The Indirect Impact of the Electricity Crisis on Property in South Africa

South Africa’s electricity supply and cost issues have become increasingly important for the country’s property market in recent times, notes John Loos, property sector strategist at FNB Commercial Property Finance.

This is not because the electricity crisis is something new but rather because there are a host of other “economic negatives” that have been mounting, he says.

Loos said that the current electricity crisis becomes an extra challenge at a time when other key operating cost items are also rising rapidly.

The electricity supply crisis is not new. Load shedding first started in earnest back in 2008, as did the big electricity tariff hikes. MSCI data shows that the major increase in gross electricity costs as a percentage of commercial property income receivable took place between 2007 and 2012, where it rose from 6.4% in 2007 to 12.2% by 2012.

In 2021, this percentage was not significantly different from 2012, measuring 12.4%, noted the financial services firm.

Another area of ‘government-related’ costs that has become a challenge to the property market is property taxation costs, largely relating to council rates. As a percentage of gross income receivable, this cost item has doubled – from 5.12% in 2007 to 10.35%, said Loos.

He said rising electricity costs must also be viewed in the context of an environment of rising costs in other areas.

Additional economic negatives are also providing pressure points for the property industry, said Loos.

Eskom has applied to the National Energy Regulator (Nersa) to increase tariffs by 38.1% for 2023/24. “In addition, the timing of big electricity tariff increases gets progressively worse as the economy stagnates, and the economic stagnation is in part due to a deteriorating power supply. General inflation has surged recently, and interest rates are on the rise too,” he said.

The tenant population finds itself far more financially pressured than pre-Covid 19 times. Citing data from TPN Credit Bureau, Loos said that only 66.3% of commercial tenants were in good standing early in 2022 regarding their rental payments. In pre-lockdown times this percentage was often above 80%.

“Therefore, while landlords can, in theory, recover electricity and other costs from tenants, in practice, a financially pressured tenant population means that something has to give, and in many cases, it is rentals that have to decline, at least in real terms.”

MSCI data does point to All Commercial Property rentals in decline in real (inflation-adjusted) terms, has declined in real terms by 8.3% since 2014, the property strategist said. And the All-Property Net Operating Income measure has declined in real (inflation-adjusted) terms by 19.9% since 2016.

“The current financial time is thus a significantly tougher environment in which to absorb electricity tariff increases, or cost increases associated with finding alternative reliable power supply sources, compared with more than a decade ago,” said Loos.

Indirect impact

The indirect impact of the electricity crisis on property markets is difficult to quantify but easy to understand, noted Loos.

“The erratic nature of electricity supply disrupts economy-wide production in a myriad of ways, and this, in turn, constrains GDP growth to lower levels than would otherwise be the case. The rising real cost of electricity supply, too, hampers economic and business performance by raising the cost of doing business and thus reducing the financial viability of certain business.”

Lower rates of GDP growth imply weaker business performance and business confidence, which in turn implies constraints on business expansions and new startups, he said. This, in turn, constrains the demand for commercial property space.

“There is thus little doubt that the electricity supply crisis exerts pressure on property market performance, either directly via the property operating cost impact, or indirectly via the impact on the economy.”

But what about regional market differences?

An interesting development in property’s relationship with the electricity crisis is playing out in regional property market performances. The electricity crisis provides an additional opportunity for local governments to differentiate themselves and their regions from others, said Loos.

Proactive councils such as the City of Cape Town have already achieved something of an economic competitive advantage through relatively sound city management, a feature that has been attracting skilled and affluent semigrants to the region, according to FNB.

“These skills inflows should drive a superior economic and property market performance for Cape Town and the broader Western Cape region, something we appear to be seeing already.”

The City of Cape Town often kept load shedding at lower levels than the rest of the country through procuring power from independent sources.

“This more reliable supply of power in Cape Town promises to be a further attraction for business and individual investors alike and can further the region’s competitive advantage, and thus further promote a superior economic and property market performance compared to many other regions and council areas.

“The City of Johannesburg has also, in recent days, been emphasizing its plan to secure alternative sources of power supply to improve reliability,” said Loos.

What all this potentially means is that the electricity supply crisis could indirectly lead to a wider divergence between economies and thus regional property markets, those proactive councils attracting investment and skills to a greater degree than those who leave their fate in the hands of the power utility.

Source –