Smaller malls face harder times.

Posted On Wednesday, 05 March 2003 10:01 Published by
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Small to medium-sized shopping centres could come under further pressure as consolidation in the retail sector continues.
Small to medium-sized shopping centres could come under further pressure as consolidation in the retail sector continues.

Coronation Fund Managers portfolio manager Kirshni Totaram has joined experts sounding warning bells about the health of small neighbourhood shopping centres.

"We expect retail sales to slow due to the 4% interest rate hikes last year," says Totaram.

She says the spending trend in the past decade has been biased towards regional shopping centres.

"With the majority of SA spending taking place in these centres their rentals will be least affected, and it is the small neighbourhood centres that are likely to struggle," she says.

She says retailers are expected to continue consolidating space and closing down stores in less profitable areas.

Looking at the industrial property market, Totaram says the rand's depreciation at the end of 2001 boosted manufacturing activity last year.

"It gave manufacturers a competitive advantage, and they benefited from both import substitution by domestic consumers and export opportunities into previously inaccessible markets," she says.

The industrial property market benefited from the huge capacity expansion by the manufacturers resulting in additional industrial space being taken up, she says.

The decline in demand and the resultant increased capital expenditure may result in margin squeeze.

She says the industrial market has been under pressure for about five years and last year showed signs of improvement last year.

"The market expects some growth in the sector this year, but if the rand remains strong, this is unlikely to occur," she says.

"We foresee a turnaround of the office market over the next two years," says Totaram.

She says the office market has been under pressure as a result of a slowing economy particularly in the IT and financial services sectors.

Vacancy levels are high. As a result the high amount of speculative development that took place and which was not commensurate with demand, resulting in excess space.

Office rent differential between A grade and B grade buildings has closed as a result of the supply demand imbalance over the past few years, says Totaram.

A Grade buildings have dropped their rental charges significantly in order to reduce vacancy rates.

High building costs, largely driven by increased steel and cement prices , have significantly increased the rental levels at which speculative developers would break even.

Totaram says property market fundamentals have set the listed property sector for a re-rating which should close the yield gap between listed property and bonds.

Business Day

Publisher: Business Day
Source: Business Day

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