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Monday Mar 25, 2013

Municipal property valuations under fire

Although property rates are a critical component of municipal revenue bases there's a growing tendency by municipal valuers to undervalue properties - sometimes by as much as 70 percent.

The Municipal Property Rates Act prescribes that all properties within a municipal jurisdiction must be valued in terms of generally recognised valuation practices and that the basis for valuation is market value. Market value is prescribed as the amount a property would have realised if sold on the date of valuation in an open market by a willing seller to a willing buyer.

Municipalities and their appointed valuers have a responsibility to deliver accurate market values within their valuation rolls. A study of residential values for the City of Johannesburg revealed undervaluations or inconsistencies of as much as 70 percent.

Why are some municipalities' valuations so far off ? One reason is late project start dates. General valuation projects are big undertakings, so delayed project starts can lead to timing bottlenecks and possible compromises in quality.

Another is sales research and market reports being delivered as part of the project closeout, or even being completely overlooked. These are critical to support the municipality's own internal review of the values determined by the valuer.

A third is poor value review, with draft rolls being submitted too late for consultative review. It is emerging best practice for municipalities to call for early submission of draft valuation rolls. Crashed project time frames lead to this critical task being compromised.

The roll review includes the presentation of the draft values by the appointed valuer and a review of the draft roll by an appointed review panel of local property practitioners who can comment on the draft values. The final certified roll is then a product of consultation. Municipalities report a significant decrease in the number of objections received when they have adopted this approach. This is a cost saving.

In addition the finance department receives early data on which to platform its preparation of draft budgets.

Finally, there's the issue of municipal capacity.

A recent appeal court judgment found that undervaluations could not be compensated for by an escalation on the rating tariffs applied. The SA Property Owners Association challenged the City of Johannesburg's implementation of an additional discriminatory rates hike of 18 percent over certain business, commercial and industrial properties.

The crux of the ruling is that a municipality cannot correct its budget simply by applying punitive discriminatory rate tariffs to certain categories of properties, to counteract a sub-standard valuation roll.

The judgment referred to the issue of undervaluations: "This of course reduced council's revenue base and contributed to an income shortfall. The council in more ways than one was the author of its own misfortune, which then became the misfortune of ratepayers."

The message is clear: the entire valuation roll must be accurate from the start.

To enable this, municipalities must plan well and take care to accommodate long procurement processes. The market research should be conducted at the start and consolidated throughout the roll preparation period.

Municipalities should call for early submission of draft valuation rolls, so that a consultative review can be done. Municipalities must ensure that structured skills transfer to municipal officials is included within the appointed valuer's scope of work to reduce future dependency on external service providers.

Draft standards drawn up by the International Association for Assessing Officers give guidance on recommended best practices for mass appraisal of real property at market value. The standards will be a useful benchmark to adjudicate the professional performance of appointed municipal valuers.

These mass appraisal standards will be workshopped by all stakeholders, finalised and adopted for implementation by the national statutory body - the SA Council for the Property Valuers Profession.

Janet Channing ( BA MPhil NDPV) is a registered property valuer and managing director of Metropolitan Government Services, which works with municipalities in a variety of roles.

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