Retail property sector looking up

• Higher electricity, food and fuel costs will place increasing pressure on the disposable incomes of consumers

SA’s listed property funds report improving fundamentals and recovery for the retail property sector on higher footfall and retail sales. But the economy is not out of the woods yet.

SA’s listed property funds report improving fundamentals and recovery for the retail property sector on higher footfall and retail sales. Redefine Properties says foot count at its malls has reached 94% of pre-Covid-19 levels, up 2% a year ago, while average footfall for all of 2022 was 80% of prepandemic levels. Retailers are now signing longer leases, indicating that the post-Covid-19 recovery has momentum.

“Turnover within our retail portfolio exceeds pre-Covid-19 levels. We expect this growth to continue, driven by essential services, apparel and a recovery of entertainment in malls, said Nashil Chotoki, national ”retail asset manager at Redefine.

JSE-listed Redefine owns a diversified property portfolio in SA and Poland. At end-August 2022, the real estate investment trust had 60 retail assets comprising superregional, regional and convenience malls valued at R24bn.

Sit-down restaurants, which were most affected by the pandemic, recorded a recovery to pre-Covid-19 levels. Still, higher operating costs for owners have affected the profitability of this retail category. Cinemas recorded growth, while sales growth in workwear clothing and formal wear is expected to continue as more people return to the office, said Chotoki.

Longer leases, which declined during the pandemic, are improving, and the continued growth of retail sales will provide further support in 2023, he said. Renewal reversions improved from -13.1% during the 2021 financial year to -8.6% in 2022. Active vacancies improved from 5.2% to 4.4% over the same period.

“The economy is not out of the woods yet, as rising interest rates and higher costs of food, fuel and electricity will suppress consumer disposable income,” said Chotoki.

According to Rahgib Davids, an equity analyst at M&G Investments, SA’s retail property sector showed strong recovery from the pandemic in 2022.

Retailers continue to open new stores, but rising inflation and interest rates are putting strain on the consumer and this dampens the prospects for nearterm rental growth, he said.

In a recent survey, FNB said that the retail property sector is expected to be more challenging in 2023 due to economic pressures and financially stressed consumers.

“Though consumer price inflation may gradually slow, eating less into household disposable income growth as the year progresses, the average interest rate on household debt is projected to be significantly higher in 2023 than 2022,” said John Loos, a property strategist at FNB Commercial Property Finance. Loos said that rising interest rates and slower economic growth will result in real household disposable income growth slowing from a positive 0.8% in 2022 and declining 0.2% in 2023.

Poor consumer retail spending will affect the retail property sector negatively and increase the cost of occupancy, according to a report by Jones Lange La Salle (JLL).

About 88% of SA consumers said they were most concerned about price increases of everyday purchases among 24 global countries surveyed for the State of the South African Consumer Tracker Report by Deloitte.

Rodger George, an Africa consumer industry leader at Deloitte, said that SA consumers are increasingly financially stressed, with only 38% of those surveyed saying they have money left at the end of the month after paying expenses.

“With spending on essentials such as food and housing taking a bigger share of wallets, the share of discretionary expenditures is under pressure,” said George.

To mitigate pressure from rising prices, grocery shoppers are most likely to choose meals that make the most of food they have at home and plan shopping trips, he said. About a third are switching to cheaper proteins and buying store brands.

“Consumers are increasingly looking for value for money. Retailers who invest in understanding consumer needs will most likely be rewarded,” said George.

Jones Lange La Salle said nondiscretionary retailers such as Pick n Pay, Shoprite, Spar, Clicks and Dis-Chem may perform better, though the likes of Truworths, Mr Price, TFG, Woolworths and Massmart are likely to feel the pinch.

“Both these categories of retailers take up significant space in SA shopping centres and could therefore affect the performance of properties that they anchor.”

Chotoki said Redefine has increased its exposure to value and essential services retailers by 21,720m². These now occupy 20% of retail gross lettable area (GLA) and the company aims to increase that to 25% in the short term.

Vukile Property Fund, which owns a defensive portfolio of property assets in SA and Spain, said that over the past five years it has reduced its portfolio exposure to discretionary spend categories such as restaurants, coffee shops and jewellery in line with changing consumer habits.

For the six months ended September 2022, Vukile said space absorption of other nondiscretionary categories increased 6% on average, with the township malls recording the largest expansion of groceries, food, basic fashion, bottle stores and accessories.

These retailers include Boxer, OBC Chicken and Meat, Pedros, Power Fashion, Studio88, Footgear, PEP Home, and House & Home. Fashion and grocery categories, which occupy 45% of GLA, recorded trading density growth of 6.8% and 8.4% respectively during the reporting period, up from 4.3% and 7.7% for the 2022 financial year. Trading density is a measure of sales turnover achieved per rentable square metre in a particular store or shopping centre.

RETAILERS WHO INVEST IN UNDERSTANDING CONSUMER NEEDS WILL MOST LIKELY BE REWARDED

Rodger George Africa consumer industry leader