Electricity & property operating costs

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16 Apr 2013

Last month’s news that power utility Eskom had been refused its application for a 16 percent a year tariff hike for five years, instead being granted an 8 percent hike, is good news for the commercial property sector which is being strangled by operating costs.

Last month’s news that power utility Eskom had been refused its application for a 16 percent a year tariff hike for five years, instead being granted an 8 percent hike, is good news for the commercial property sector which is being strangled by operating costs.

This is according to Org Geldenhuys, managing director of property development and management company, Abacus Divisions.

“Although the 8 percent hike is still above inflation, the sting in the tail is a lot less - because the 16 percent hike, if granted, would have been disastrous, and not just for the commercial property market.”

Geldenhuys says operating charges like rates and taxes, electricity and municipal charges have had a major impact on landlords, who have been saddled with soaring operating expenses while, all the time, being unable to push through increased rentals.

He says tenants pay for electricity costs and one must remember that if these costs are punitive, tenants have less money to spend and are squeezed more financially - and this ultimately has an effect on the rentals they can afford, which has an effect on landlords at the end of the day.

“It is a tenant's market and they are, right now, calling the shots and many landlords are just not able to push through increased rentals.”

He notes that office vacancy rates are still high and tenants have a gun to the head’s of landlords - they hold all the cards.

“The lower electricity costs would have a positive effect on listed property companies, and would enable them to reign in some of their operational expenses.

Neil Stuart-Findley, portfolio manager at Investec Asset Management, says administered price rises above inflation were a concern for the industry and would continue to be a feature of results going forward.

According to Stuart-Findley, the bottom-line effect for listed groups varied significantly, depending on management's ability to offset this cost inflation through top-line rental growth.

Generally companies with exposure to dominant regional shopping centres were able to trade far more positively and were able to negotiate decent increases - as well as good renewal rates at the end of rental contracts.

Geldenhuys says the office market space is really battling to negotiate increases and in many cases rentals were decreasing in real terms.

“On the upside, had Eskom’s application for a 16 percent hike gone through, many companies with exposure to the office market segment would have been severely affected.”

In some instances it could have been the last straw, he adds.

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