The Impact of electricity hikes on SA property


The National Energy Regulator of South Africa (Nersa) last week announced its decision to grant Eskom a 9.41% tariff increase for the 2019/20 financial year.

While the increase granted for 2019 wouldn’t appear too harsh in isolation, one has to evaluate the trend of tariff hikes well in excess of CPI inflation over more than a decade, which has significantly altered property operating costs and thus property affordability, says John Loos, property sector strategist at FNB Commercial Property Finance.

Since 2009, the CPI for Electricity and other Household Fuels has well exceeded overall CPI inflation almost all of the time bar a short period from mid-2017 to mid-2018, according to the FNB report.

“The latest tariff hike approval doesn’t appear to alter this tariff inflation sharply from where it was as at January, i.e. 7.63% (when overall CPI inflation was at 4%).

“However, the cumulative inflation rate in the Electricity CPI since the 1st quarter of 2008 (about the time where the Eskom Crisis first gathered steam), to the final quarter of 2018, just over a decade later, was a massive 274.45%.

“By comparison, the CPI for Water and Other Services (meaning municipal rates and other non-electricity utilities tariffs) inflated by a lesser, though also sharp, 147.16%.”

Both of these indices’ cumulative inflation rates over this period were well above that of the Headline CPI, which inflated by 79.55% in what has actually been a relatively low moderate general inflation environment, says Loos.

"one way to cut costs is to purchase a smaller home with less frills"

 What this means for residential property development

On the residential property side, sharply rising electricity costs - along with municipal rates and other utilities tariffs - have long since become a housing-related affordability challenge, he says.

“We use the Consumer Price Index for Electricity to compile an Electricity/Per Capita Income Ratio Index starting in 2008. It shows that the electricity tariff increases applied to consumers have far outstripped Per Capita Income growth, with this index increasing by a massive 92.15% from 2008 to end-2018 as a result.

“And it is important to bear in mind that the CPI for ‘Water and Other Services’ also saw its affordability index deteriorate (rise) by 26.75% over the period, thus adding further upward pressure to home operation-related costs.”

Loos says this provides a strong incentive for households to lower electricity consumption or to cut broader operating costs on the home to compensate for the sharp electricity cost increases, and 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. The other way is to cut electricity costs, either through more energy-efficient homes or alternative energy sources.

Not surprisingly, the report notes that building statistics show an increasing portion of building activity comprising flats and townhouses, much of this assumed to be sectional title, as opposed to freestanding houses, the former being more land efficient and often more economical to maintain and run.

“From 27.9% of residential units’ plans passed in 2010, the ‘Flats and Townhouses’ category of StatsSA’s building stats rose to 40.9% of total units’ plans passed in 2018,” says Loos. “Not all of this increase in this category’s share is due to municipal rates and utilities’ tariff increases, but we believe that this is a key contributor nowadays.”

Building statistics show an increasing portion of building activity comprising flats and townhouses

FNB expects that the average building size for new residential properties will decline, in part influenced 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, says Loos.

“Using SARB Household Consumption Expenditure data, we see 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.”

The overall impact of above-inflation tariff hikes

In short, electricity supply cost inflation looks set to accelerate once more, says Loos. “For the property sector this looks like ‘more of the same’ if one looks at high electricity cost inflation over the past decade.”

He says on the residential side, FNB expect this to contribute to the longer-term trend towards building more land/operating cost-effective flats and townhouses (much of it being sectional title) relative to the number of freestanding homes.

“We also expect the average size of units built to decline further, helped on in part by electricity tariff inflation, along with other rates and tariffs inflation which is also significant.”

Each above-inflation tariff hike also adds to the motivation of households and businesses alike to become less dependent on the grid through finding alternative energy sources, and the upside of this is that it often promotes cleaner types of energy, says Loos.

Electricity inflation can also be a boost for “green” building demand, he notes.

On the retail property side, where electricity cost per square meter is highest of the major property categories, Loos says renewed hiking could further encourage the drive towards retail alternatives such as online shopping.

But there are potential indirect impacts too, via the economy, says. “A lack of reliable and affordable electricity can impact negatively on near-term economy-wide production (GDP), and on longer-term growth through dampening sentiment and future investment in production capacity.

“It also exerts upward pressure on CPI inflation, although not a major driver of CPI inflation, and this can possibly mean that we have higher interest rates now than would have otherwise have been the case over the past decade - although we’ll never know for sure.”

And interest rates and economic growth both feed back into levels of demand for property and thus its performance, says Loos.

Article by Property24




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