Retail property sector forecast points to a mild slowdown

Posted On Friday, 15 July 2016 15:22 Published by
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According to John Loos, a mild slowdown for the Consumer and Retail Property sector is projected based on an FNB macroeconomic scenario where recession is avoided, inflation is moderate, and interest rates have just about peaked.

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Average capital growth per square metre (net of Capex) is forecast to slow from 5.9% in 2015 to 4.1% by 2017. Slower capital growth in the 3 forecast years would represent a shift in real terms (when adjusting for general inflation as per Consumer Inflation measures) from positive growth in 2015 to mildly negative growth (decline) in 2016 and 2017.

Our econometric model-driven forecast for the Retail Property Sector could perhaps be described as benign, based on the FNB Macro-Economic Outlook which shows South Africa “ambling” along in low positive real economic growth territory, and with the SARB’s latest round of interest rate hiking coming to an end a quarter of a percentage point from now, with rates flattening out at a level where Prime Rate is 10.75%, and then move sideways through the rest of our forecast period to 2018.

We assume a global economic growth rate bottoming out in 2016, and some mild strengthening thereafter, but nothing too impressive in a world constrained by a massive debt burden. Domestically, this translates into a Real GDP (Gross Domestic Product) growth forecast of 0.2% for 2016, narrowly avoiding recession, before some mild strengthening to 1% in 2017 and 1.6% in 2018. The drought-driven food price spike is assumed to pass on, and after averaging 6.6% in 2016 CPI (Consumer Price Index) inflation returns to the 3-6% SARB (Reserve Bank) target range to average 5.9% in 2017 and 5.5% in 2018.

This is the FNB “Base Case”, and would be a fairly good outcome “under the circumstances” for Retail, should it materialize. We say this because given certain key structural constraints in the global and domestic economy currently, “downside” forecast risks are very significant. Globally, a massive debt burden and an apparent bond market “bubble” can easily be more of a drag on global growth in future than assumed, and domestically the presence of “heightened social and political tensions” can at any stage become more disruptive to economic output, and dent investor confidence. These are the uncertain times we live in.

But assuming this “slow but stable” environment, this translates into Real Retail Sales growth that remains positive albeit slowing from recent levels. From 3.3% in 2015, 2016 growth is forecast to slow to 1.7% in 2016, after some good months in the 1st half of the year, and then further to 1% in 2017 before turning the corner to record 1.9% in 2017. Can “mainsteam” retail sales grow at rates higher than GDP growth? The answer is “yes” it is possible, with Durable Consumer Goods such as motor vehicle sales often slowing more significantly in times of interest rate hikes and slowing economic growth such as that of recent years. But this has its limits, and we have also seen historically that recessionary periods can turn things around and lead to Retail Sales growth underperforming overall Household Consumption expenditure growth and economic growth.

We know that Consumer Confidence is currently weak, with consumers concerned about future economic prospects. Does this lead to a drive towards a higher savings rate? We have seen some early evidence of that in the SARB’s Net Savings figures. Higher savings would be a longer term positive, but can constrain retail spend in the short term. Herein lies a further “downside risk”.

On a national basis, the Retail Property Sector appears set for a mild slowdown, the national vacancy rate (using MSCI/IPD data) is forecast to rise mildly further from 4.7% in 2015 to 5% by 2018. Significant levels of new Retail Space development activity contribute to this projected rise. Retail Capitalisation Rates are expected to creep slowly higher through the forecast period, influenced not only by higher interest rates but also by slower projected retail sales growth compared to recent levels. Average capital growth per square metre (net of Capex) is forecast to slow from 5.9% in 2015 to 4.1% by 2017. Slower capital growth in the 3 forecast years would represent a shift in real terms (when adjusting for general inflation as per Consumer Inflation measures) from positive growth in 2015 to mildly negative growth (decline) in 2016 and 2017.

In short, therefore, a mild slowdown for the Retail Property sector is projected based on an FNB macroeconomic scenario where recession is avoided, inflation is moderate, and interest rates have just about peaked. Given the global and local times that we are in, however, the forecast risks lie very much to the “downside”, with recession risk high both globally and locally. Further questions for Retail Property exist with regard to “structural change” in the form of the potential move to greater use of online shopping in future. This is of potential benefit to the Warehouse Property Sector, perhaps a cheaper option at a time when Retail Space has become “expensive” in terms of capital values and operating costs.

Source: John Loos

Last modified on Friday, 15 July 2016 16:59

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