The effect of load shedding on South Africa’s REITs Returns

Abstract

Load shedding was first introduced in South Africa in October 2007 as a strategy to manage grid overload caused by increasing electricity demand that is surpassing supply, exacerbated by inadequate infrastructure maintenance. The economic repercussions of load shedding have been significant, particularly for various sectors of South Africa's economy. In 2023, the South African Property Owners Association conducted a survey on the impact of load shedding on the commercial real estate industry and its cost implications. This study aims to investigate the impact of load shedding on South Africa's Real Estate Investment Trusts (SA REITs) during the period from 2019 to 2023. Using the Autoregressive Distributed Lag (ARDL) model as the primary analytical tool, the study seeks to assess both the short- and long-term relationships between load shedding and South African REIT performance. Additionally, the Arbitrage Pricing Theory (APT) model is employed to examine the influence of macroeconomic factors on the returns of two REIT portfolios, with a specific focus on the effect of load shedding as a risk factor. The analysis evaluates the factor sensitivities and risk premiums associated with each macroeconomic factor. The results from the ARDL model indicate no significant long- term relationship between load shedding and REIT returns; however, the short-term analysis shows a positive, though statistically insignificant, relationship. Similarly, the APT model reveals that the load shedding factor is insignificant for both REIT portfolios, suggesting that the overall effect of load shedding on REIT returns remains inconclusive.