Will mall ma­nia mis­fire?

Re­tail sales hit the floor but 200 shop­ping cen­tres are in pipe­line

Finweek English Edition - - Openers - JOAN MULLER

THE SHOP­PING CEN­TRE de­vel­op­ment frenzy that’s gripped South Africa over the past five years – amid what’s ar­guably been the coun­try’s big­gest con­sumer spending party ever – has added close to 2,5m sq m of new re­tail space to the mar­ket. That’s roughly equiv­a­lent to 20 Sand­ton City’s, one of SA’s big­gest shop­ping malls.

An­other 200 or so new malls are cur­rently un­der construction or on the draw­ing boards ac­cord­ing to the lat­est fig­ures from the SA Coun­cil of Shop­ping Cen­tres (SACSC). If all those de­vel­op­ments go ahead it could add at least 1,3m sq m of re­tail space to what some would ar­gue is al­ready an over­traded mar­ket.

That begs the ques­tion whether de­vel­op­ers and re­tail­ers are per­haps over­es­ti­mat­ing SA’s ap­petite for re­tail ther­apy and the po­ten­tial growth in house­hold in­come to sup­port so many new cen­tres.

Ad­mit­tedly, whether SA is over-shopped (or head­ing in that di­rec­tion) isn’t a new de­bate. Three years ago, at the SA Prop­erty Own­ers’ As­so­ci­a­tion’s an­nual con­ven­tion at Sun City, a num­ber of in­dus­try play­ers voiced con­cern about re­tail­ers’ ag­gres­sive roll­out of new stores. At the time sug­ges­tions that de­vel­op­ers and re­tail­ers may be a tad overzeal­ous in their ex­pan­sion drives were quickly dis­missed.

Af­ter all, back in 2005 re­tail trade was pump­ing and de­mand for new malls from a shop­ping-mad na­tion seemed in­sa­tiable. The fact that re­tail was still SA’s best per­form­ing real es­tate sec­tor, with to­tal re­turns of 33% in 2005 (see IPD ta­ble), was a fur­ther in­cen­tive for de­vel­op­ers and in­vestors to re­main on the shop­ping cen­tre band­wagon.

How­ever, three years on re­tail sales have hit the floor, rais­ing re­newed ques­tions about the sus­tain­abil­ity of SA’s ever-grow­ing pool of shop­ping cen­tres.

Re­cent earn­ings fig­ures re­ported by a num­ber of na­tional re­tail­ers and shop­ping cen­tre own­ers cer­tainly sug­gest the SA re­tail in­dus­try could be head­ing for a fall-out of some sorts. The cracks are al­ready start-

ing to show in smaller neigh­bour­hood and con­ve­nience cen­tres, which are gen­er­ally prov­ing to be more vul­ner­a­ble in the cur­rent con­sumer down­turn than larger malls.

Old Mu­tual-man­aged listed prop­erty fund SA Cor­po­rate Real Es­tate, which has a R5bn port­fo­lio of shop­ping cen­tres mostly smaller than 35 000sq m, last month re­ported a dis­ap­point­ing 1% slide in in­come pay­outs on the back of ris­ing shop­ping cen­tre va­can­cies and slower rental growth.

“A year ago few would have an­tic­i­pated just how tough the re­tail en­vi­ron­ment would get,” says SA Cor­po­rate CEO Craig Ewin. “No doubt we’re find­ing it more dif­fi­cult to let re­tail space. And we may have to soften on lease terms to close deals.”

By con­trast, re­tail­fo­cused prop­erty stocks with ex­po­sure to domi- nant re­gional malls – such as Hyprop In­vest­ments and Growth­point Prop­er­ties – are still sit­ting rel­a­tively pretty.

Growth­point’s R9,7bn re­tail port­fo­lio has yet to ex­pe­ri­ence any no­tice­able drop in foot traf­fic or trad­ing den­si­ties (turnover di­vided by gross let­table area).

Growth­point CEO Nor­bert Sasse says there’s no doubt SA con­sumers are still spending, al­though peo­ple are buy­ing down. “That may ex­plain why trade in big­ger malls with a large per­cent­age of na­tional re­tail­ers is still hold­ing up, as such cen­tres pro­vide enough va­ri­ety to do com­par­a­tive shop­ping.”

But Sasse con­cedes even re­gional malls aren’t en­tirely im­mune to re­tail cy­cles. He says re­tail­ers are adopt­ing a more moderate store ex­pan­sion ap­proach, which is mak­ing it in­creas­ingly dif­fi­cult to lure ten­ants to new shop­ping cen­tres.

Na­tional re­tail- ers who at­tended the SACSC an­nual African shop­ping cen­tre congress held in Dur­ban 10 days ago told del­e­gates in no un­cer­tain terms they’ll no longer rush into ev­ery new shop­ping cen­tre just be­cause their com­peti­tors may beat them to it.

Mass­mart CEO Grant Pat­ti­son says: “Over the past 10 years ev­ery­thing re­tail­ers did worked, which has per­haps led to an over­con­fi­dence. But it’s now a given that we’ll start clos­ing un­der­per­form­ing stores and fo­cus more at­ten­tion on space plan­ning.”

The Mr Price Group has adopted a sim­i­lar ap­proach. Greg Az­zopardi, real es­tate MD at the Mr Price Group, says more at­ten­tion will have to be given to mar­ket re­search to en­sure re­tail­ers se­lect the right sites. Says Az­zopardi: “I’ve never seen a mar­ket re­search doc­u­ment that says don’t build. The re­search clearly needs to be a lot deeper and we need to ask the right ques­tions.”

At­tract­ing the right ten­ant mix, cen­tre de­sign, size and, of course, lo­ca­tion has be­come more crit­i­cal than ever, says Paul Simp­son, CEO of newly formed prop­erty com­pany RED de­vel­op­ments and for­mer real es­tate head at Wool­worths.

But Simp­son dis­misses the no­tion that de­vel­op­ers and re­tail­ers have been reck­less in their ex­pan­sion drive and push­ing the mar­ket to sat­u­ra­tion point. “Far from it,” says Simp­son. “Mil­lions of new, highly as­pi­ra­tional con­sumers ea­ger to shop have en­tered the mar­ket over the past decade. And the fact that we’ve yet to see a marked ero­sion of re­tail trad­ing den­si­ties im­plies the growth in new shop­ping cen­tre space hasn’t out­stripped the growth in SA’s cus­tomer base.”

But Simp­son ad­mits there may be an over­hang of space in some ar­eas, notably Four­ways (north of Jo­han­nes­burg), which has seen huge growth in its re­tail of­fer­ings in re­cent years. But that’s only a tem­po­rary sit­u­a­tion, with pop­u­la­tion growth likely to play catch-up quickly.

Simp­son says over-de­vel­op­ment in ar­eas such as Four­ways has hap­pened by de­fault, where older shop­ping cen­tres haven’t moved with the times. “That’s prompted new play­ers to take the gap and cre­ate ex­cit­ing shop­ping op­por­tu­ni­ties not avail­able pre­vi­ously, such as life­style cen­tres De­sign Quar­ter and Cedar Square.”

Adam Blow, di­rec­tor of de­vel­oper Zen­prop – which has among oth­ers De­sign Quar­ter (Four­ways) and Maponya Mall in Soweto (see box) in its sta­ble – has a sim­i­lar view. “Shop­ping cen­tres are ex­pen­sive an­i­mals. If the SA re­tail mar­ket was in­deed al­ready over­shot, there’s no way de­vel­op­ers would risk get­ting burnt by adding new space to the mar­ket.”

Blow says if you take a longer-term view, the SA re­tail mar­ket still has a long way to go to sat­u­ra­tion. How­ever, it’s in­evitable that de­vel­op­ers some­times get their tim­ing, lo­ca­tion and prod­uct of­fer­ings wrong.

Says Blow: “It can eas­ily take five to seven years from the day a new cen­tre is mooted un­til it opens its doors. Many things can change on the macro-eco­nomic front dur­ing that time that de­vel­op­ers and re­tail­ers have no con­trol over.”

Dirk Prinsloo, of mar­ket re­search com­pany Ur­ban Stud­ies, says the is­sue of over­sup­ply was raised as long ago as 1969 when SA had only 200 000sq m of re­tail space. The fact SA cur­rently has around 16m sq m of re­tail space clearly sug­gests those fears were mis­placed.

Says Prinsloo: “Don’t for­get that re­tail­ers have in re­cent years brought many new prod­uct of­fer­ings and brands to the mar­ket, which has cre­ated much ad­di­tional de­mand for re­tail space. The growth in home­ware and spe­cial­ity food stores is a case in point.”

How­ever, he con­cedes some new shop­ping cen­tres have been built too early and some are the wrong size. But he agrees with Simp­son that growth in new res­i­den­tial nodes will pro­vide enough house­holds to en­sure those cen­tres are able to gen­er­ate ac­cept­able re­turns on their in­vest­ment within a few years.

Mean­while, it re­mains to be seen how many new cen­tres will sprout out of the ground over the next two years and to what ex­tent – if any – those new of­fer­ings will can­ni­balise turnovers of ex­ist­ing malls.

It’s more than likely that a po­ten­tial over­build sit­u­a­tion will be kept in check by ris­ing build­ing costs and the high cost of debt fund­ing.

Con­sumers buy­ing down.

Nor­bert Sasse SA far from over-shopped.

Paul Simp­son

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