The load-shedding that has been experienced by South Africans over the past few months has a severe impact on all who depend on reliable energy. Some have attempted to quantify the effect of continual load-shedding, and the figures are astronomical — R500m per day is the broadly quoted figure. As a result, property owners, tenants and users of buildings of all sizes and types feel the negative effect of an unsustainable, expensive and unreliable energy supply.
As president of the SA Institute of Valuers I am familiar with the pinch property owners and investors feel. So I have examined how the current energy crisis affects the industrial, commercial and residential property markets, and will outline what property valuers need to consider when valuing properties.
Energy costs — who benefits and who loses out?
There are winners and losers in the energy supply and cost dilemma. Landlords that invest in alternative energy sources for their properties are better off than those that don’t. Tenants will be attracted to the value-adds of sustainable energy supply. Lenders such as FNB are offering funding for solar photovoltaic systems, which enable property owners to invest in their property and improve its lettability (will a tenant pay the requested rent?) because it will not be affected by irregular energy supply.
However, there is a premium attached to solar PV solutions. The inconsistent and unreliable supply from the main grid does not help break down the barrier for entry either. Solar PV is still the preferred alternative since the fuel price has skyrocketed, making generators a less popular investment.
Alternatively, the retail property sector is the loser during the crisis. A retail property, like a mall, has two components that make up the energy cost. The tenants of the shops who pay per use, and the general operating expenses of the mall — lights in bathrooms, corridors, passages and parking spaces. All these need to be on all the time, and this is starting to become a thorn in the side of retail property owners, who are seeing their net operating profits erode.
Amid the energy crisis, how should property valuers respond?
There are three components valuers need to study when valuing a property in our current energy crisis:
- Cash flow. The operating cost of the property affects the net operating income, and when this is affected by an increase in energy costs, the capitalisation rate is affected. Therefore, the property value will moderate when the net operating income is less.
- Lettability. The valuer must factor in the lettability of the property. One with a sustainable energy supply will be more lettable than one that depends solely on the energy provision from the main grid.
- Saleability. The valuer should factor in the saleability of the property. When you have done your valuation, considering the cost and net operating income, sustainability, and the appeal of the building, as the valuer you must summarise these aspects and determine how saleable and liquid the property is. The more liquid the property, the more favourable the view; the less liquid the less favourable the view would be.
From an investor’s perspective, you would pour your capital into a sustainable property and not be entirely dependent on the energy grid. This type of property will attract more tenants.
Trends that will affect property values
Energy costs and reliability certainly affect all South Africans today. Two trends will dominate the property market as investors and developers combat the energy crisis:
- Sectoral planning. People will want to move into properties closer to their place of work, reducing travel costs and time. Historically, workers lived closer to industrial areas. So though residential areas are popping up in office nodes today, we will probably see an increase in office-to-residential conversions.
- Grid selection. The business will plan properties closer to energy grids with less likelihood of supply issues. I expect that smart property developers are likely to ascertain which areas are national key points (places that cannot experience load-shedding due to their national importance) and target them as hotspots for development.
All South Africans share the same feelings when the energy supply suddenly stops. A collective sigh, followed by expletives that can probably be heard in neighbouring countries each time the lights go out. However, sustainable solutions protect property owners and investors from the energy crisis only if the purse permits.
Countering unreliable energy supply and increased costs by adopting more sustainable energy solutions can add value to properties and benefit tenants and owners alike.