Shopping centre developments ahead of market support

Posted On Monday, 25 August 2014 16:50 Published by
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New shopping centres: are we building too big too soon?

With more retail competition than ever before in South Africa and local consumers coming under mounting economic pressure, recently opened shopping centres, and those set to open soon, could experience a slow start to trading, says Marius Muller, CEO of Pareto.

Marius Muller Pareto CEO

He adds that while some will quickly progress beyond these growing pains to become thriving retail successes, others may not be sustainable.

"The success of a shopping centre has as much to do with site selection as it does with execution from its developer," explains Muller. "Right now, the listed property sector is hungry for chunky retail development, but cannot find high quality stock in the market. So, they're dipping into the next tier and creating demand for B-grade retail property at keener yields than found previously. Developers are aware of this demand and putting it out there."

This is resulting in some developers delivering shopping centres that are oversized or too far ahead of market support. Muller believes this brings the long-term sustainability of some of these malls into question.

Muller explains that shopping centres are usually brought to market some degree ahead of consumer support. This model, although not without early challenges, has resulted in some of the country's most successful malls. Muller cites Canal Walk Shopping Centre in Cape Town and Gateway Theatre of Shopping in Umhlanga, as centres which entered their markets well ahead of consumer support and at sizes that were not sustainable when they first opened.

As a result, they were met with challenging trading in their early days. "But, as their markets grew, these centres were right-sized. Now, they are growing with their markets and are star performers."

Muller believes the massive 120,000sqm Mall of Africa, which is due to open in Waterfall City, Midrand, in 2016, may experience a similar pattern as its shopper market grows, but will ultimately be successful.

However he is concerned that some South African malls are being brought to market way ahead of their time in terms of market support. "There are cases where delivery to market is far too early, because there does need to be some market demand. There are malls being built too far ahead of time and too big. In one case, a significant portion of one such development has had to be mothballed," points out Muller. He notes that large retail developments in the Eastern Cape are of particular concern in this regard.

Muller believes that most new retail developments would be better off taking a more cautious approach in the current economic climate, starting off around the right size for the available market, and then growing in a phased approach, as market support grows. This phased development strategy has proved highly successful at a number of local malls, and mitigates the risk of early slow trading.

He adds that national retailer expansion strategies are also impacting the wave of new retail space coming to market.

"While some retailers like Shoprite have made it clear that its growth will not see it cannibalising its own stores, others are less defensive of their existing outlets. As profit margins are being squeezed, they are hoping to offset this with greater turnover. This is resulting in retailers expanding their footprints because their competitors have, or to shut out competitors, which doesn't always make sense. More stores are not always the answer and can sometimes result in little gain," says Muller.

Pareto owns an unmatched portfolio of regional and super-regional shopping centres. It is the full owner of Cresta Shopping Centre, Southgate Mall and Value Market, Westgate Regional Shopping Centre, all in Johannesburg, and a 50% stake in Menlyn Park Shopping Centre in the East of Pretoria. It also wholly owns The Pavilion in Durban and Mimosa Mall in Bloemfontein. In Cape Town it co-owns Tyger Valley Shopping Centre as well as a 50% stake in Cavendish Square.

Pareto also holds 25% of Sandton City and its surrounding assets including the Sandton Convention Centre and three hotels: The Sandton Sun, The InterContinental Johannesburg Sandton Towers and Sandton Garden Court.

Last modified on Monday, 25 August 2014 17:15

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