Beyond the infrastructure challenge

Posted On Tuesday, 15 May 2007 02:00 Published by eProp Commercial Property News
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There are some broader implications of South Africa’s groaning infrastructure for investors in general and Property Unit Trusts (PUTs) in particular

Infrastructure IndustryAs some Johannesburg residents and business owners are counting the cost of the recent 3-day electricity outage and preparing to sue for lost income, there are some broader implications of South Africa’s groaning infrastructure for investors in general and Property Unit Trusts (PUTs) in particular.

Eskom has been called all sorts of names, usually ironic and mostly unkind, and disaster stories of blackouts abound in the media. Beyond the inconvenience suffered by residents, businesses in the area experienced large losses, much of which can never be recovered.

The cost to the South African economy of the generally deteriorating national power supply, and inefficiencies because of poor infrastructure, is estimated to be between a massive R2,9-billion and R8,6-billion annually. In addition, the maintenance backlog has been put at R5-billion, according to the annual report of the accelerated and shared growth initiative (Asgisa). Consumers throughout the country have been warned of “darker days to come” as municipalities on a national scale are lagging in terms of technical asset management.

For building developers, the implications are clear. They will need to include back-up generators as a matter of principle in all of their new projects.

“But it’s not only power that we need to consider,” says Association of Property Unit Trusts spokesman, Craig Hallowes. “If the doom sayers are right, we will have to start incorporating water reservoirs in new buildings. We are seeing some tenants who want backup generators written into their lease agreements. I expect that this is just the start of a trend and we are likely to see such requests increasing.”

It is already very common that the development of road and transport networks is necessary for a new property project to receive planning permission. Other infrastructure could become a necessity too.

“This is expected to raise the cost of owning and developing property,” notes Hallowes. “Not only will development costs be affected, but running costs too. This is compounding the problems that our industry already faces – skills shortages, a lack of materials and delays in council planning permission and zoning applications.”

Councils, already struggling with approval times due to a lack of resources, are restricting additional rezoning until the required infrastructure is in place. For this reason, certain areas already have a moratorium on further development.

The infrastructure crisis will also impact negatively on property owners via turnover clauses. If a lease includes a turnover clause, property owners will suffer along with their tenants. In the recent outage in Bedfordview, the loss of business has been estimated to run into millions, which may also mean lost revenue for the owners.

Perhaps the most worrying aspect of this is the fact that there is no quick fix. Any solution to South Africa’s problems will take, literally, years to achieve. The lead time for new power stations, for raising capacity and improving delivery is upwards of five years – it is not simply a matter of laying new cables.

For a PUT investor this is both good and bad news. The supply of new developments may be restricted, so PUTs will benefit as they already own developed properties. The supply squeeze is also expected to flow through to increased rental income. In addition, PUTs have a well-diversified portfolio of properties, so an outage in one area will have only a relatively minor impact on the overall performance of the PUT.

The load sharing and rolling power cuts in the Western Cape last year were shrugged off by the market and PUTs saw returns of around 20% for the year to end March 2007.

For those properties which do have emergency generators and other infrastructure, they will be able to attract a premium on rentals.

However, running costs are expected to rise as are the costs of a new development, which may impinge on near term growth.

 

Last modified on Saturday, 02 November 2013 14:00

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