For a two year period, during a golden window of time, starting in the very late 1990s, overnight fortunes were made by CRE investors in South Africa.
Against a backdrop of terrifyingly high interest rates, and the divestment of property by the major life houses and owner occupiers, brave investors (like Zenprop. Griffon, RMB, Collins, Atterbury etc.) were acquisitive. In the most lucrative transactions going, properties were bought with long-dated, triple net leases. in simple terms, these leases were taken to financial institutions and discounted back. The process went something like this: “for this lease delivering 20 beans a month, escalating at 8% per annum, and running for 10 years, please give me 1.500 beans in my hand now”.
In the juiciest deals, the discounted value of these leases exceeded the sales prices of these properties. For example, the sales price was 1,400 beans, the discounted value of the lease was 1,500. In simple terms, for no cash down (and some cash upside), you could pick up a high quality multi million Rand asset, on a fully repairing and maintaining lease. While, for cash flow purposes, your asset would be sterile for the duration of the lease, on termination of the lease, your rental-generating asset would be worth a fortune.
Over 20 years later, we may have a similar perfect storm upon us now. Solar power.
This article lifts the veil on solar – the opportunities, the benchmarks and the landmines
Ask yourself…
For property owners, familiar with purchase prices, ANIs or NOIs and yields or cap rates, the maths is very familiar.
Solar plant is the capex or purchase price. So let’s say R10M.
The NOI or income, is the electricity cost this plant saves you, net of costs**. How is this calculated? If your average day time cost of power is R1.90 kWh and this plant produces 1.64M kWhs / year (and it costs**, say, 20% to do this), you’re looking at an annual saving of R2.5M / year.
I.e. solar gives you a yield of 25.0%. (R2.5M / R10M)
Whether the yield is packaged as a roof rental or as a separate line item in the property’s NOI, it results in property valuation increases.
Except for these¹ catches, the investment decision for solar doesn’t get any simpler.
(** Unlike solar, a property investment does not net depreciate. So, to make the transactions comparable, the costs above include a generous accrual for replacement of parts / plant)
Where is solar most profitable?
On properties where their electricity usage tracks the sun, and runs 7 days / week. Examples of this: retail, hospitals, cold storage.
Solar models work even better, where (day time) power tariffs are high.
Solar provides an additional benefit where you’re seeing day time peaks on notified maximum demand (the maximum energy required to service your property).
(Resi, for example, is less attractive. Because here your major power demands of cooking, heating, geysers, entertainment etc. happens after sunset. In addition, without wheeling (see below), the sizing of solar on industrial roofs should be limited to the tenant’s power demand.)
Here the property owner “does it yourself”. They engineer, procure and construct (aka EPC). This carries the highest risks, but comes with the highest returns.
With these once-off projects, the property owner finances, develops and owns their plant.
The EPC work is generally subcontracted to a specialist. In turn, sometimes these specialists can act as “middleman”, further subcontracting the construction work out.
In the leanest pricing model, EPC costs to the property fund are roughly
Ongoing annual operations and maintenance costs (excluding capital expenditure) on solar for commercial real estate can run at roughly 1.5% of the capex.
Here the specialist gets your roof, and is responsible for everything solar related.
Instead of paying the municipality tariff, say R1.90 per kWh, you will buy your power from the solar specialist using your roof – and this can come in at say R1.40 to R1.50 per kWh (for medium solar radiation areas in SA).
Generally property funds still charge tenants the same, pocketing the delta.
Your PPA partner is responsible for equity and debt funding, for maintenance and for the ongoing creation of power.
These deals generally come with
This is a “best of both worlds” approach.
Here the property owner gets to delegate the risky of installing and running an IP-intensive solar plant to a specialist.
In turn, the specialist is incentivised to deliver the goods to the property owner.
How it’s structured?
As covered above, depending on your property’s energy usage profile, solar can reduce / flatten your midday energy consumption peak. This reduction in notified maximum demand (the maximum energy required to service your property), will reduce your monthly fixed energy costs.
This NMD relates to that moment during the previous month or year, when energy demand spiked to maximum. The penalty for this once-off spike can run for either/both a calendar year or month. The penalty is calculated as the difference between your threshold kVA amount, and the maximum amount of power used during any 30 minute period, multiplied by a penalty factor.
Onto the prices. Grid energy in SA costs an average of c.R1.90 / kWh, escalating annually.
Solar costs, per kWh come in as follows:
Battery- and diesel-powered energy ranges from R4 to R12 / kWh. (With battery costs coming down, and generator costs going up)
For a medium radiation location, it costs roughly R10M to develop 1MW of solar output. (This value moves based on exchange rates and (growing) solar panel output). With increasingly powerful panels, 1MW takes up around 7,500 sqm of roof.
When solar is supported by comprehensive back up power solutions, it can deliver ongoing power. This enables retail tenants to trade, undisrupted, improving turnover rentals, and boosting occupancy levels. All tenants are attracted to premises that are load-shedding proof.
Solar, as a low carbon source of energy, delivering an approximate saving of 660 grams per kWh, can reduce carbon emissions, and mitigate the risk of climate change.
While only 1/8th the value of total property, the commercial property industry is understood to be responsible for half of the industry’s 28% operations carbon emissions. Self-generating power reduces the ratio of carbon intensive energy.
Both of the above play into investor demand for climate-friendly assets.
The construction and maintenance of solar power is responsible for both creating employment and training in alternative energy spheres – enabling a just transition to a decarbonised world. It is anticipated that the implementation of solar in Africa will create an estimated 321K new jobs.
In summary: solar makes business sense, makes environmental sense, and contributes to the long term sustainability of the industry by improving the social fabric of the country.
Effect of power cuts
Not good.
Why? Because solar can’t provide predictable power. The simple passing of a cloud across the sun can drop output, and trip the property loads dependent on it. Therefore, during loadshedding (when no backup grid power is available), and assuming no backup power solutions (genny/battery), solar is turned off.
Catch¹: Paradoxically, despite the sun emitting maximum rays and the need for power during loadshedding, solar for commercial real estate can not deliver power to a property. Technology may, in the future, however, change this. (Solar for residential, because it is generally always supported by powerful batteries, does not suffer from the same issue)
Wheeling is when solar energy is sold/transmitted to a third party outside your property boundary.
The municipality/local government takes a fee for processing the transmission of this power.
This is standard practice: in SA, municipalities make significant money by selling Eskom power to residents at a mark up. Further, as a result of loadshedding, municipalities’ revenues have been hard hit. Without power to sell, they can’t make a margin on these electricity sales. So municipalities are incentivised to wheel.
In simple terms: Either they wheel and make a margin on the solar power. Or they don’t, and they make no money.
This wheeling fee can range from 5c to 70c per kWh. Where the cost to generate power and wheeling fee is too high, the cost of such solar power can get outpriced.
Other catches¹ around solar for commercial real estate:
Other risks – we’ve heard the horror stories
We’ve seen some fairly misleading and confusing articles on this.
We demystify this. The maths around solar for commercial real estate is pretty simple.
First ensure your roof can support the weight of solar kit (individually, panels can weigh between 23kgs and 28 kgs). Some (roughly 15% to 35% of) roofs can’t carry the extra weight.
Then deduct non-usable roof area – e.g. roof furniture like HVACs and lifts, service walkways, and south facing steep-pitched roofs.
From here, it’s straight forward maths.
You take your average panel size of 2.6 sqm.
Take your available roof area, and reduce it by say 15% for solar service walk ways and other (to be conservative). So, for, say, a 5,000 sqm flat roof, you’re down to 4,250 sqm.
Number panels = 4,250 sqm total usable roof area / 2.6 sqm size per panel = 1,635 panels.
Power output = number panels x watts per panel = 1,635 x 550W = 899,250W or 899kW. (Obviously using the same number of lower-powered, older panels of, say, 345W, would give you only 546kW).
This is what peak sun output, without any performance ratio adjustments, looks like.
From here, you want to make various conservative adjustments – e.g. for conversion from DC to AC / system loss and interference (made up of reflection, temp, mismatches, clipping, inverters, shade etc.). This total can approximate 20%.
Once done, you’re at 719kW peak output. This is a drop in the ocean for Eskom’s total peak grid output of 30GW, or 30,000,000kW. But every solar plant counts!
To get to daily kWhs, apply an average 5 hours of peak sun a day, and your system is delivering 3,597kWH per day.
Where you or your tenants can’t use all this power, you will want to have wheeling in place to be able to sell the surplus power to other parties.
Thank you to many solar experts – you know who you are – for helping me with this learning journey. Special thanks to Jono Baer at PPi / SSE for patiently and transparently walking me through large parts of this learning curve. Hopefully, by putting this knowledge down in writing, I can extend the favour.
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