By Milenko Rajak, Senior Consultant Galetti Corporate Real Estate
As South African businesses continue to feel the effects of the current economic crisis, everyone is searching for sustainable and viable options to reduce costs. This is evident in the wave of consolidations and reduction of space usage, as businesses try to cut down on their largest expenditures – property, energy, and labour.
Businesses require a certain amount of energy, usually in the form of electricity, to run, so how can the cost of energy be lowered without using less of it, while increasing the property value?
What are the options?
There is an essential relation between energy costs and property – the electrical energy supply has a direct impact on property and rental costs.
South Africans have limited options when it comes to electricity suppliers, which currently consist of either Eskom or local municipalities. Unfortunately, attempts to “go green” and make use of renewable energy are still in their infancy. This leaves businesses with only two options for electricity supply.
The price difference between the Eskom and municipal supply is ranging from 35% to 65%, and the resale of electricity represents a major portion of municipalities’ income. With Eskom’s rates being much lower than what a municipality might charge, massive savings could be made. This also increases the value of properties located in areas receiving electricity supply from Eskom, rather than a municipality.
The importance of location
Businesses that are large energy users, such as steel fabrication factories, foundries, data centers, etc. require round-the-clock energy and large areas of land to operate. As an example, a generic industrial property or a factory of 5000m2 on a 10 000m2 site consuming 4MVA of electricity, would likely cost around R40 million or be leased at around R4.8 million a year. Such factory would run for around 8000 hours per year, operating for 24 hours a day, seven days a week, every day of the year (accounting for shutdowns for maintenance and repairs). The energy consumption amounts to at least 32 000 000 kWh (kilowatts) of electricity.
If this factory were located in an area supplied by Eskom, the electricity supply would cost around R32 million per annum, while receiving supply from the municipal network would cost on average around R48 million per annum. Taking into account the cost of the property and land, this ongoing price differential (R16 million per year) would justify relocating from a municipal supply area to an Eskom supply area. This relocation would save the business massive costs in the future. If other high energy users follow such relocation, it would be logical to assume that the increase in demand and reduction of the energy costs will increase the value of the properties in the Eskom supply area. If only a small saving in energy cost is passed onto the value of the property, massive value can be added to properties located in Eskom supply areas, over those located in municipal supply areas.
Land situated in Eskom supply areas is many times more valuable to high-energy users than land in areas that rely on municipal supply. The potential saving on electricity costs is adding value to many properties, even in cases where the location may not be completely ideal.
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