Plans for about 330 000 sq m of new shopping space were approved in the eight months to end-August – equal to three times the floor area of Sandton City, one of SA’s biggest shopping complexes.
Analysts say that if these projects all go ahead, they could have a major impact on existing shopping centres’ returns, especially as most retail groups’ margins are down and many are no longer willing to open shops in new centres simply because the competition does so.
The returns which pension funds and life assurers earn from their shopping centre investments have already declined. Figures from the SA Property Index (Sapix) show that returns on shopping centres fell from 17,6% in 1999 to 10,5% last year. This was the first time in six years that returns from retail property lagged those from offices and factories.
The Sapix figures also indicate that vacancies in shopping centres have more than doubled since 1997, from an average of 2,4% to 5,3%. Trading densities (turnover per sq m) also seem to have dropped markedly in the past year or so. Most retailers are apparently struggling to achieve turnovers of R10 000/sq m/year whereas R20 000/sq m/year is preferable if a business is to be worthwhile for both retailer and landlord.
Gensec Property Services (formerly Sanlam Properties) MD Banus van der Walt believes the shopping centre market reached saturation point five years ago. He says it’s impossible to earn decent returns on new centres nowadays. The continual addition of new retail space merely puts extra pressure on existing centres as consumer spending simply moves from one centre to another.
Property economist Francois Viruly agrees there is little need for more retail space, especially big regional centres. He refutes the argument that SA has less shopping space per capita than the UK or the US and that this justifies adding new space to the market. Viruly says SA simply does not have the UK or US population or income densities.
Just how dramatic the growth of new shopping centres has been in the past few decades is evident from figures produced by Urban Studies, which show that the number of centres (of over 10 000 sq m) has grown from only 12 in 1969 to about 235. SA’s total shopping floor space now comprises 6m sq m, compared to about 200 000 sq m 30 years ago.
Analysts believe that this growth would not have been a problem had the number of retailers increased apace. But the retail market has shrunk in recent years as retailers that went to the wall were not replaced.
Another trend contributing to the oversupply of shopping space is that retailers have begun to realise they can achieve the same turnover with less space. And they no longer want to open shops in every new shopping complex because they realise more shops don’t necessarily mean higher profits.
But not everyone agrees that SA has an oversupply of shopping centres. Old Mutual Properties is one institutional investor that is still injecting billions into the retail property sector while others are mostly scaling down their exposure.
In the past two years, Old Mutual has spent about R3bn building new retail centres and expanding existing ones. These include the Gateway Centre in Umhlanga north of Durban, The Zone in Rosebank, Johannesburg, and extensions to Pretoria’s Menlyn Park. Plans to develop the R3bn megamall Zonk’Izizwe in Midrand within two years are also still on track.
Old Mutual Properties has come in for considerable criticism for adding, some say, unnecessary shopping space to an already saturated market. It’s the R1,4bn Gateway Centre – SA’s biggest centre at 120 000 sq m – that has sparked controversy. The general feeling is that Gateway, which opened last month, does not offer many new retail facilities and will draw spending away from centres such as La Lucia Mall and the Pavilion.
As a result, many retail groups such as Edgars, Foschini and Pick ’n Pay have decided not to take up space at Gateway.
Old Mutual Properties retail executive Brent Wilshire denies that Gateway is simply a duplication of existing facilities. He says the centre offers SA consumers a new shopping experience with more emphasis on sport, leisure and entertainment – the so-called “shoppertainment” concept.
Wilshire says increasing the entertainment component of Menlyn Park last year boosted some tenants’ turnover by as much as 60%. He says OM’s shopping centres are still achieving above-average returns, proving that new investments in retail projects are indeed viable.
But whether Gateway will deliver the kind of returns that old Mutual is hoping for remains to be seen. Only about 42% of the centre’s stores are open for business.
And though leases have been signed for 76% of the stores, many tenants have apparently signed contacts at bargain basement rentals, which could dilute the centre’s income yields considerably.
Publisher: Finance Week
Source: Finance Week
Shopping Centres Less Profitable
Posted On Thursday, 20 December 2001 14:01 Published by eProperty News
Plans for about 330 000 sq m of new shopping space were approved in the eight months to end-August – equal to three times the floor area of Sandton City, one of SA’s biggest shopping complexes
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