RETAIL property is in for a tough year as higher interest rates, an expected tighter economy, electricity supply woes and a drop in consumer demand come into play.

Government infrastructure roll-out is also gobbling up construction resources.

Ian Anderson, portfolio manager at Fortress Asset Managers, says one of the most important factors affecting retail property is that the construction of new shopping centres is going to become increasingly difficult to undertake this year.

Anderson says this issue is driven by uncertainty regarding a reliable electricity supply for the construction work, increasing funding costs and a lack of available resources.

He says the construction industry is largely focused on the government’s infrastructure roll out, and little capacity is left for other large developments.

“It is going to be increasingly difficult to find a construction company to do work for you,” Anderson says.

He also believes retailers are going to face a “really tough trading year” and that this may lead to tenant failures.

However, he does not expect tenant failures among the major national retailers.

He says the smaller line shops or “mom and pops operators” are likely to suffer.

In this more challenging retail environment, super shopping centres, such as Canal Walk in Cape Town, Gateway in KwaZulu Natal, and The Glen and Mall of Rosebank in Johannesburg, are going to weather the storm far better than smaller convenience and neighbourhood shopping centres.

This is because the larger centres are dominated by the more resilient national retailers. However, at the smaller centres, grocery anchor tenants should be able to maintain their businesses.

“It’s more the guy who sells biltong or your florist and that is where there could be problems,” Anderson says.

He also predicts that rural or decentralised retail centres will continue to perform well because they benefit from the social grants that are paid out to beneficiaries in the areas they operate in. Social grants continue to increase and a lot of the shops at these centres rely on them for income.

Norbert Sasse, CEO of Growthpoint Properties, SA’s largest listed property company with a market capitalisation of more than R19bn, says the company expects the more dominant regional shopping centres to be better able to withstand the effect of slower retail sales than the smaller convenience, value and neighbourhood centres.

He says the larger regional shopping centres have “more national tenants and more critical mass”.

“From our perspective, there is no doubt that the centres that do not have critical mass or don’t have an established market are going to suffer,” Sasse says.

Erwin Rode, property economist at Rode & Associates, says property development projects are being cancelled because developers cannot obtain electricity certificates because there is no guarantee of electricity supply.

“On top of that, the retail property market is cooling down fast because of decelerating expenditure by consumers.

“In fact my impression is that turnovers per square metre are growing at a rate less than the contractual escalation rates.

“This is bound to put pressure on market rentals and therefore market value,” Rode says.

He expects the medium-sized shopping centres — between 10000m² and 30000m² — to be hit the hardest. Regional shopping centres will “weather the storm the best”.

Chris Renecle, MD of Johannesburg-based developer Renprop, says there has been a “massive amount of development in the retail sector over the past four years”.

He says the growth in residential development fuels growth in retail property because new centres are needed in new residential areas or existing residential areas that have been experiencing densification. “Based on the slowdown in residential development, shopping centres are becoming less viable,” Renecle says.

“With the slowdown in consumer expenditure, it is more difficult to get suitable tenants if you actually build.”

Source: Business Day