Un­der pres­sure

Mega-malls no longer bring­ing in the big bucks

Finweek English Edition - - Property - JOAN MULLER

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

MAR­KET SEG­MENTS RANKED BY RE­TURNS IN 2006

Source: IPD

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