We know that the past couple of years were simply exceptional in the retail sector, but does the more recent downward trend pose a risk to the macro demand/supply retail equilibrium going forward?

Average annual retail development planning activity has been negative at -1.24% through 1999-2004; for the same period, annual retail trade sales activity growth has averaged +14%. Industry data on eProp’s system reveals that retail rentals have grown by around 10-18% over the past year and returns for retail property in general have been buoyant.

Notwithstanding a slight undercount in the building stats (though using alternative sources we do not necessarily need to dispute these stats at all), the prognosis for the sector has been a very good one given the relative faster growth of sales compared with developments.

A useful analysis comes from the ratio of sales value to m² of space supplied: we see that for each m² of new development brought to market, around R615 000 worth of sales is occurring in the economy if averaged over the past seven years - or R370 000 in terms of sales to planned space. Of note is that this planning to sales ratio has been trending up until 2001 and was almost equally strong over 2002-2004 for developments to sales.

As such and implicitly, should those heavily invested in retail be a little concerned? Assuming 10% sales growth for 2005 and a 80% success rate for mooted retail projects (or 65% - being the 14 year development to planning ratio - of 2004 planning activity), then we can expect a slight ‘deterioration’ to levels approximating the period 1998-2001 and just below the 7 year average. Certainly the planning stats bear out such a scenario with 2004 activity reached its highest level since 1998

Furthermore it may be somewhat generous to be forecasting retail sales growth of 10% in 2005 given that forecasts for final household consumption, real gross domestic expenditure and real disposable income rest between 5%-6%.

In summary, it is never advisable to draw conclusions using one set of data relationships; so the obligatory two handed economist approach gets added to the pot for complexity sake: on the positive hand, sales continue to be supported by low interest rates, resulting in a strong overall spending partly financed by healthy growth in disposable income that stems from a combination of income and wage growth and consecutive tax cuts of 6,9 billion to individuals; consumer growth is also driven by the strong rise in asset prices, with equity and house prices both growing more than 20% in 2004 from 2003. On the negative side, whilst credit is not only cheaper and also easier to obtain, this has lead to households being less inclined to save; households are saving only 0.6% of their disposable income while their debt to income ratio rose to 56.8% - a worrying sign for a country where the social net is a little brittle. The current growth in money supply and credit extensions may in the long run exert upward pressure on interest rates. Balance of payments pressures, may still scupper further interest rates cuts, though the latest FDI banking deal should go some way to boosting reserves and reducing current account risk

So, on balance the retail property scenario will still thrive over the next few years but almost certainly not at the level enjoyed over the past three.

Ends: Marc Schneider- eProp Research: 9 May 2005