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The electricity hike's impact on South African property

The electricity hike's impact on South African property

Author: Pranil Maharaj
Date: 2019-03-29

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

FNB expects that the approximate building size for new residential properties will decrease, in part influenced by growing electricity costs.

Over a period of time, sharply rising electricity costs also "crowd out" disposable income, some of which would otherwise be aimed at funding property purchases.

The overall impact of above-inflation tariff hikes

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 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.

Electricity inflation can also be a boost for "green" building demand.

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

It 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.