Will mall mania misfire?

Posted On Thursday, 02 October 2008 02:00 Published by
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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 starting 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, retail-focused property stocks with exposure to dominant 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 retailers 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.

Publisher: Finweek
Source: Joan Muller

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