessment or external third party that can offer a valuation that all can agree upon, there will continue to be discrepancies.

Following SAs recession, rates and taxes increased again, climbing even faster than commercial property values resulting in an over recovery of commercial property municipal rates (p. 6). This over recovery has since reversed and entered into a phase of under recoveryhowever, the correlation between the two over time has stayed fairly consistentor so it would seem. SAPOA takes a closer look at this consistency and expands the question to ask: Are rates and taxes consistent with property values across similar property types? and finds that consistency is indeed lacking, with the largest mispricing being found in the industrial sectors, a sector where properties have very unique characteristics which could affect its valuation (p. 7). See the chart below:

Source: SAPOA, 2016.

SAPOA further notes substantial variations across Municipalities with respect to valuations. For instance, on a municipal level, the EThekwini municipality has the highest rates and taxes per square meter and as a % of capital value for all three main property sectors being Retail, Office and Industrial. The City of Tshwane has the second highest rates and taxes relative to capital values across all three property sectors followed by the City of Johannesburg (p. 9).

SAPOAs May 2015 Rates and Taxes Report shows, moreover, the total municipal value of commercial and industrial properties in the large Municipalities. It also shows that the commercial and industrial properties account for 54% of all rates and taxes collected by Municipalities. This is a considerable percentage and indicates that Municipalities have a lot to lose by undervaluing commrcial and industrial properties.

Source: SAPOA, 2016.

The discrepancy in rates and taxes and valuations among the various Municipalities is an indication of the need for more standardized valuation methods. To that end, researchers have studied the efficacy of some of the most common valuation systems to assess their effectiveness. Dr. Douw Boshoffis one such researcher. A discussion of his article on the effectiveness of Automated Valuation Models and other issues related to valuation standards can be found in the following section, 2.28 Dr. Boshoff, Valuation Standards and Accuracy Tests. For now, it is helpful to continue to examine some of the information that SAPOA has provided SA in recent years regarding the valuations problem that Municipalities face.

During the 46th SAPOA International Conference, Ben Espach delivered an important paper that was meant to address this very issue of valuations problems in South African Municipalities. The paper was titled Property Rates Making Cents of It. Espach outlined the challenges facing the property industry relating to municipal valuations and rating. He highlighted the curse of under valuations, the tedious process of lodging objections and appeals, the lack of quality control, inadequate monitoring, incorrect implementation of rates policies, incorrect implementation of effective dates and the resultant burden falling onto the property owners throughout the country. More importantly he stressed the fact that the majority of municipalities were under administrative collapse (Massel, 2014). What was Espachs solution? His solution was for property owners to take control of the valuation and rating process. He introduced the concept of Self Determined Municipal Valuations (SDMV). The principle of SDMV is for municipal valuations to be determined by representatives of the property owner and negotiated with the various municipal valuers prior to the publication of a valuation roll (Massel, 2014). SDMV is, in spirit, very similar to the proposal that this study makesexcept in the case of this study it not only calls for owners to take part in the valuations process but rather for qualified professional valuers employed by the owners to take part in the process. In other words, it calls for Municipalities to turn to Publicly-Traded Companies, which own and invest in properties and which have a team of valuers working for them, for their valuations. This would solve many of the problems that Municipal valuers faceand it would satisfy the demand that property owners have for fairer and more equitable valuations. The following information from various presenters was delivered at the 46th SAPOA International Conference:

Escalation in rates is causing value destruction he stated.He stressed that there was a need to have the municipal valuations negotiated well before the valuation was published and was of the view that the SDMV concept was a definite possibility.

Douw Boshoff of the Pretoria University stated that the current process of implementation was unfair. There is a need for property owners to manage the challenge of rating in conjunction with municipalities. Accurate and up to date data is the key factor to correct and accurate municipal valuations. Data must be owned by the municipality and a valuation process should be instigated that will result in objections being the exceptions rather than the norm.

Rob Kane of Vunani Property Fund advised that the ever increasing rates are having a major negative impact on the economy. This is causing value destruction and in reality the Rates Act is not working. He stressed the lack of municipal skills and concluded by saying that property owners should be focusing on their core business and not rating issues.

Izak Peterson of Dipula Income Fund stressed the need to avoid objections and to hasten the lead time to obtain a result. He said that municipalities require more competent teams and that the current turnaround time for objections and appeals is too long. He said that SDMV will assist in avoiding the current delays.

Veronica Mafoko representing Cogta stated that market value was here to stay. She emphasised the need to trust a municipal valuation roll. There is currently a lack of data integrity as well as unrealistic time frames given by municipalities to a municipal valuer to compile a valuation roll. She was aware of the general inconsistencies in municipal valuations and the need for valuations to be market related. Any fixed type formulas to determine municipal valuations would be in conflict with the current provisions of the Rates Act.

Werner Sarvari excelled himself in his role as the facilitator. He advised that the negotiation process was already happening but at the end rather than in the beginning. Negotiating and determining municipal values upfront would solve a lot of the difficulties currently being experienced by property owners across the country. Is SDMV not the solution he asked?

2.28 Dr. Boshoff, Valuation Standards and Accuracy Tests

Dr. Boshoff and Leane de Kock published an article in 2013 on the accuracy of Automated Valuation Models (AVMs). They found that the adoption of Automated Valuation Models (AVMs) in the field of property valuation is a trend, considered controversial and not readily accepted by the valuation profession (p. 1):

AVMs are a relatively new concept in South Africa; however, they have been operational in various countries for a number of years. In South Africa, these models are used for municipal valuation purposes for all types of properties and, in the mortgage sector, primarily for residential property valuations. Residential mortgage valuations are currently moving from traditional valuation approaches and are adopting AVMs. In both these fields, the correct property value needs to be determined. Incorrect values will lead to over- or undervalued properties, with a negative influence on the general property market and municipal property taxation bases.

The AVM is described as a mathematically based computer software programme that produces an estimate of market value based on analysis of location, market conditions, and real estate characteristics from information collected. The distinguishing feature of an AVM is that it produces a market valuation through mathematical modelling. The credibility of an AVM is dependent on the data used and the skills of the modeller or operator producing the AVM (Boshoff and Kock, 2013, p. 5). This issue of credibility is one that is also raised in Chapter 4 with respect to Municipal valuers who lack all of the necessary data to make an accurate reflection. Here, the issue is not the valuers themselves but rather the modeler. What is significant and similar about both the Municipal valuer and the AVM is that both rely upon and require data inputs in order to make effective valuations. If the data is not being collected efficiently or effectively, by either the valuer or the AVM, then the outputs will be over or under. The problem, therefore, is the same regardless of whether it is man or machine. (Once the findings of this study are examined in full and discussed, the only logical recommendation that can be made for Municipalities is provided in Chapter 6).

Returning to the issue of the AVM, the researchers purpose in evaluating the effectiveness of the AVMs was to determine whether the commercial property sector in South Africa is ready to accept and adopt or reject AVMs and to investigate the possibility of AVMs replacing professional valuation services for commercial property valuations (p. 1). What they found was that:

Limited research was available both nationally and internationally on commercial property AVMs. It was found that AVMs utilised for the valuation of commercial property are still in the development phase and cannot be considered feasible as yet. The major concerningfactor is that commercial property markets are heterogeneous. AVMs offer various advantages over traditional methods, but there are also some disadvantages, which were identified in the study.

The general attitudes towards AVMS were negative and a small percentage of respondents indicated that there may be future potential. AVMs were also regarded as a threat to the valuation profession. It was established that there is scope for commercial property AVMS, however, on a limited basis, and the results could be improved by combining these with traditional valuation techniques. Commercial property AVMs will never replace traditional valuations and can be implemented as a useful tool for verification and auditing of values (Boshoff and Kock, 2013, p. 1).

Boshoff and Kock (2013) described four main valuation standards are services currently in use in South Africathe Gold Standard, the Drive by and broker price options, the Desktop, and the AVM. They describe each respectively:

Gold standard After a physical internal and external inspection of the property, a qualified and registered valuer prepares the professional standard of valuation in writing, and supported by market information.

Drive by and broker price opinions The next service level down from the gold standard is a drive by or external valuation, which involves an external physical inspection in order to confirm the propertys existence and some of its physical characteristics.

Desktop A desktop valuation excludes any inspection of the property, and the valuer may use satellite photos, owner contact and market knowledge to establish information, as well as select and analyse appropriate comparables.

AVM An AVM, at its most basic, provides only a valuation output; however, some AVM systems supplement the figure with various features, the most important being a list of comparable transactions and a measure of the expected accuracy, expressed as a confidence score (Boshoff and Kock, 2013, p. 3).

As Boshoff and Kock (2013) point out, it is highly critical that a balance between among standards and services be achieved simply for cost-benefit purposes: In each case, there must be a balance between savings in time and cost versus the property risk factors. More automated models replace traditional valuation approaches. It is important to review the cost benefit relationship of replacing gold standard valuations with automated valuations or values. Gold standard valuations are referred to as high quality, comprehensive reports, which include a physical inspection and a detailed market analysis (Boshoff and Kock, 2013, p. 4). For Municipalities, the highest standard is the most desirablebut, as shall be shown in the following chapters, this standard is not always possible, especially when Municipalities struggle with the funding needed to acquire Gold Standard valuers.

Valuation methods have advanced over the years, but Boshoff and Kock (2013) identify the main components of the methods still used todayincluding both traditional and modern approaches: Traditional methods include the sales comparison method, the investment method or discounted cash flow analysis, the cost method, the profits method and the residual method. Advanced valuation or data-analysis methods developed from advanced technology and include hedonic pricing methods, artificial neural networks, spatial analysis methods, fuzzy logic, autoregressive integrated moving average, real options method and rough set method. Advanced valuation methods are mainly used for the construction of AVMs, and a better terminology includes data-analysis methods or decision support tools for values (p. 4). AVMs of course have their advantages and disadvantages. Advantages include lower cost, time-saving, consistency, transparency, easier data management, and the ability to combat fraud and valuer bias. Disadvantages include data limitations, public opinion, the lack of property inspections, financial regulation, risk acceptance, and transparency (Boshoff and Kock, 2013, p. 5).

However, one of the big problems of AVMs is when they are used to value commercial properties. As Boshoff and Kock (2013) point out, the use of AVMs is far more complex for commercial valuations than for residential valuations, as limited comparable data is generally availableScarcity of evidence makes the consideration of AVMs for commercial property much more complex. The complexity and the lack of recorded transactions require professional judgement to analyse the data. (p. 6). Other researchers have come to the same conclusion: Tretton (2007) also has pointed out that commercial AVMs have limited usefulness and that while some models have appeared, they require constant maintenance and work best in a supportive role rather than in a primary valuations method role. Municipalities in South Africa currently use variations on the AVM, such as CAMAthe computer assisted mass appraisal system. More shall be said on that in the following sections.

Boshoff and Kock (2013) note that the implementation of AVMs is not the solution for valuation problems and difficulties in South Africa: There is concern regarding AVM accuracy, and the expectation is that 30% of valuations will in future be done by AVM for easy-tovalue standard properties in the mid-range market. According to Seota (2011: personal communication), the South African Council for the Property Valuers Profession (SACPVP) does not favour the use of AVMs and no guideline has been formulated to date. The accelerated adoption of residential AVMs by the commercial banks, combined with the limited consultation held with the valuation profession regarding these models, are cause for concern. One should address this approach for future commercial property AVM use or implementation (p. 7).

Yet, while the problem of a lack or shortage of valuers in South Africa is admitted (Robson & Downie, 2007), the use of AVMs is not viewed as the answer that Municipalities need. AVMs will only further take jobs away from citizens by making the task automated. The automation of the task of valuations, however, is not suitable. Boshock and Kock (2013) explain: This is evident in South Africa where there is a shortage of valuers, as the majority of them are approaching retirement age. AVMs can alleviate this problem to some extent; however, they are also viewed as a threat to jobs. In addition, professional bodies initially regarded AVMs as a threat to valuers employment. In mature markets, guidance to members on using them is now incorporated in professional standards. Valuers are open to the notion of using AVMs as a supplement rather than a replacement for their traditional services (p. 7). One researcher even went so far as to assert that AVMs may constitute a threat to the very profession of valuers (Mooya, 2011).

As Boshoff and Kock (2013) assert, however, the greatest risk to the valuation profession is commoditisation and automation, which reluctant professional valuers ignore. There is no substitute for the skill of a competent and experienced valuer. As part of what is essentially a risk-management exercise, data and output analysis by appropriately trained valuers can avoid pitfalls (p. 8). This point about there being no substitute for skill and competency should be well-heeded, as it is one of the main points that this study makes in order to justify its proposed solution to the problems that plague Municipalities with regard to the valuations process.

Finding valuers who are skilled and competed, who are audited and trusted, sounds difficultespecially in todays South African climate. The reality, however, is that these valuers are working right under the noses of the Municipalitiesand their valuations are not even being regarded. This study is, of course, referring to the professional valuers of South Africas Publicly-Traded Companies. More shall be said on that in the following sections as well.

<>Boshoff also has shown that valuers need to be respected: When Municipalities choose to select tenders to do the valuations for their region, they should do so based on quality and not on the fact that the tender is the lowest cost. The problem, however, is that Municipalities simply do not have the budget to hire always the best valuers. In going for the cheapest option, Municipalities undermine their own credibilityand the case of Kouga Municipalities represents this fact well. See section 2.42 How the Municipality Attends to Valuation Disputes for more information on that particular scandal.

Boshoff is not alone in decrying the state of valuation standards in the Municipalities of South Africa. Another valuer has experienced similar problems and his case is worth describing in order to better understand the environment in which valuations for Municipalities are being conducted and why there is such great and urgent need to amend this situation. The following information is supplied by Massel (2014):

Well known and highly experienced mass valuer, Niel de Klerk attended a tender briefing of the Matjhabeng (Welkom) Municipality relating to the award of a tender for their general valuation roll commencing 1stof July 2015. There are approximately 110,000 properties to be valued. The requirements of the tender are that the successful tenderer must supply new aerial photographs, draw up a geographical information system and supply a download of all properties from the deeds office. Tenders close on the 22ndof August 2014.

The valuation roll has to be submitted by the 1stof December 2014! This is humanly impossible and goes against every guideline set out by COGTA in their time line guideline issued to all municipalities. This must call for government intervention to avoid a pending financial disaster for this municipality. Readers will recall that Rates Watch stated that the completion of the Johannesburg and Ekurhuleni municipalities within the specified time period was mission impossible. We were certainly not wrong as is evident by the fact that Johannesburg has lodged 63,000 objections against their own valuation roll. Something is very wrong somewhere. A valuation roll needs to gain the trust and respect by all affected parties. If a municipality has no confidence in their own roll where does it leave the ratepayer?

This anecdote and the conclusive question gets straight to the heart of the matter. The Municipal valuers of South Africa need clear assistance in providing fair and equitable valuations of properties. That assistance is not forthcoming from the Municipalities. Thus, it stands to reason that an external source must be sought.

2.29 The Supplementary Valuation Roll

An explanation of the Supplementary Valuation Roll helps to complete this section on Valuations and the problems associated with them. (More shall be discussed in the coming sections to provide even greater depth and scope to the issuesbut for now it is important to move and cover other relevant topics). The Supplementary Valuation Roll is designed to address issues that arise over the year to impact the General Valuation Roll. The Supplementary Roll allows for changes to be made and the roll to be updated in a separate compilation.

In Johannesburg, the Municipality is compelled by legislation to reflect all changes on properties in a Supplementary Valuation Roll (Frequently Asked Questions, 2013). Thus, the Supplementary Valuation Roll is the index through which the City maintains updated records affecting existing properties and the existing General Roll. Additionally, the Supplementary Valuation Roll is updated annually as opposed to the General Roll which can go more than four years before being updated. Thus, one sees that in the Municipality, supplementary valuations are performed during each financial year, according to the relevant legislation, to supplement the current general valuation roll with any new properties and/or changes to property values contained in the current general valuation roll (Frequently Asked Questions, 2013)but if it is possible for the Municipality to provide annual updates to its Valuations Roll, using a public record of market valuations such as those made available through the annual reports of Publicly-Traded Companies, should not be an issue. More will be discussed on this in the following chapters.

2.291 Valuations according to Rates Watch

Rates Watch is a Monitoring Company based in Ekurhuleni and has had many successes representing clients in their disputes with appeal boards regarding property valuations. The company has issued the following declaration on its website as of 2017:

Rates Watch is proud to advise of their resounding success at the recent hearings of the Ekurhuleni Appeal Board. The Appeal Board hearings were in regard to Section 78 Applications submitted by Rates Watch on behalf of numerous clients. Many of the applications were reconsidered by the Municipal Valuer and reductions were then made by him. Eighteen appeal cases were handled by the Ekurhuleni Appeal Board. Rates Watch were the major appellants at this hearing. Reductions in value of over R23 million were upheld by the Appeal Board, with a resultant saving in rates and taxes of R1, 4 million being achieved!!Two appeals lodged by Rates Watch against incorrect category entries on the original general valuation roll resulted in rates savings of R175, 000 to the delight of the appellants. A significant reduction in a mining property from R22, 6 million to R12, 6 million brought about a rates saving to the property owner of approximately R800,000! Rates Watch are particularly proud of these results, as they related to properties against which no objections were lodged or alternatively were incorrectly categorised on the general valuation roll. A section 78 application relates to a property that was incorrectly valued and against which no objection was lodged when the general valuation roll was open for objections. Rates Watch compliments the Ekurhuleni Valuation Section for the expeditious way in which they handled the outcome of the cases heard at the Appeal Board.Within a few days, official notices were forwarded to Rates Watch.

Rates Watch has also provided a description of the valuation process as it understands it. It is important to note that the term market value is here defined as the price upon which a property is able to sell. This study uses the term market value in conjunction with the price at which an investor values the property (as in a Publicly-Traded Companys property portfolio). According to Rates Watch, the following information should be considered by all individuals interested in appealing a valuation by their Municipality:

Residential properties are valued on the Direct Comparison method of valuation.This means that the Municipal Valuer will obtain data relating to the property itself, the surrounding area and compare this data with sales in the immediate vicinity of the subject property. There are highly sophisticated tools available which enable the Municipal Valuer to predict Market Value. The most important aspect of any municipal valuation is the collection of correct and accurate data relating to a property. In suburbs that are mainly homogeneous the collection of accurate and meaningful data is a fairly easy task. The challenge is where properties differ in terms of location, views, aesthetic design etc. In these types of suburbs, it is far more difficult to compare properties on a mass basis and the municipal valuer has to adjust his norm valuations to allow for positive features such as: view, locality, special features, ambience and the physical design of the property. Conversely, negative features must also be taken into account. These may include:-proximity to a taxi rank, busy roads, flooding etc. Residential property owners should keep records of the following: Size of buildings. Description of buildings.Features such as swimming pools, landscaped gardens, boreholes, etc. Any aspect that may have a negative impact on the property. If the property has been offered for sale, copies of the advertisement showing the asking price. Length of time the property has been on the market. Documentation of any additions and photographs of the stage of completion as at the date of valuation. If a property owner can show that he was selling the property for R1million and the Municipal Valuer has valued the property at R1, 5million, the chances of success at an Appeal Board hearing will be very good.

Clearly, Rates Watch has succeeded in challenging Municipalities for better valuations for the firms clients. Considering the approach of Rates Watch will help a Municipality better establish its own defense of its valuation and valuation process in the future.

The CEO of Rates Watch, Clive Massel, has also written an evaluation of the current difficulties that Municipalities are experiencing in both the compilation and administration of their valuation rolls (Rates Watch, 2017). That article is worth assessing in its own right to assist in the understanding of the valuation process as it exists in South Africa at the moment.

Massel (2011) begins his assessment of the MPRA of 2004 by asking: What we need to establish is whether the MPRA has achieved the objectives envisaged by the legislators when the Act came into effect and whether the municipalities have been able to implement the Act fully. Massels full evaluation will be discussed in a later section of this chapter. For now, an examination of Rates Watchs success is helpful in seeing some of the shortcomings of the MPRA. Rates Watch (2017) reported in 2012 that:

It is exactly three years since Rates Watch commenced business and starting challenging municipal valuations. A key factor of the Rates Watch success story has been their ability to challenge municipalities and their municipal valuers regarding the correct interpretation of the MPRA. The results to date are nothing short of phenomenal. In Ekurhuleni alone, Rates Watch has achieved a 2,4 billion rand reduction in value, with a resultant saving of nearly R130 million in rates and taxes!! Nationally, we have obtained valuation reductions in excess of 3 billion rand. Rates Watch have been extremely innovative in challenging municipalities regarding incorrect and unjust implementation of the MPRA. Currently, Rates Watch are in the process of bringing about High Court declaratory orders against the Ekurhuleni Metro relating to the "no change" policy of their Municipal Valuer as well as a further order regarding the back dating of rates and taxes as a result of incorrect category entries in their general valuation roll - ab initio. These applications are time consuming, costly and require a very clear understanding of not only the MPRA, but also the Promotion of Administrative Justice Act (PAJA). Rates Watch has already successfully brought about a High Court mandamus application compelling the Municipal Valuer of Ekurhuleni to provide proper and adequate reasons for his objection decisions. Currently, Rates Watch is the only company in South Africa dedicated to monitoring and auditing of municipal valuations and rates accounts.

Recent National Results of Valuation Objections and Appeals

(1stApril 2009 to 7thMarch 2012)

Reduction

Objections

R1.502 Billion!

Appeals

R572.0 Million!

Sectio