Development frenzy continues

Posted On Thursday, 27 September 2007 02:00 Published by
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It doesn't look like the expected slowdown in consumer spending has curbed retailers' enthusiasm to open new stores and expand existing ones

Owners of shopping centre portfolios continue to report remarkably strong demand for floor space, indicating that higher interest rates and tougher credit lending criteria haven't yet placed a noticeable dampener on trading densities (turnover/sq m). It also suggests that shopping centres will continue to spin good profits for investors. 

Pieter Prinsloo, MD of retail-focused listed fund Hyprop Investments, says despite perceptions that South Africa may already be over-shopped, most retailers are still keen to expand their national footprint.  

Prinsloo says the continued demand for retail space has driven rentals in Hyprop's portfolio of five shopping centres 15% higher in the year to end-June. Its malls include Canal Walk at Century City (Western Cape), Hyde Park, The Glen and Rosebank Mall (Johannesburg) and Southcoast Mall (KwaZulu-Natal) The portfolio's overall vacancy has dropped to only 0,5%, while Hyde Park, The Glen and Rosebank Mall are all fully let.

Hyprop is spending R53m this year to expand its existing centres to meet additional demand for space. Other listed funds with exposure to shopping centres report a similar trend.  Figures from the SA Council of Shopping Centres (SACSC) confirm that shopping centre development continues apace. Over the past year, around 1m sq m of new shopping centre space was either under construction or in various planning stages.

That's roughly eight times the floor space of Sandton City, one of SA's largest shopping centres. SA already has around 16m sq m of shopping centre space, translating to about 1 500 shopping centres.  SACSA executive director George Skinner says that number could double over the next 10 years if SA's economy keeps growing at its current rate. He maintains that there are many areas in SA that are under-serviced in terms of shopping centres, specifically rural areas and former townships where spending power has grown exponentially over the past few years. 

However, FNB economist and property strategist John Loos is less bullish concerning the short-term outlook for the retail property market. He says consumer demand is no doubt starting to slow. Although real retail sales growth was still at a healthy 6,4% in June (year-on-year) Loos says it's significantly lower than the September 2006 peak of 13,5%. He says slower sales growth, coupled to a significant amount of additional supply of retail space in recent years, could make shopping centres a less profitable place for investors to be over the next two years.  

Investment Property Databank (IPD) data indicates that retail property returns have already slowed somewhat: down from a 32,6% high in 2005 to 27,4% last year.  But Loos says even if there's a further slowdown in retail property returns the downside should be limited. "The household debt situation isn't as bad as some would have us believe and the interest rate cycle is near its peak." Besides, Loos doesn't believe that SA is heading for an oversupply of shopping centres any time soon. "During the late Nineties, when shopping centre completions were relatively high (see graph) and retail sales growth was relatively low, SA was probably far closer to creating an oversupply of retail property stock." 

Loos says that at the time IPD recorded total returns of a mere 9,1% for the retail property sector. Also, IPD vacancy rates and the ratio of new real retail sales compared to new square metre of space added to the market don't indicate a major oversupply. Loos says as the economy continues on its solid growth path, SA has a situation where any oversupply of shopping centre space is taken up fairly quickly. So all things considered, says Loos, it's plausible that total retail property returns could bottom out at a not too pedestrian 20% next year. 

Publisher: Finweek
Source: Finweek

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