The JSE’s R220bn real estate investment trust (Reit) sector, whose earnings are already squeezed by higher debt funding costs, faces further pressure from relentless load-shedding.
The energy-intense commercial property sector finds itself in something of a Catch-22: fork out millions to help keep South Africa Inc running during outages, or risk losing tenants.
The staggering cost of the electricity crisis is illustrated by numbers coming thick and fast from retailers and property heavyweights such as Growthpoint and Vukile.
Growthpoint owns the country’s biggest listed portfolio of retail, office and industrial buildings. Its sprawling footprint, which includes co-ownership of the V&A Waterfront in Cape Town, spans more than 400 properties worth R78bn.
By the end of June, says CEO Estienne de Klerk, the company will have spent R500m to provide backup power solutions for 3,000 retail, office and industrial tenants.
Renewable energy solutions will ... ensure we meet the daily shopping, leisure and Wi-Fi needs of the communities we serve
— Itumeleng Mothibeli
The capital outlay excludes the R10m-plus a month it spends these days on diesel to run the 330-odd generators it has installed.
However, most of the capital costs since load-shedding began in 2007 have gone towards renewable energy solutions, chiefly solar, and the rollout is being significantly ramped up.
De Klerk hopes that by end-June the company will have doubled its solar generation capacity to 27.4 megawatts-peak.
That will provide a welcome reprieve for Growthpoint tenants that still rely heavily on generators for backup power. As De Klerk points out: “The increased frequency of outages is forcing businesses to burn diesel at unprecedented rates.”
Last year’s sharp rise in fuel prices hasn’t helped. In the six months to end-December, Growthpoint spent just over R47m on diesel. In the fourth quarter, the bill climbed to more than R10m a month.
That amount excludes the V&A Waterfront, Growthpoint’s largest and most valuable asset, where 48 generators burnt through diesel worth an additional R14.8m in the second half of 2022.
Landlords recoup only part of the fuel costs from tenants. In Growthpoint’s office portfolio, where generators supply backup power to 1.2-million square metres, or just over 70% of total gross lettable area, diesel cost recovery is 60%.
However, De Klerk says recovery from retail tenants is minimal because shopping centres typically have large common areas and more comprehensive security requirements than office blocks.
Food and beverage outlets in malls also need additional support as they are often hit hardest by load-shedding. It’s also a sector that hasn’t yet fully recovered from losses during lockdowns.
At the V&A, Growthpoint and co-owner the Public Investment Corp have been footing the full monthly diesel bill on behalf of almost 1,000 tenants.
The positive spin-off for Reits investing heavily in backup power supply is that they’re helping tenants stay open for business during load-shedding. That should help stem tenant failures and, ultimately, keep a lid on vacancies
Retail-focused Vukile Property Fund has earmarked a capital investment of R350m to roll out solar and battery-driven backup power options to all tenants in the next nine months.
Vukile’s 30-plus shopping centres are mostly township and rural malls including Dobsonville Mall in Soweto, Daveyton Mall on the East Rand, Gugulethu Square in Cape Town and Maluti Crescent in Phuthaditjhaba.
Itumeleng Mothibeli, MD of Vukile Southern Africa, says 70% of the malls trade during load-shedding, mostly thanks to generators.
However, he says rising diesel and maintenance costs resulting from more frequent outages have made continued reliance on generators financially unsustainable.
Tenants’ total electricity bills increased by 25%-30% on average from January to October because of increased diesel usage, he says.
The company recovers a fairly large portion of diesel costs from tenants. Still, the total diesel spend at Vukile’ s malls will come to about R11.5m in the financial year to end-March.
Mothibeli says Vukile’s proposed solar PV and battery energy management solution will lower diesel expenses and maintenance costs, save many retailers the expense of installing their own backup systems and reduce the carbon and noise pollution caused by generators.
Notwithstanding the initial capital outlay, Mothibeli says solar power combined with battery storage costs less than grid power over time.
“Renewable energy solutions will therefore save money for both Vukile and its tenants in the long run. They will also ensure we meet the daily shopping, leisure and Wi-Fi needs of the communities we serve.”
Liberty Two Degrees (L2D) is adding solar capacity at Sandton City, neighbouring Nelson Mandela Square, Eastgate Shopping Centre near Bedfordview, Promenade Mall in Mitchells Plain and Midlands Mall in Pietermaritzburg.
CEO Amelia Beattie says additional investments in solar will ensure that by 2025 about 25% of L2D’s energy will come from renewable sources.
The positive spin-off for Reits investing heavily in backup power supply is that they’re helping tenants stay open for business during load-shedding. That should help stem tenant failures and, ultimately, keep a lid on vacancies.
Reducing reliance on the national grid will also aid the property sector to reach ESG targets.
However, in the short term, rising operating costs will be a drag on Reits’ earnings and dividend growth — at least until landlords start to recoup the capital outlay of solar installations through reduced monthly electricity and diesel bills.
In a comprehensive report on the impact of load-shedding on the listed property sector, Standard Bank’s wholly owned broker, SBG Securities, estimates diesel costs incurred by real estate stocks in the 2021/2022 financial years could erode earnings by 1%-1.5%. That excludes the cost of capital expenditure on solar installations.
SBG real estate analyst Pranita Daya says there is further downside risk from the more severe load-shedding in the fourth quarter, which would not be included in some companies’ 2022 financial year-ends.
Rocketing fuel consumption also means the cost of diesel as a proportion of property operating expenditure will rise from 1.5% (up to June 2022) to SBG’s base case of about 6% in 2023. SBG’s analyses assume recoveries of 75% on average.
Daya believes retail-focused portfolios are more vulnerable to higher load-shedding levels than office and industrial buildings. That’s based on shopping centres’ relatively high SMME component, which makes the sector more susceptible to business failures and rising vacancies.
She forecasts that retail vacancies will rise marginally to 4% from 3.6%. The likely knock-on of higher vacancies, coupled to increased occupancy costs due to load-shedding, is a more protracted recovery in rentals.
She expects retail rental reversions to weaken to an average -8% in 2023 compared to the current -6.9%. That said, Daya thinks the retail sector is nevertheless best suited for solar power optimisation given roof sizes and seven-day-a-week operating hours.
In fact, she says the ramp-up of solar power rollouts could provide a welcome tailwind for Reit earnings over time through higher property valuations and reduced reliance on diesel and Eskom.
Currently, less than 10% of the Reit sector’s energy requirements come from solar and other backup solutions. “So it just depends on how quickly landlords can increase their solar capacity,’’ Daya says.
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