Retail therapy-starved South Africans have returned to malls in their droves, with latest industry data pointing to a stronger-than-expected rebound in shopping centre metrics.
Retail sales, as measured by trading density (turnover per square metre), surged by 17.5% year on year in the fourth quarter, according to the SA Property Owners Association and MSCI Real Estate’s latest retail trends report. That’s the highest annualised growth on record — albeit off a low base.
The report provides a reliable picture of the state of SA’s retail property sector, as it is based on data collected in 108 centres across SA, spanning more than 5-million square metres.
The fourth-quarter rally in the MSCI trading density index followed a dismal 2020, on the back of various pandemic-related lockdowns, a curfew and an on-off ban on alcohol sales. The index was in negative territory for most of 2020 and bottomed at -17.4% in the first quarter of 2021.
The rebound in sales turnover saw average trading density bounce back to R34,500 a square metre by the end of 2021. That’s up from less than R30,000 a square metre for most of 2020, and only 1.4% below the R36,000 a square metre recorded pre-pandemic, at the end of 2019.
Equally encouraging is that mall visitor numbers also bounced back in the fourth quarter, albeit to a lesser extent. Foot count per square metre was up 7.6% year on year, though that’s still 23% below the levels reached in December 2019.
Niel Harmse, head of research at MSCI Real Estate and author of the retail trends report, says the lower growth in foot count was offset by higher spend per head. That suggests shoppers are making fewer visits to malls, but spending more per visit.
However, sales didn’t recover to the same extent across all shopping centre or merchandise categories. Harmse notes that mega-malls exceeding 100,000m2 — known as super-regional centres — showed the strongest rebound, with trading density growth clocking in at close to 23%.
Shoppers’ return to large malls was no doubt buoyed by the relaxation of the curfew and reopening of leisure and entertainment venues, which typically occupy more space in sizeable super-regional centres.
Neighbourhood centres, the smallest retail category, at 5,000m2-12,000m2, showed the smallest trading density growth, at 12%. That’s probably because these centres, typically anchored by one or more grocery stores and a Clicks or pharmacy, didn’t see sales drop to the same extent in 2020 as their larger counterparts.
The community or convenience-centre category — those centres sized between 12,000m2 and 25,000m2 — was the only mall segment where annualised trading density had surpassed pre-Covid levels.
Top-performing retail categories in the fourth quarter included food, apparel, electronics and speciality stores. Unsurprisingly, the laggards were in the restaurant or food service segment, and department stores.
A quicker-than-expected recovery in sales and foot count, coupled with most landlords providing widespread rental relief to keep struggling tenants afloat during 2020’s hard lockdowns, seems to have kept in check the number of retailers forced to close shop last year.
Though the amount of empty retail space had risen to an 18-year high of 7% of gross lettable area by March 2021, the vacancy rate had retreated to 5.6% by December, says Harmse. He expects vacancies to continue to decline moderately over the coming months, given that movements in vacancy levels typically lag the economic growth cycle.
The improved trading metrics recorded by shopping centres in the fourth quarter have already translated into higher returns for mall owners. Retail property notched up a total return (income and capital growth) of a decent 6.5% last year, up from -4.4% in 2020, according to the MSCI SA annual property index.
The index tracks the performance of more than 2,200 properties (retail, office, industrial, hotel and residential) worth R382bn. Retail, the single-largest sector, comprises 56% of the index.
The subsector was SA’s second-best-performing in real estate, behind industrial property’s 7.5%. Residential property came in at 4.7%, while offices lagged, with a return of a marginal 0.8%.
Harmse says while retail posted a strong recovery, large, super-regional shopping centres still lagged smaller retail formats. Offices were struggling the most, with little if any new demand from corporates amid a weak economy and adoption of work-from-home policies.
In contrast, returns in the industrial sector — distribution centres in particular — were clearly underpinned by the pandemic-related rise in online shopping.
It seems improved shopping centre returns have already boosted investor appetite for retail property as an asset class. While deal flow across the office and industrial property sectors declined year on year in 2021, the value of retail centres that changed hands was up a hefty 18% to R7bn, according to the latest data from real estate advisory and investment management firm JLL.
The transactional value of retail centres last year effectively exceeded the historical five-year average.
JLL research manager Mieke Purnell says appetite for shopping centre investments has no doubt been supported by the improved income performance of retail property on the back of lower vacancies.
Consumer financial fundamentals still look far from strong
— John Loos
Purnell refers to several landmark deals concluded in 2021, including the sale of Atterbury Value Mart in Pretoria and Joburg’s Nicolway Shopping Centre, both for more than R1bn. More recently, Fourways Mall owner Accelerate Property Fund sold the nearby Leaping Frog Centre for R130m.
However, it remains to be seen how sustainable the recovery of SA’s retail property market will be. Harmse says a downward correction in the level of trading density growth to the mid-single digits is likely as the country transitions out of the pandemic, given that growth will be dependent on spending and foot count rising in unison.
It’s also uncertain if and when SA’s mall vacancy rate will return to December 2019 levels of 3.8%. “Given the headwinds faced by the consumer, we expect the absorption of space to hit a floor in the next 12 months with a bumpy recovery after that, perhaps similar to the period after 2011,” says Harmse.
FNB property sector and household strategist John Loos shares a similar view. He cautions that while the retail property market has recovered steadily as Covid disruptions recede, the sustainability of the recovery is highly dependent on consumers — “and consumer financial fundamentals still look far from strong”.
It is not yet clear how sustainable the recovery of SA’s retail property market will be. Things may still regress as the country transitions out of the pandemic
— What it means:
Loos says despite a strong uptick in demand for retail space due to the normalisation of the economy and a proliferation of new, smaller businesses, as well as the expansion of existing ones, income and inflation risks are in “abundance”.
He refers to FNB forecasts of real household disposable income growth slowing from 5.9% in 2021 to 2.1% this year, which will likely dent spending.
Lower disposable income expectations come partly on the back of higher inflation forecasts — specifically for food and fuel prices, due to Russia’s war in Ukraine — as well as rising interest rates, which Loos says will inevitably eat into the money available for retail spending.
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