Presenter: Lindsay Williams  Guest(s): John Loos 

Retail property returns are 33% for the Investment Property Databank (IPD) in 2005, but should investors be worried with so many shopping centres going up everywhere? FNB property strategist John Loos is on the line

LINDSAY WILLIAMS: John, you’ve observed shopping centres going up “like mushrooms” - does that suggest we can’t expect high returns with oversupply becoming a reality?

JOHN LOOS: Ironically it doesn’t seem like that. I think the oversupply was being created more in the 1990s than now. That may sound strange, because it would appear that shopping centres are going up like mushrooms - and certainly there has been substantial growth - but what one has to remember is there has been strong growth in retail sales volumes. I calculate the ratio of the additional annual real retail sales per square metre of new shopping space - and this ratio has risen quite dramatically, suggesting that it’s justified to have expanded with new space as much as what we’ve had. I don’t think a gross oversupply has been created over the last couple of years.

LINDSAY WILLIAMS: Is there a link between returns on the JSE retail property market and retail sales? We saw 9.1% growth in retail sales recorded in June 2006 - that’s a very high number, isn’t it?

JOHN LOOS: That 33% return was from the Investment Property Databank (IPD) on retail property. The JSE is normally a forward-looking market - so often that’s based on pricing in future prospects rather than the actual historic performance of retail and commercial properties. The JSE is also influenced by emerging markets troubles - as we saw recently - so it’s a bit more volatile than the actual property performance.

LINDSAY WILLIAMS: What are you seeing now? We’ve talked about shopping centres going up like mushrooms - there’s obviously a time lag between seeing a piece of land and putting up a shopping centre. Are those sorts of plans still on the drawing board? Do we have that sort of data?

JOHN LOOS: We saw a big surge in building plans passed - that peaked last year, and it rose to a level far above actual completion - so there are a lot of plans in the pipeline that haven’t come to reality yet. Often these plans never do come to reality - plans passed always exceed completion - so I would suspect that given the expected slowdown in the consumer boom plans in certain areas might be put on hold. But it’s difficult to generalise about that.

LINDSAY WILLIAMS: What do you think for anyone with retail exposure on the JSE? Should we hold on - what should we be doing?

JOHN LOOS: I think retail property returns are going to slow - I think 33% last year was the high point and we will probably see it slightly slower this year. We’ve already seen net income growth going down slightly, and rentals inflation has been coming off according to the IPD. I think that this is probably the most interest rate sensitive of the three big commercial property sectors - so it’s going to be affected slightly negatively by interest rate hikes, but I think it’s going to be a soft landing. I don’t think a gross oversupply has been created - I think the situation looks relatively healthy under the circumstances with a soft landing. With regards to the JSE and listed property - at the moment industrial and office property shows much better prospects than retail, so a bigger exposure to those two categories would probably be a better bet.