As the City of Cape Town considers changes to how full-time short-term rental properties are rated for municipal purposes, property owners and investors are watching closely.
Source: Pexels.
Luxury property-management firm Nox Cape Town is helping clients unpack the potential tax implications and prepare for possible shifts in costs and returns. For many owners who depend on rental income—whether as supplementary earnings, retirement support, or portfolio growth—understanding how the proposed adjustments could influence expenses, yields and long-term investment strategy is becoming increasingly important.
What's being proposed
Based on engagement between industry representatives and the City's policy team, short-term rental properties that are not primary residences will transition from residential to business/commercial rating categories during the course of the next 12 months.
The proposals regarding thresholds and which properties qualify are still under consideration, but this would mean business/commercial properties being rated at 135% more than the residential tariff.
For properties valued at under R7m the impact will be even more severe, as they lose the benefit of the residential rebate on the first R435,000 of a property’s value.
Nick Taylor, managing director of Nox Cape Town and Board Member of the South African Short-Term Rental Association (Sastra), has been engaging directly with the City's policy strategy team.
While the City will make official announcements in due course, Taylor emphasises that what's important now is that property owners understand the potential impact and have time to consider their options strategically.
The potential financial impact
If these changes proceed as proposed, the rate differential would translate to approximately R9,665 per R1m of property value per year. For property owners, this could mean:
Source: Supplied.
These costs would apply regardless of occupancy and therefore directly affect net yield and cashflow, particularly during shoulder and winter months when margins are already tighter.
Based on Nox's initial modelling, for many properties this could represent an additional expense ranging between 4.5% and 6.5% of revenue, with potential impact on net rental income yields in the region of 0.5% to 1%. However, every property requires individual assessment.
The impact of the residential rebate
Under the City of Cape Town’s residential property rates system, qualifying residential properties benefit from a rates rebate on the first portion of the property’s value.
Currently:
- The first R435,000 of a property’s municipal valuation is exempt from rates, up to a valuation of R7m.
- This exemption applies automatically to residentially classified properties.
- The balance of the valuation is then charged at the residential tariff rate (approximately 0.75%).
- The City has typically not made a clear distinction between primary residential and non-primary residential properties, and for properties below R7m, the rebate has had a meaningful cushioning effect, which will now fall away.
The rebate provides proportionally greater protection to mid-market properties than to very high-value homes.
Removing it means:
- The effective percentage increase is largest for properties in the R2m to R7m range. (The median price point for all sectional-title properties sold on the Atlantic Seaboard during 2025 was R3.47m.)
These are the units most commonly used in professionally operated short-term rental portfolios.
Protecting your investment: What property owners can do now
This potential change is less about compliance and more about protecting revenue, says Taylor. The real issue is net yield. Owners who proactively reassess their performance, pricing, and seasonality will be far better positioned than those who wait and react under pressure.
Higher fixed costs disproportionately affect underperforming assets. Without proactive planning, owners may find themselves making rushed decisions - cutting prices to drive occupancy, switching strategies hastily, or selling assets without a clear view of long-term value.
Taylor recommends three steps property owners should take now:
1. Understand your potential cost impact
Calculate how commercial municipal rates could affect your specific property expense profile. Model the impact on your current net yield and cash flow to understand what this might mean for your investment returns.
2. Assess your real performance data
Move beyond instinct-driven decisions. Property owners should have clear visibility over:
- Occupancy trends by season
- Average daily rate (achieved, not listed pricing)
- Booking windows and length of stay
- Net yield after fixed and variable costs
These metrics become especially important when fixed costs increase, says Taylor, as even small shifts in performance can materially impact annual returns.
3. Consider your strategic options early
Potential regulatory changes don't mean short-term rentals are being shut down, but they do create an opportunity to reassess how each property fits into broader asset strategy. Depending on your objectives, options include:
- Continuing with short-term letting, with revised net yield expectations
- Transitioning to long-term rental for more predictable income
- Selling the asset and reallocating capital where equity growth has been realised
- Consideration of the “lifestyle asset” component, typically regarding personal use for leisure or business reasons
Each option has different tax, cash-flow, and risk considerations. The key is evaluating these options deliberately, not reactively.
Why professional management matters more now
Data from professionally managed properties shows more stable outcomes during periods of regulatory change. Well-managed properties are better positioned to absorb higher fixed costs, optimise rates during peak demand, and protect yield during quieter periods.
In a changing regulatory environment, owners who rely on lagging indicators are always reacting too late, says Taylor. Those with real-time data can adapt proactively and protect income.
Nox combines real-time performance monitoring with hyper-localised market data across bedroom sizes, property uniqueness, past performance, and competitor sets by suburb across Cape Town's CBD and Atlantic Seaboard. This allows owners to model realistic scenarios specific to their asset.
Looking ahead: From uncertainty to informed action
While official timelines and final details will be announced by the City, the direction of travel provides property owners with an opportunity for strategic planning rather than reactive decision-making.
The biggest mistake is assuming regulation will automatically reduce demand, says Taylor, when guest demand remains strong and supply may tighten. Supply compression could well result in higher achievable daily rates and, effectively, similar or better net returns for well-positioned and established properties.
The question owners should be asking isn't "Should I panic?" but rather "How do I optimise my asset under potential new cost structures?" A firm understanding of the financial hygiene of a real-estate investment is critical to navigating a regulatory environment.
“Data allows owners to move from emotional decisions to informed, scenario-based planning,” says Taylor. “Early engagement means more options - whether that's refining pricing strategies, repositioning inventory, or making deliberate transitions that protect value.”
For property owners across Cape Town's premium rental market, now is the time to understand your asset's performance, model potential scenarios, and make strategic decisions while you have time and options on your side.
