Ringing in better profits
Malls set to outperform m offices and industrials this year
IT APPEARS SHOPPERS are slowly returning to malls on the back of lower interest rates, which should translate into higher profits for retail property investors over the next 12 months. Hyprop Investments – South Africa’s biggest JSE-listed shopping centre owner, with malls such as Cape Town’s Canal Walk and Hyde Park, the Mall of Rosebank and The Glen in Johannesburg in its stable – has reported a noticeable up-tick in footfall and sales turnover since mid-November last year.
Hyprop CE Mike Rodel says early indications also point to an improved trading in December. “Consumers appear to be far more relaxed, which should translate into greater footfall and higher spend per head for the festive trading period.”
Rodel says it appears the improved outlook for consumer spending is prompting retailers to take a fresh look at expansion plans that may have been shelved during the recession. Hyprop has over recent months seen a steady increase in enquiries from retailers to expand existing stores and roll out new ones. For example, at Canal Walk a number of new stores were opened during fourth quarter 2010, including specialised retailer Toy Kingdom, Australian fashion chain Forever New, Inglot and Lu by Lolita, while Dis-Chem and Incredible Connection opened extended floor space early in December.
New leases have also recently been signed at Hyprop’s struggling Stoneridge centre near Modderfontein, east of Johannesburg. A new McDonald’s drive-thru will occupy currently vacant land next to Fruit ’n Veg in May, while The Garden Shop is set to take occupancy next to Adventure Golf in July.
Other industry players report similar recoveries in consumer spending and retail
space uptake that will boost the income streams of shopping centre owners.
Johan Engelbrecht, director of retail management at property services group JHI, says it’s seeing all categories of retailers gradually beginning to recover from a highly challenging trading period.
While that’s prompting retailers to reconsider their expansion strategies, Engelbrecht notes retailers remain cautious about opening stores in new shopping centre developments, opting instead to expand well-established and successful outlets in existing malls. Expansion projects worth more than R500m currently under way at shopping centres under JHI’s management including extensions at the Kolonnade Retail Park and Kolonnade Shopping Centre (Pretoria north) and at Greenstone Shopping Centre (Edenvale).
Property management company Broll’s research and marketing manager Sanett Uys says all indications point to declining retail vacancy rates in prime areas, increased consumer confidence levels and modest growth in gross retail rentals for this year. Uys expects final festive season trading figures at Broll-managed shopping centres of more than 20 000sq m to show year-on-year growth of 10% to 12% on average. She says the best performing merchandise categories last year included socalled catalogue stores, such as Verimark and Glomail, followed by cinemas, hardware stores, car services/repairs and junior department stores sized between 2 500sq m and 4 999sq m.
Uys says rental growth will be supported by limited new retail property stock coming on to the market over the next two years. Broll research shows a total of only 287 000sq m of new retail supply is expected to come on line this year, while
All indications point to declining retail vacancy rates in prime areas and increased consumer confidence levels
around 120 000sq m is planned for completion in 2012. Uys expects prime regional shopping centres to start showing rental growth as early as first half 2011, reversing the trend of rental declines experienced by large malls since early 2009.
Property economist Francois Viruly shares that view. He maintains the retail sector will lead the commercial real estate recovery in 2011, citing the improved economic growth outlook and lower interest rates as key drivers. Says Viruly: “Consensus forecasts suggest GDP growth will gradually rise from 3,6% in that first quarter to 4,3% in fourth quarter 2011. Research into SA’s commercial property returns indicates a 1% rise in GDP growth results on average in a 3% increase in total returns.”
Viruly expects the office and industrial property sectors to lag the retail property market, with the office sector still having some way to go to mop up the oversupply. Viruly says office vacancies will most likely only drop back to 2008 levels (below 10%) by year-end 2011. “And it’s unlikely rentals in the office sector will rise in real terms until vacancies rates have moved below the sector’s natural vacancy rate, estimated at around 8%.”
Although the manufacturing sector is re-stocking, Viruly says exporters will continue to feel the brunt of the strengthening rand. Therefore, prospects for the industrial property sector remain subdued.
Latest figures from the SA Property Owners’ Association/IPD SA biannual property indicator show offices were still leading the performance stakes in first half 2010, with a total return of 6,1%, which was followed by retail property (4,1%) and industrial property (3,7%), bringing the total return for SA’s three commercial property sectors in first half 2010 to 4,6%.
The report notes returns for shopping centres in first half 2010 were dampened by sharp increases in operating costs, such as electricity, rates and taxes. It will be interesting to see to what extent, if at all, shopping centres manage to close the gap with offices when IPD releases its performance figures for second half 2010 next month. IPD tracks the performance of large listed and unlisted commercial property portfolios worth around R100bn.