Last week NERSA decided to allow a further above-inflation tariff hike.
Whilst the 9.4% 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.
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.
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 first 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
Implication for residential 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. FNB uses 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
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, therefore, building statistics show an increasing
portion of building activity being flats and townhouses, much of this
assumed to be sectional title, as opposed to free standing houses, the
former being more land efficient and often more economical to maintain
and run too.
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. 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.
FNB expects 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.
Using SARB Household Consumption Expenditure data, FNB sees 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.
Impact Commercial Property
The operating cost impact of electricity tariff hikes has been
significant on the commercial property side too, especially in the area
of retail property. For all commercial property, IPD data shows
electricity costs in terms of Rand/Square Metre/Month rising by a sharp
216.4% from 2008 to the first half of 2018. This is compared to 115.7%
for total operating cost over the same period, and only 88.7% increase
for total operating cost/square metre excluding electricity.
In the process, this has meant that the electricity cost component of
property operating costs has risen from 21.1% of total operating cost
in 2007 to a first half 2018 percentage of 31.1%.
Electricity has thus become a big deal for property owners and occupants over the past decade.
This most recent 31.1% estimate was slightly down on the 34% high of
2017, with electricity price inflation having been more moderate from
mid-2017 to mid-2018. But the recently announced hike suggests the
likelihood of renewed increase in electricity’s share of total operating
This then begs the question as to whether such operating cost increases, in a toughening economic environment, would “crowd out” a portion of rental growth that otherwise may have occurred in a stronger market, given financial pressure on tenants.
While the electricity cost portion of operating costs is highest in
the area of industrial and warehouse property (35.4%), retail property
operating cost in terms of Rand/per square metre/month is far higher
than industrial and warehouse property, so the electricity cost/square
metre/month in retail property averages R29.3, compared to a far lower
R15.3 for office space and R6.6 for industrial and warehouse space.
The potential impact of major electricity tariff hikes would thus
appear highest in the area of retail property, depending on how one
In short, electricity supply cost inflation looks set to accelerate once more.
For the property sector this looks like “more of the same” if one looks at high electricity cost inflation over the past decade.
On the residential side, FNB expects 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 free standing homes. FNB also expects 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
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.
Electricity inflation can also be a boost for “green” building demand where energy efficiently can be improved.
And, of course, on the retail Property side, where Electricity
Cost/Square Metre is highest of the major property categories, renewed
hiking can further encourage the drive towards retail alternatives such
as online shopping.
Above, FNB have focused on the magnitudes by which electricity costs
have risen and the direct impact on affordability for households and
But there are potential indirect impacts too, via the economy. A lack
of reliable and affordable electricity can impact negatively on near
term economy-wide production (GDP, or Gross Domestic Product), and on
longer term growth through dampening sentiment and future investment in
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.