Electricity looks set to be a key source of attention for the property sector in 2019.
This is according to FNB property sector strategist, John Loos, who said that the most obvious potential impact on property is via the potential impact of electricity supply limitations in constraining economic growth and thus the demand for property.
In November, Eskom said it would it said be raising the risk of load shedding for the remainder of 2018 on the back of a number of operational challenges.
However this is not the only issue that Eskom has created, Loos said.
“Then there is the high level of Eskom debt at a time when its electricity sales battle to grow, with the utility reportedly having over R400 billion worth of debt and rising,” said Loos.
“Does this debt, along with rising general government debt begin to exert upward pressure on yields in the bond market? That’s a potential source of upward pressure on property capitalization (cap) rates.”
Another key concern will be the introduction of electricity rate hikes, said Loos.
“A key concern would arguably be the granting of the requested 15% electricity tariff hikes each year for the next 3 years, which may contribute to saving Eskom financially in the near term, but would contribute significantly to increases in property operating costs at a time when many property occupants may be battling as a result of the weak economy.
“On the residential property side, sharply rising electricity costs (along with municipal rates and other utility tariffs) have long since been a housing-related affordability challenge.
“We use the Consumer Price Index for Electricity to compile an electricity/per capita income ratio index starting in 2008.
“It shows that electricity tariff increases applied to consumers have far outstripped per capita income growth, with this index increasing by a massive 82.71% from 2008 to date,” he said.
Loos said that this provides a strong incentive for households to lower electricity consumption or to cut broader operating costs at home to compensate for the sharp electricity cost increases.
“One way of doing it is to purchase a smaller home with less “frills”, such as swimming pools” which can add to operating costs significantly,” he said.
“The other way is to cut electricity costs, either through more energy efficient homes of alternative energy sources.
“Not surprisingly, therefore, we expect that average building size for new residential properties will decline, in part helped smaller by rising electricity costs.
“Over time, sharply rising electricity costs also crowd out”disposable income, some of which would otherwise be aimed at funding property purchases,” he said.
Using SARB household consumption expenditure data, FNB found that the portion of total consumer spend being spent on “Household Fuel and Power” as having risen from 2.1% in 1975 to 3.0% by 2007, and then more sharply to 4.69% by 2017 in part due to sharp increases in power costs over the past decade.
Source: Business Tech