This means that the quarterly year-on-year growth rate has slowed from +2.8% in the 1st quarter of 2022 to +0.5% in the 2nd quarter.
The slow growth in real retail sales reflects a recent acceleration in retail price inflation, most notably (but not only) in the “Specialised Food, Beverage and Tobacco” category (7.6%) of retailers as well as in the “General Dealers” category (7%), the latter retail category where much of the general food and grocery retail is found. A global and domestic food price inflation surge has been a key driver here.
Key potential Implications on retail shopping centres:
- Weaker retail tenant rental payment performance: The rental payment performance of retail tenants is expected to remain the poorest of the 3 major commercial property categories through 2022. TPN data in the 1st quarter of 2022 still put retail tenants in good standing with rental payments at a lowly 62% and having weakened on the prior quarter, slightly below the office percentage of 63% and the Industrial Property percentage of 68%. Not only do retail tenants have the challenge of weak real retail sales growth in the face of higher price inflation, but they also have to deal with rising interest rates on debt, the SARB already having hiked interest rates by 200 basis points since late 2021, and expected by FNB to hike by a further 125 basis points this year.
- Recent decline in retail vacancy rates may stall: The weak growth in real retail sales contributes to our expectation that the recent retail property recovery may be “stalled” for the time being, while South Africa goes through this period of higher inflation and interest rate hiking. The FNB Property Broker survey had reported the majority of brokers as having seen retail property vacancy rates declining in the 1st half of 2022, as new business start-up and expansion accelerated following the 2021/21 lockdowns. But the recent renewed financial pressures on consumers, reflected in weak retail sales growth, are likely to slow demand for additional retail space for new businesses and existing business expansions for the time being. The recent declining vacancy trend may therefore likely be stalled for the time being.
- Centres focused more on essential high frequency more essential purchases may still yet outperform the rest, but it’s not guaranteed: Centres focused more on basic necessities such as food and groceries don’t have it all their own way as we had expected, with the “General Dealer” category of StatsSA retail data, along with Health Care and Pharmaceuticals Retail, feeling some sales pressure, Real General Dealer Retail declining by -5.7%, and the Health Care and Pharmaceuticals Retail category seeing sales decline by -4.3%.
However, we still expect these categories of retail to prove to be more “insulated” against the recent increased consumer financial pressures, possibly remaining more stable than those centres more focused on non-essential purchases such as entertainment and eating out, luxury goods, and “postpone-able” expenditure items. Postpone-able expenditures are often found in areas such as Clothing and Footwear, Furniture and Household Appliances, or Hardware, Paint and Glass products for home maintenance.
Larger regional centre categories may ultimately be at a relative disadvantage compared to many neighbourhood and convenience centres in this regard, because they do often have a greater focus on Clothing and Footwear, Fashion, and Entertainment of various types along with Household Furniture and Appliances Retail, all of which can be quite cyclical and experience pressure in tougher times.
However, the recent data aren’t firmly against the larger centres yet. The major Clothing, Textiles and Footwear Retail category had recovered quite nicely following the pain of the hard lockdowns of 2020, and at June 2022 was still 6.8% above the pre-lockdown level of June 2019 as households played catchup on clothing and footwear spend following the lockdown period. The Household Furniture and Appliances Retail category is another very cyclical one not yet showing too much pressure as at June, growing slightly positively by +0.5%, and still +10.4% above the level of June 2019 in real terms.
- A key risk of pressure looks to be for properties with a key focus on the Hardware, Paint and Glass Retail category, which saw a major real decline of -8.6% year-on-year in June. These expenditure items, often related to home maintenance, can often be postponed in times of increased financial pressure, and this appears to be what is happening.
Low-income area essentials-focused retail centres won’t have it all their own way either, however: It won’t be all “plain sailing” for those retail centres focused largely on basic essentials such as food and grocery shopping in low income areas, however. Former township and rural centres “outperformed” others in many cases during the lockdown period, their essentials retail having avoided lockdown measures to a greater extent. But they now have the challenge of keeping the basic items affordable in an environment where food price inflation may be outstripping income growth.
Source: John Loos
