Retail property returns are expected to deteriorate in 2007 although, with the South African economy on a long-term accelerating growth path, the decline is unlikely to be prolonged, FNB property economist John Loss says.

According to him, total returns on retail property were an impressive 33% in 2005 and, while 2006 statistics are not yet available, real retail sales growth was also impressive, suggesting that this property class enjoyed another strong year.

Nevertheless, signs that fundamentals in the sector are deteriorating became apparent in 2006, he asserted.

Loos said that while the 200 basis point rise in local interest rates from June to December 2006 had far from broken the back of the consumer, it did have an impact.

"In the more interest-rate sensitive area of durable consumer demand growth, we have indeed seen significant indications of slowdown. New passenger vehicle sales growth was down to 4.5% year-on-year as at January 2007, a far cry from the cyclical high of 44.6% in April 2005," he noted.

While real retail (which do not include motor vehicles) sales grew by 10% year-on-year for the 11 months to November, up from 6.6% for the 2005 year as a whole, he did not believe this growth was sustainable

"A number of forces will be conspiring to lower the pace of sales growth in 2007, and the downward direction of durable sales growth is a reasonably good leading indicator," he asserted.

He added that on the supply side, 2006 saw a considerable rise in the number of square metres of shopping space completed, in lagged response to the consumer boom. While unfortunate, the time lag between planning and completion of shopping centers - with much new stock only coming into the market as demand growth waned - had always be a reality.

"Investment Property Databank (IPD) data for 2006 is not yet available, but with retail sales being what they were it must have been another great year for retail property," Loos said.

"However, the performance data from 2005 already suggested a moderation in performance looming ahead at some stage. The strong rental inflation of earlier years, peaking at 15.9% in 2003, began to give way in 2004 and 2005."

Loos acknowledged the heterogeneity of retail property, with many well- placed/well-designed retail outlets producing impressive returns even in the market downturns.

"However, for the market as a whole, the fundamentals are looking weaker. While the demand side still appeared strong through the entire 2006, rising household debt-service costs and the anticipation of a slowdown in real disposable income growth are expected to lead to a weakening in retail demand. Simultaneously, the supply-side appears strong, with retail space completions expressed in terms of square metres accelerating last year and with further possible acceleration in 2007."

Loos said that the combination of demand and supply-side forces led him to the expectation that total retail space returns might begin to see marked deterioration in 2007.

However, a long downturn was unlikely, he asserted.

"For as long as the economy continues on its long term accelerating growth path, we?ll probably find it difficult to create oversupplies of space that linger around for too long. Demand is bound to catch up rapidly," he concluded.

Sunday Times