2020 Commercial Property Themes –Electricity supply and cost will be a key wildcard for the Commercial Property Sector this year

Posted On Thursday, 23 January 2020 19:40 Published by
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Will electricity supply reliability and cost increases become a key issue again in 2020?

John_LoosFNB

 Stability of electricity supply is a major economic
growth, and thus commercial property,
performance wildcard in 2020.
 And major electricity tariff increases remain a risk to
property operating costs until such time that we
have certainty over this year’s hikes.

For the Commercial Property Sector, Eskom and the supply and cost of electricity could once again be a key issue in 2020, but at present much uncertainty exists around the power utility.

Late in 2019, Eskom dominated the headlines as it moved at one stage to “Stage 6” load shedding, an unprecedented step.

For the time being, the load shedding has lessened, but these periodic bouts of it have highlighted the gradual deterioration in the state of the state power utility over many years. A lack of quality investment in new power generation capability and distribution infrastructure is one issue, exacerbated by an apparent deterioration in the capability to maintain the ageing infrastructure. Its financial situation is a further issue, and Eskom, with its reportedly bloated labour force and cost structure, has found itself sliding deeper and deeper into debt.

These problems have all been well-documented. But how does it potentially impact on the property sector, should the utility’s troubles continue into 2020?
We would identify 3 broad impact “channels”.

Production Disruption - The Direct Economic Growth Impact

Firstly, when electricity supply is disrupted, there is a direct impact on economy-wide production levels and thus on economic growth. The impact is tough to quantify, but it is clearly there. Slower economic growth than would otherwise be the case means slower business growth, and slower growth, or even decline, in the demand for commercial space to rent. This, at a time when average commercial property vacancy rates are already on a rising trend, could further constrain landlord “pricing power” and exert further downward pressure on already-slowing rental growth.

Sentiment – An Indirect Growth Impact

The second broad electricity supply disruption impact stems from the dampening impact on national sentiment, and this can be significant. It dampens
sentiment, not only because of the impact on current production, but it also raises significant concern as to the longer run economic future of South Africa, given
that reliable electricity supply is absolutely crucial to the smooth running of a modern economy.

The fact that Eskom’s visible troubles have been around for over a decade (the first major load shedding starting in 2008), and with little apparent sign of improvement to date, boosts pessimism regarding the future of the SA economy, dampening confidence of businesses, investors and households alike. Weaker confidence in the economic future translates into less new business investment and expansion plans, which in turn constrain the demand for new commercial space over and above the direct negative impact of load shedding on current economic output.

On the household side, not only can this consumer confidence dampener slow consumer spend (a direct impact on retail and retail property), but could also be one of the key negatives contributing to a higher emigration rate, exerting upward pressure on emigration-related home selling and thus on residential supply. The emigration rate is also busy taking much-needed skilled labour out of the economy, further likely to dampen economic growth with a further “feedback” to property demand.

Conversely, any signs of major Eskom reforms under its new management can be a major boost to sentiment.

Commercial Property operating cost pressures

But while the above 2 impact areas are difficult to 22 January 2020 FNB Commercial Property Finance Property Insights

Last modified on Thursday, 23 January 2020 20:05

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