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Category:
Insurance
News /
Investments /
First National Bank
/ January 2008
What Could the 'Eskom Effect' be?
The impact of electricity production and distribution shortages on
the property market:
When one looks back over the years of economic or property data, it
is possible to identify certain spikes or troughs which may be
associated with a certain event. The early-1980s house price surge
could be termed the “Gold Boom Effect”, or one could call one of the
slumps in the rand in the late-1990s the “Emerging Markets Crisis
Effect”.
A
recent issue that begs consideration is, when we look back at 2008
property data in years to come, will an “Eskom Effect” be visible?
The
recent series of “rolling blackouts” has certainly got many tongues
wagging, and has caused much anger. But apart from the general
irritation caused by the power cuts, what could the real impact on
property market performance conceivably be?
There are two obvious ways in which the electricity production and
distribution shortages could conceivably impact upon the property
market.
Firstly, the crisis has the potential to impact negatively via its
negative impact upon economic growth.
Slower (than would have been the case in the absence of an
electricity shortage) economic growth would negatively impact on job
creation and household disposable income growth numbers, thus
slowing the growth in demand for residential property as well as
consumer demand. And consumer demand is crucial in driving the
demand for, and returns on, retail property.
Slower economic growth would also negatively affect the demand
growth for office and industrial space.
Simplistically, the above would suggest that property returns across
the board should suffer at the hands of the power shortage due to
its negative effect on demand for all of the various categories of
property.
But
as we know, the real world is never that simple.
Offsetting the negative effect either partly or wholly is the impact
that electricity capacity constraints could conceivably have on the
supply of new property stock.
My
expectation of growing supply-side constraints as 2010 approaches,
as the economy grows faster, and as the fixed investment boom
accelerates, has been a cornerstone in my view that property returns
will excel in the coming years, and that even residential property
can make a comeback. The latest electricity crisis just adds to this
belief.
While we will need to wait for more detailed crisis plans to emerge
in the coming days and months, it seems clear that for some years,
electricity supply constraints will be a reality in SA.
This will require a demand management programme, involving a set of
incentives and controls aimed at improving the efficiency of South
Africa’s consumption, and indeed much of the talk in recent days has
already been focused on the need to slash power consumption.
Under these conditions, it is difficult to foresee new property
developments being able to secure new electricity supply at the same
pace as in the recent past. My guess is that it will be priority to
first make sure that existing installations are able to operate
relatively free of disruption (i.e. an end to rolling blackouts),
and that demand management programmes first free up capacity, before
allowing a proliferation of new electricity-guzzling projects.
It
is also conceivable that there could be some type of prioritisation
for new projects when allocating electricity supply, and my guess
here would be that commercial and industrial property developments,
much needed to facilitate an ever-expanding economy, could receive
priority over residential developments for a while, especially given
the low levels of vacant commercial and industrial space. Even
developments in these categories, however, could experience
limitations for some time
All
of this spells possible gloom from a property developer point of
view. However, the positive side is that the more severe the
constraints on the supply of new stock (and all other things equal),
the better for property returns.
So
in Eskom’s woes we have a double-edged sword for property returns,
the negative side emanating from the negative impact of an
electricity supply shortage on demand for property via the economic
impact, and the positive side coming from the impact on curbing
supply of new property stock.
The
big question in determining the overall impact on property is which
of the 2 impacts will be the most pronounced?
While we’ll need to wait for the outcome of deliberations by the
task team set up to address the current energy crisis, it is
probably fair to say that power scarcity is a relatively new
phenomenon to South Africans. As such, “gutfeel” would suggest that
there is significant potential for improvements in the efficiency of
electricity use, both in business as well as in SA’s household
sector.
To
achieve major energy savings, Eskom may have to do more than put out
appeals to save power on national TV. It may have to adjust the
pricing structure, and rationing has been discussed. But I suspect
we’ll all be amazed by how much energy efficiency can improve when
push comes to shove.
While tough to quantify the energy saving potential, if one buys
into the view that it is significant, then at this stage we should
probably not entertain the view that business and economic growth
will be brought to a grinding halt (though admittedly there must be
some negative impact)
Efficient utilisation of space, be it residential space or space in
the workplace, is also an area where South Africans are arguably
well-behind many countries in the world due to a relative abundance
of it in bygone years.
While we have witnessed a gradual improvement in space utilisation
as scarcity grows and rentals accelerate, the potential effect of
Eskom in constraining new property development may well serve to
accelerate efficient space utilisation, driving densification in
both work and living space (although admittedly this is not always
an easy task and often takes the redesigning of facilities).
In
conclusion, therefore, while the potential impact is almost impossible to
quantify due to the amazing ability of humans to adapt (so take the
various financial estimates of the Eskom effect with a pinch of
salt), it is fair to say that there has to be some negative impact
on business and economic growth.
However, because SA is relatively new to demand management both for
electricity as well as for space, my feeling is that the business
growth ceiling that Eskom places on South Africa is perhaps a little
higher than what the alarmists would have one believe, for the time
being at least.
As
a result, my view is that the “Energy Crisis” will have a greater
negative impact on the supply of new property stock in next few
years than on business and economic growth.
The
net effect of all of this, I believe therefore, will be positive for
both commercial and residential property returns.
From a property development point of view, however, I am far less
optimistic, and the negative impact on the supply of new stock could
be significant. This doesn’t necessarily mean negative growth in new
developments but merely slower positive growth than would otherwise
have been the case.
Not
all would be lost for the building construction industry, however,
as a greater focus on alterations and additions to existing
buildings could be stimulated by the power issue, as the drive
towards “greener” buildings and better space utilisation is stepped
up.
There
is as always, however, a key risk to this view.
I haven’t touched on how confidence levels both in SA as well as
abroad towards SA have been affected by all of this.
Realistically, we need to anticipate various supply side constraints
during an accelerating economic growth phase, and during a major
fixed investment boom. Such constraints are fairly normal in most
booms, as it is seldom that all suppliers increase their capacity to
supply in sync. We’ve already experienced some periodic shortages
in materials, now power, and I expect that this will not be the
last.
But, unfortunately, many people don’t understand the normality of
some of this, and interpret these periodic shortages as just another
sign of a country going backwards. Will this contribute to a rise in
emigration rates after a seeming decline a few years ago? Will
foreign investment be curbed not only by actual power constraints
but due to perception issues (misplaced or not)?
Such questions cannot be answered yet, as much depends on how Eskom
makes amends to its handling of the issue in the weeks and months to
come. The more significant the negative impact on residents’ and
investors’ confidence is, the more the scale tips towards the net
impact on property returns being negative.
At
this stage, though, I take the early view that the sword (net effect
of the energy shortage) will be double-edged, i.e. positive for
property returns but negative for new property development.
Source: ITInews – Insurance
Times and Investments Online
www.itinews.co.za
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