Due to the restricting effect power cuts have on new property development, property analysts concur that in the near to medium term they will be advantageous to property rentals as a result of stock supply not meeting demand.

Moreover and for this very reason, they will be advantageous to property prices in the medium to longer term.

However, power cuts will not be advantageous to the South African economy, which is reeling from the effects of foreign investors becoming more risk averse, decreased equity investment, reduced manufacturing and disposable income, and curtailment of proposed developments and projects.

According to Eskom power consumption has to be reduced until 2014, and in the interim period priority will be given to existing developments, except new residential developments requiring less than 100KW, as well as to commercial and industrial developments over residential developments as they are more in demand and more important to the growth of the economy.

The impact of power cuts is already evident in the fact that building, renovations and additions in the residential sector have decreased noticeably, as well as construction of new commercial and industrial developments.

Rode's Report on the fourth quarter of 2007 says evidence in the form of the square meterage of building plans passed suggests a possible future cooling-off in activity in both the residential and non-residential sectors.

The report further states that "furthermore, this deceleration in building plans passed was noticed before the January 2008 Eskom electricity shock and before Eskom's moratorium on electricity certificates for new developments, which might further dampen the mood of developers". This in itself gives an indication of the extent to which property development is tapering off.

New mortgage loans for the construction of residential buildings fell by 12,6% in the third quarter of 2007 and growth in new residential space completed fell 15% year-on-year to November 2007.

The good news is that most analysts do not believe that the residential sector is set to take a dive. Standard Bank specifically does not anticipate a significant increase in residential property prices in the short term but does anticipate solid growth in the longer term.

Kelvin Bell, product manager at Absa Mortgage Fund Managers, says if developers choose or are forced to defer their plans for a while, the supply of new space will decrease. "This shift in the supply/demand balance will keep rentals rising and should support property values," he says.

It should be noted though that rental performance and value between different properties in different sectors could vary quite significantly.

Andrew Schaeffer of letting firm Trafalgar predicts that rents will rise in double digits over the next twenty years and Catalyst Fund Managers says investors in commercial property stocks, who have been experiencing low yields, are now anticipating good future distribution growth as a result of rental growth.

Evan Jankelowitz, co-head of Stanlib Property Franchise, points out that the impact of power cuts will be most keenly felt by listed property companies that have a large exposure to retail property, because the smaller retail tenants, who are just as important as their larger counterparts, are having difficulty reconciling loss of business during power cuts, resulting in reduced rental payment or default on payment. He adds that listed property companies with large exposure to offices and industrial property will be less affected because they are less reliant on power.

The view that the shift in the supply/demand balance will keep rentals rising and should support property values, is offset to a lesser extent by the view that power cuts will reduce demand for property, i.e. if economic performance slows due to power cuts, people's income and disposable cash as well as demand for property will be affected.

According to Bell, the counter-argument is that property investors will look for compensation for increased risk in the form of higher capitalisation rates.

According to Rode's Report, capitalisation rates continued to decline in fourth-quarter 2007, despite worsening inflation and more interest rate hikes. "The impact of the electricity crisis on the economy in 2008 and beyond looks set to reverse the capitalisation rate trend. Higher capitalisation rates, of course, equal lower property values," says Bell.

"Higher fuel prices, in tandem with electricity shortages, are also affecting the demand pattern for commercial and industrial property. The premium on existing properties close to major urban areas is likely to increase. The fuel factor will have the same effect on vacant land and this could be exacerbated if developers find that electricity is easier to obtain for projects close to built-up areas." – Kara Michaels

Property24 2008/05/06