Warning about buying a sectional title property in South Africa

Experts warned landlords to be careful before buying sectional title properties, since weak governance and poor levy collection can quickly erode rental yields and property values.

When landlords assess a sectional title apartment for rental income, the focus typically falls on purchase price, expected rent and financing costs.

However, across large residential portfolios, a different variable repeatedly determines whether an investment compounds income or steadily underperforms.

That variable is sectional title governance, starting with levy collection, said Landsdowne Property Group CEO Jonathan Kohler.

He explained that more than half of South Africa’s urban housing stock now sits inside sectional title schemes and estates.

These buildings operate as shared financial systems. Levies fund security, insurance, utilities, maintenance and long-term capital replacement.

When collection is strong, buildings function, and costs remain predictable. When it weakens, the systems quickly deteriorate.

“A sectional title scheme is effectively a micro balance sheet,” Kohler said. “Landlords are not just buying a unit. They are buying into a cash flow system. If that system is unstable, rental yield becomes fragile very quickly.”

In schemes where levy arrears rise, management is forced into reactive decision-making. Planned maintenance is deferred, emergency repairs increase costs, and insurance claims rise.

As a result, levies escalate sharply to recover lost ground, and landlords absorb these increases immediately, while rental escalations lag or face resistance from tenants.

The risk is often mispriced at acquisition. Units can appear affordable with attractive headline yields, even as the underlying scheme is already under financial strain.

By the time this shows up in resale values or vacancy rates, the damage has usually compounded, Kohler cautioned.

Across Landsdowne’s national portfolio of more than 40,000 apartments and freestanding clusters, levy arrears consistently emerge as one of the earliest indicators of stress.

“We often see payment behaviour soften months before any broader market weakness becomes visible,” Kohler said. “By the time prices start reflecting distress, the scheme’s financial position is usually already compromised.”

How landlords can ensure good returns

Kohler explained that, for landlords, the most important figure to interrogate is not the current levy amount, but the collection rate.

A scheme collecting consistently above 95% is fundamentally different from one operating in the high 80s, even if levies appear lower on paper.

Governance quality compounds this effect. Schemes with clear rules, professional enforcement and transparent financial reporting experience lower tenant turnover, fewer disputes and slower wear and tear.

Poor governance leads to higher vacancy risk, reputational damage and rising operating costs – all of which erode net yield.

Discussions about rent control further heighten this risk, Kohler said. While rental escalation may face political or regulatory pressure, shared costs are not capped. Security, insurance and utilities continue to rise.

In weakly governed schemes, the gap between income growth and cost escalation lands directly on landlords. “Landlords underestimate how quickly governance failures show up in net yield,” he explained.

“Higher turnover, more damage, more disputes. Individually, these costs look manageable. Together they destroy return assumptions.”

Kohler said that avoiding these outcomes requires treating sectional title due diligence as a core part of the investment process. Before committing to a purchase, he advised landlords to –

• Request levy arrears reports and confirm historic collection rates
• Review audited financial statements and reserve fund adequacy
• Assess whether maintenance is planned or purely reactive
• Understand how rules are enforced and disputes resolved
• Engage directly with the managing agent, not only the selling agent

“The managing agent is often the best source of truth,” Kohler noted. “They can explain how levies are collected, how arrears are handled, and whether the scheme is running ahead of problems or constantly catching up.”

Where access to information is limited or resistance is encountered, landlords should treat this as a warning signal rather than an inconvenience.

“In a well-run scheme, transparency is normal. If basic financial and governance information is difficult to obtain, that usually tells you something about how the building is being managed,” he said.

For income-focused landlords, Kohler said the implication is clear. Yield stability in sectional title investments is increasingly decided at the scheme level, not the unit level.

Those who price governance risk correctly protect both income and exit value, while those who do not often discover too late that their return assumptions were built on fragile foundations.