Cape Town's short-term letting by-law could reshape property investment returns
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Cape Town's proposed short-term letting by-law would push heavily let properties into the commercial rates category, and a property practitioner argues the knock-on effect on net income could shift what investors are willing to pay.
Cape Town's proposed short-term letting by-law has sparked debate about Airbnb, tourism and housing affordability, but one of its more significant consequences has drawn less attention: the effect on property investment returns, buyer demand and the prices investors are prepared to pay. Writing in Moneyweb, Christina Masureik, who founded and ran the short-term rental business South Seas Properties before moving into residential sales with Sotheby's International Realty in False Bay, sets out how closely ownership decisions are tied to income expectations.
Under the proposed framework, short-term letting properties would be subject to registration requirements, while properties available for short-term accommodation for more than 50 percent of their annual room-night capacity would fall into the commercial accommodation municipal rates category. The intention is to improve transparency, compliance and fairness between different accommodation operators, and there is a reasonable argument for treating properties that function predominantly as accommodation businesses consistently with hotels and established guesthouses.
From an investment perspective, the implications go beyond the municipal rates bill. Masureik illustrates the point with a property generating R180,000 in annual net operating income: if annual municipal rates rose by R30,000, net operating income would fall by about 17 percent, assuming revenue and other costs stayed unchanged. For an investor targeting a particular yield, that reduction could materially change the price they are willing to pay, although it does not mean the market value of the property would fall by the same percentage.
She does not expect a uniform response from owners. Some depend on rental income to cover ownership costs, others bought specifically for returns, and some want the flexibility of using the property themselves between lets. For profitable operators, additional rates may simply become another cost of doing business, while others may try to recover costs through higher nightly rates, depending on competition, seasonality and guest demand. Some may conclude the income no longer justifies the management, maintenance, cleaning, vacancies and unpredictability of short-term letting, and owners already considering selling could bring those decisions forward.
Any price effect is likely to be concentrated in property segments where short-term rental income played a significant role in purchasing decisions, rather than across the market as a whole. Masureik notes that demand for a family home in Kommetjie is very different from demand for an investment apartment in Sea Point, and cautions against predicting widespread price reductions.
She also argues that tighter regulation could encourage owners to return properties to the long-term rental market, improving choice for tenants, but warns against confusing additional rental availability with improved affordability: a luxury holiday villa in Noordhoek will not necessarily become an affordable family rental simply because its owner stops accommodating tourists.