Business by Candlelight?

In an article published in Business Day (7 February 2008), Nick Wilson analyses the effect that the shortage of electricity may have on the property cycle. He draws attention to the fact that if the crisis continues and property developers are no longer able to provide new stock and meet the expected demand, then the traditional property cycle could be altered significantly.

In Wilson’s interview with Chris Renecle, the Renprop MD predicts that the market will see a significant rise in rentals, as well as an increase in the prices of commercial and residential property. In a normal cycle, the commercial property market would be expected to slow down in 12-18 months, while the residential market would be experiencing reinvestment from various investors and speculators (Renecle). The current cycle has been greatly affected by a rising interest rate environment and this has resulted in traditional investors and speculators withdrawing significantly from the residential market (Renecle).

Alternatively, the commercial property market is currently buoyant and is expected to continue performing strongly for some time, while the softer residential market has seen a marked increase in rent because of a new lack of supply (Renecle). The JSE has also slipped recently, which usually causes an influx of reinvestment in residential property from speculators and investors for the next 12-18 months (Renecle). However, with the current shortage of electricity, developers may not be able to supply enough new residential and commercial property stock to meet the expected demand (Renecle). Consequently, this could cause an increase in the rentals and prices of both commercial and residential property (Renecle).

When it comes to energy consumption, Francois Viruly of Viruly Consulting suggests to Wilson that commercial developments tend to use less electricity than residential developments of a similar scale. Viruly believes that the tight market conditions will continue and that there will be a significant drop in development. While it was previously thought that rising building costs would negatively affect private sector development, a new dimension has been brought in terms of the energy crisis (Viruly). Viruly believes that developers may shift their focus to existing buildings and the renovation of B-grade office stock.

Ken Gerber, director of property services group Broll, told Wilson that the ability to provide backup power during blackouts has suddenly become a key concern for businesses with commercial premises, whether in the office, retail or industrial sector. In fact, being able to supply backup power to tenants through generators, inverters, battery banks or other sources has quickly become a determining factor in attracting and retaining clients, as well as achieving desired rentals (Gerber).

The provision of backup power has traditionally been a concern of electricity-sensitive businesses, such as those in the hi-tech manufacturing or information technology sector and call centers, but now it has become a major concern for even the smallest of businesses (Gerber). Those premises that already cater for full electrical backup can now command unprecedented rentals in a market where there is such a high demand (Gerber). Retailers will be pressing landlords who have not catered for such a demand to come up with a viable solution (Gerber).

The information in this article is courtesy of Nick Wilson (“Electricity Shortage may Affect Property Cycle”, Business Day, 7 February 2008).
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Business by Candlelight?

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