Mega-malls no longer bringing in the big bucks
Tretail- focused property funds – such as SA Retail and Hyprop – outperformed IPD’s benchmark by a significant margin. Both funds delivered total returns on underlying portfolios of more than 40% last year. HERE’S NO DENYING that commercial property as a sector has had an impressive run over the past three years, with total average returns of 27%/year – a far cry from the paltry 9% to 11% that investors had to be satisfied with between 2000 and 2002.
But a closer look at latest figures from the South African index of international research company Investment Property Databank (IPD) shows that not all sectors of the market performed equally well. In fact, the performance gap between various types of retail, industrial and office properties are quite significant.
The message from that is clear: investors can no longer bet on the market as a whole but need to become more selective. That’s particularly true for shopping centre investors, who are no longer sitting as pretty as before. Retail property investors have been in the pound seats in recent years, recording healthy income and capital growth on the back of SA’s ongoing consumer spending boom. But it seems that shopping centre investors are starting to feel the pinch as higher interest rates and high household indebtedness forces SA shoppers to tighten their purse strings.
Total returns on retail property slipped from 32,6% in 2005 to 27,4% in 2006. That compared to industrials at 31,1% (33,1%) and offices with a repeat performance of 24,5%.
Interestingly, the portfolios of listed
IPD figures show that among the various sub-sectors of the retail market super regional shopping centres – mega-malls typically exceeding 100 000 sq m – were the biggest loser, with total returns sliding to 25%, down from 36% in 2005. That saw super regional shopping centres dropping from second to ninth position on the overall performance rankings (see bar chart).
Neighbourhood shopping centres – smaller, suburban centres usually anchored by a SuperSpar, Pick ’n Pay Family Store and/or a Woolworths Food outlet – saw total returns slip from 26% to 25%.
However, not all types of shopping centres lost ground. Investors who last year put money into regional shopping centres – generally sized between 40 000 sq m and 100 000 sq m – would have seen returns remain steady at around 33%.
Kgaogela Mamabolo, IPD SA’s research manager, says the relatively poor performance of super regional shopping centres could be linked to increased traffic congestion in urban areas. “It seems that consumers are becoming increasingly averse to travel to large malls far from where they live. As more smaller shopping centres appear on suburban street corners consumers are able to do their shopping closer to home.’’
Mamabolo says it will be interesting to see what happens to the returns of the various types of shopping centres going forward as higher interest rates start to kick in. New township malls will be the ones to watch, as township developers could struggle to meet expected returns in a softer retail trading environment.
FNB property strategist John Loos has a similar view. He says retail property investors are likely to see further pressure on returns as the consumer boom continues to taper off. It also won’t help that there’s still a lot of new retail space expected to come on stream over the next year. Plans for just more than one million square metres of new retail space were passed last year – roughly equivalent in size to eight Sandton Cities.
That comes on top of the one million sq m of new shopping centre space already added to the market over the past two years.
Loos says the usual time lag between planning and completion of new shopping centres is unfortunate, with plenty of new stock expected to come on to the market this year just as demand for space is expected to wane. “The combination of dwindling demand growth and solid new supply is expected to translate into a further decline in the ratio of new real retail sales per new square metre of retail space.”
Loos says that could see the declining vacancy trend of the past few years start to reverse. IPD figures show that retail property vacancies dropped from 6% in 2001 to 3% last year. However, Loos doesn’t believe that the retail property market is heading for a long downturn. “Given my belief that the SA economy is on a long-term accelerating growth path any oversupply of shopping centre space will be taken up without too long a delay.”
Will township malls deliver expected returns? Kgaogela Mamabolo