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How electricity, rates have squeezed owners, landlords

And homeowners can likely expect ‘more of the same’ …

The cumulative inflation rate in electricity over the past decade, as measured by the consumer price index (CPI), is a “massive” 274.45%, according to a new report from FNB Commercial Property Finance property sector strategist John Loos.

Loos uses the first quarter of 2008 as the start of this measurement as it was “about the time where the Eskom Crisis first gathered steam”. Over the same 10-year period, the increase for municipal rates and non-electricity utilities (i.e. water, sewerage, refuse removal) was 147.16%, effectively more than doubling over the period.

These cumulative inflation rates are well-above that of headline CPI, “which inflated by 79.55% in what has actually been a relatively low/moderate general inflation environment”. Electricity prices are up 3.5 times faster than inflation since 2008, with municipal rates and other utilities up nearly twice that of CPI.

Source: FNB

The decision by the National Energy Regulator of South Africa (Nersa) earlier this month to allow a “further above-inflation hike” of 9.4% for 2019 does not “appear too harsh in isolation”, says Loos, but “one has to evaluate the trend of tariff hikes well in excess of CPI inflation over more than a decade, which has significantly altered property operating costs and thus property affordability”.

A separate longer-term calculation by PowerOptimal CEO Dr Sean Moolman, using 1988 as the base, shows just how rapidly electricity prices have increased since 2008.

Source: PowerOptimal

On the residential property front, these sharply rising administered tariffs “have long since become a housing-related affordability challenge,” argues Loos. The bank calculates an electricity/per-capita-income ratio index starting in 2008 by using the CPI for electricity. “It shows that the electricity tariff increases applied to consumers have far outstripped per capita income growth, with this index increasing by a massive 92.15% from 2008” – effectively doubling over the past decade.

Loos says this “provides a strong incentive” for households to lower electricity consumption or to cut broader operating costs on the home to compensate for the sharp electricity cost increases … One way of doing this is to purchase a smaller home with fewer ‘frills’ such as swimming pools, which can add to operating costs significantly. “The other way is to cut electricity costs, either through more energy-efficient homes or alternative energy sources.”

Not surprisingly, says Loos, “building statistics show an increasing portion of building activity being flats and townhouses, much of this assumed to be sectional title, as opposed to free-standing houses, the former being more land efficient and often more economical to maintain and run too.

“From 27.9% of residential units’ plans passed in 2010, the ‘Flats and Townhouses’ category of Stats SA’s building stats rose to 40.9% of total units’ plans passed in 2018. Not all of this increase in this category’s share is due to municipal rates and utilities’ tariff increases, but we believe that this is a key contributor nowadays.”

Source: FNB

Over time, he says “sharply rising electricity costs also ‘crowd out’ disposable income, some of which would otherwise be aimed at funding property purchases”. 

“Using South African Reserve Bank Household Consumption Expenditure data, we see the portion of total consumer spend being spent on ‘Household Fuel and Power’ as having risen from 2.1% in 1975 to 3% by 2007, and then more sharply to 4.69% by 2017 in part due to sharp increases in power costs over the past decade.”

While for homeowners, increases in electricity and administered prices are eating into previously disposable income, for tenants the situation is slightly more nuanced. Electricity usage is generally recovered from tenants, but many (most) of the other utility charges and, obviously, rates, are not. In sectional title schemes, levies too are not. These have been rising at a rapid clip, sometimes at double-digit percentages year-on-year.

With rental inflation far more moderate – and an absence of pricing power for landlords in many markets – it is landlords who are having to absorb much of this inflation. Tax practitioners suggest that a majority of ‘buy to let’ residential properties are actually loss-making (not simply being dressed up to be).

The South African Revenue Service (Sars) is not exactly enamoured with rental enterprises being ‘loss-making’, particularly those owned by high-income earners. Section 20A of the Income Tax Act, which came into effect in the 2005 tax year, ring-fences any assessed losses of those in the highest marginal tax bracket, under specific circumstances. With rental income, Sars repeatedly insists that taxpayers somehow ensure a “reasonable prospect” of making a profit in future. But with such steep increases in administered prices, one has to question whether this is logical (and even possible).

Driving trends

Loos says homeowners can likely expect “more of the same” if one looks at high electricity cost inflation over the past decade. This will continue driving 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 free-standing homes, he says.

“We also expect the average size of units built to decline further, helped on in part by electricity tariff inflation, along with other rates and tariffs inflation which is also significant.”

Importantly, he notes that: “Each above-inflation tariff hike also adds to the motivation of households and businesses alike to become less dependent on the grid through finding alternative energy sources, and the upside of this is that it often promotes cleaner types of energy.”

There are indirect impacts too, argues Loos. “A lack of reliable and affordable electricity can impact negatively on near term economy-wide production (GDP), and on longer term growth through dampening sentiment and future investment in production capacity. It also exerts upward pressure on CPI inflation, although [it is] not a major driver of CPI inflation, and this can possibly mean that we have higher interest rates now than would have otherwise 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.”

Not a great environment in which to be a homeowner (and worse still, a landlord).

Hilton Tarrant works at YFM. He can still be contacted at hilton@moneyweb.co.za.

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The article is spot on. Eskom and local governments imagine that consumers are a bottomless pit of money to be tapped at will. Then SARS demands to know why your rental income is flat for the year.

These are people who clearly do not live in the real world, and yet they’re running the show.

Well constructed article Hilton,

Does Eskom provide free vaseline at least?

Rotten, bad buy of my life the sectional title unit. I thought I was buying in an affordable area and also buying security but it is just too expensive. It is equal to 75% of my bond payment because of rates and taxes, prep electricity, electricity charges and sewage charges. They also charge wrong tariff for electricity( switching of geyser and all the other electricity suggestions on how to save electricity never work.
I wish I live in Soweto and Tembisa and not pay even if I have backrooms and I am renting out a spaza to the not South Africans( this is so unfair that other people get away with not paying and the law abiding citizens gets abused)

And Soweto not an option I assume because it’s so far theb from work? More decent ontime commuter trains and subways would help massively..

And still they advertise “How to Become a Landlord”-seminars with Robert Kyosaki. Can someone from the MW community inform us all what is the money-making angle that I am missing?

The seminar. When something is heavily pushed you can be pretty sure the promotor’s incentive is to sell the product…

People should have listened to Magnus when said he repeatedly warned that BTL is a very BAD investment due to these exact same issues. Instead he was made out to be too negative and promoting his own business. Loos is still painting a rosy picture. It is much worse. Best investment I ever made was to sell my BTL.

Wait till they start charging us tax on the air that we breath!!!!!!

The Eskom-connected BEE projects, BEE owners of coal mines, BEE transport companies that deliver coal to Eskom, BEE engineering companies that build Kusile and Medupi, ANC cadres at municipalities that do not pay for electricity, and ANC ward counsellors found a way to sidestep the financial constraints from Treasury. These looters effectively laid an ambush for SARS. They positioned themselves above SARS in the financial statements of every company in South Africa. Companies pay tax on profit. Eskom extorts the profits before SARS can tax it. NERSA took over from Treasury to set economic and fiscal policy in South Africa

This parasitic strategy of the BEE looters do not only rob SARS of company tax revenue but also steals the Capital Gains Tax and estate duties because of the lower capital appreciation of properties and businesses.

Eskom, with the help of NERSA, under control of Luthuli House, basically syphones off the tax revenue and distribute it amongst the BEE looters before Treasury receives it. In effect, the ANC is stealing from itself. BEE projects and Luthuli House are stealing the taxes before Treasure can pay social grants. We can either have an economy, or we can have Eskom. We cannot have both.

People vote for the ANC to get n opportunity to steal from themselves.

Here’s where things get even WORSE than Hilton or myself can imagine Sensei, on the 8th of May tens of millions of ‘liberated’/members of the community will line up in the freezing cold in very long lines to…wait for it…vote straight back into power the self same gangstas, thugs and corrupt incompetents who are running this country into the ditch right now!
Now that is what keeps me awake at 2am pal! How about yourself?

@Sensei, you are so on the button again

Yup,its no secret that Eskom is now in fact holding the country to ransom

Eskom: Dont want to give us more money ?……eish, here’s another power cut for you……really, you smart people complaining again ?,here’s another blackout…now shut up and pay”

And so, like being prodded by a hot poker, we beg for relief, and capitulate to keep paying

All the while keeping those in power at Eskom[ excuse the pun ]firmly entrenched as they ride this gravy train all the way till the end

To add insult to injury, check the Eskom deals just pulled off by Cyril/brother in law Patrice Motsepe etc

Capiche ??

“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation”. Vladimir Lenin.

The ANC regime has adopted this philosophy. The use currency debasement to inflate asset prices and then use CGT to usurp a chunk of the value. The Eskom debacle is another form of taxation. Only a sector of the country pay for electricity- the rest get it for free by stealing it without fear of consequences. Eskom is vastly over staffed with cadres and above inflation increases on an ongoing basis are used to keep it afloat. The same sector pay again. Industry implodes.

What made anyone think that an organisation skilled at planting bombs outside nightclubs or shooting up school buses with AK47s could ever run a country?

@Richardthe Great …………well said, and am in full agreement

While everyone sits around their braai’s and complains about yet another unfair tax/blackout/incomprehensibly stupid move by our govt etc, they fail to see the BIG PICTURE instead:

1] Abolishment of the minority [ ie, those pesky whites and intelligentsia ]
2] Abolishment of the middle class [ this is a world wide agenda – speak to any taxpayer in USA/Europe etc too ]

Bear in mind, we have a SOCIALIST govt in power [ they even lay it out in their manifesto ! ]

The evacuation of the SA minority is an end goal, in order for the ‘transfer of wealth’ to take place

And the abolishment of the world middle class is an end goal for the elite, where at the end of the day you will have a tiny minority on the top, ruling over the easily governable masses [ dont believe me – watch Zimbabwe/China/and even SA in action ! ]

USA and Europe next [ you think those illegal refugee’s pouring in there is by ‘accident’ ?……]

” I believe because they say its so, they showed me things therefore it must real.

I had no need for independent thought because they who ruled had our best interest at heart, and the only sound we made was at the slaughter”

When I last calculated my COJ rates bill grew at 11% pa compounded for 10 years. What do I get:

Occasional filling of potholes
Sewerage spills
Unreliable refuse removal
A bit of tree felling in the roads
Squatters building shacks nearby polluting the air in winter.
Messy taxi rank nearby which has driven away business.
No investment projects
No prospect of pensioner discount in future.

My children are better off fleeing into the sectional title world.

It’s not only the price that hurts, the people standing around doing nothing being paid that hurts even more.
Wife and I went to do our weekly grocery shop this morning, also grab a breakfast.
Well Wimpy was closed but staff sitting waiting for the power to come on, lots of other shops open but dark and empty. p and P a light on every second aisle no one around ideal to shop lift. Very sad as the notice from Stage 2 to 4 was 5 minutes so people who could have stayed at home and come to work later were there already.

For a long time I have been a BTL supporter and participant.

But I took note of the comments and arguments for and against on this site and in the media.
I must admit – mostly to myself – that BTL in this country is dying a slow and painful death…imo.

I have BTL properties, some for more than 10 yrs, and in fact yesterday was updating the numbers and I am not breaking even… after more than ten years.

The property growth is dismal, creating a huge risk in a country where the government can decide to increase at their whim the rates etc. As a landlord you cannot just increase rentals, and just have to pay pay pay, or your electricity and water gets cut.

What was supposed to enhance a retirement portfolio, now is a nightmare. I have made the decision to sell, but that may also prove to be a challenge as the bueyers are far and few nowadays….with houses standing empty where I have never seen it.

Who knows where it will end, but rather cut your losses while you still have a (sort-off)choice in the matter and are able to sell.

I agree ehh1704, also been in the BTL since 1999, 7 tenants, rates etc. Is now killing all profits, for the last 5 years I have used “creative accounting” and cash only tenants to soften these rising costs, but it’s time to let this investment go, tenants can also afford that much….

Finally someone is talking about this.

It is not just electricity, rates + levies.

Can we talk about Levy collecting companies and legal firms, with their collections … sometimes you have to ask if its just worth it.

Then there are tenants not paying rent or not paying on time. The economy is pretty… landlords are feeling it and I am sure I am not the only one.

Then there are laws protecting tenants, at a disadvantage of landlords

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