Last week’s looting and destruction of more than 200 malls, 600 retail stores and several distribution centres not only left an estimated R20bn of property damage in its wake — billions in shareholder value were also wiped off the JSE’s property sector.
The share prices of a number of real estate investment trusts (Reits), mostly those that own shopping centres in townships and inner cities in KwaZulu-Natal (KZN) and Gauteng, fell 10%-15%, as investors bailed out of retail brick and mortar.
Counters that were hardest hit by the unrest include Fairvest, which had 12 malls looted and damaged, Dipula Income Fund (12 properties), SA Corporate Real Estate (11), Vukile Property Fund (6), Fortress Reit (6), Redefine Properties (6), Arrowhead Properties (5), Safari Investments (3) and Resilient Reit (2).
Stanlib estimates that close to 40% of the more than 200 malls that were ransacked or burnt down are owned by the listed property sector, with average values for shopping centres varying from R300m to R1bn.
Centres that suffered damage include Redefine’s Chris Hani Crossing in Vosloorus, and Scottsville Mall, Isipingo Junction and 320 West Street in KZN; Resilient’s Jabulani Mall in Soweto and Mams Mall in Mamelodi; Vukile’s Daveyton Shopping Centre on Joburg’s east rand, Dobsonville Mall in Soweto and KwaMashu Shopping Centre in KZN; Dipula’s Meadow Point and Dobson Point in Soweto, and Howick Shopping Centre and Harding Corner in KZN; Fairvest’s Richmond Shopping Centre in Durban and Bara Precinct in Soweto; Safari Investments’ Thabong Shopping Centre in Sebokeng; Arrowhead’s Montclair Mall and Mkuze Shopping Centre in KZN and Maverick Corner, in Joburg’s Maboneng; and SA Corporate’s Umlazi Mega City and Springfield Value Mart in KZN.
Last week’s carnage couldn’t have come at a worse time for property stocks, as the sector had only recently started recovering from the heavy pandemic-induced income and valuation losses suffered in 2020.
The Reit sector last year provided rental relief of a whopping R3.5bn to keep struggling tenants afloat during the country’s hard lockdowns. Listed property valuations were simultaneously written down by an average 10%-20%.
Mall-owners bore the brunt of these losses, and most were forced to cut or postpone dividend payments to shareholders.
In recent months, however, mall-owners reported an encouraging recovery in sales and footcount across many shopping centre portfolios, despite the on-off trading restrictions imposed on restaurants and other leisure tenants as part of the level 4 lockdown.
The rebound has been evident in a sharp uptick in share prices, which helped the SA listed property index (Sapy) recover nearly 60% between the end of October, when it hit a 10-year low, and July 9, just before the civil unrest started.
But since Friday July 9, the Sapy has shed 6.5%.
Ironically, township malls and centres that cater mainly to lower-income shoppers had proved more resilient last year than their counterparts in wealthier suburbs.
Latest data from research firm MSCI underscores the trend. In the 15 months to end-March, average trading densities (sales/m²) in township malls dipped to 81% of the levels recorded pre-Covid. At the same time, trading densities in suburban malls last year dropped to 74% of January 2020 levels, and they’re still below 76% (see graph).
The question is to what extent last week’s events will further erode Reit earnings and investor sentiment towards shopping centres as an asset class.
Fortunately, it seems listed landlords will be able to recoup asset and income losses resulting from the unrest from the state-owned SA Special Risk Insurance Association (Sasria).
Naeem Tilly, head of research at Sesfikile Capital, says mall-owners and retailers are covered through Sasria for loss of income and structural damage to insured property as a result of riots and civil unrest. Most are also insured against business interruption.
Tilly believes last week’s events will therefore cause a temporary disruption of economic activity and will likely be followed by a catch-up period, where capital expenditure and pent-up demand will drive renewed growth in SA’s retail property sector.
Stanlib senior listed property fund manager Nesi Chetty echoes the sentiment, saying one needs to separate the short-term from the long-term impact.
"In the short term, Reits will go through a rebuild process, as damaged shopping centres need to be repaired. That could create short-term pressure on vacancies and rental income," he says.
"But, longer-term, the sector is still well-capitalised, with many Reits on track to strengthen their balance sheets and reduce debt over the next three to four years."
Despite the initial sell-down of retail-focused property stocks, Chetty believes the market doesn’t seem to have priced the event as a crisis. As such, he expects share prices to bounce back relatively quickly, as investors realise that listed property portfolios are insured.
In addition, demand for retail goods and services hasn’t gone away. In fact, Chetty believes retail sales growth in many centres may well accelerate in the coming months on the back of pent-up demand.
That said, it could take up to two years to rebuild malls that have been burnt down, says Estienne de Klerk, SA CEO of sector heavyweight Growthpoint Properties and chair of the SA Reit Association. "That can’t be positive for earnings."
But De Klerk says it’s difficult to determine the possible impact on individual Reits, as much will depend on how many malls were damaged, the extent of the damage, the percentage of malls in overall portfolios still able to trade over the coming days and weeks, and how quickly Sasria pays out claims.
The mass clean-up campaigns now under way also come at a cost. And some Reits are likely to beef up security at their malls in the coming weeks, which will further add to mall-owners’ operational costs, he says.
It’s been a tough few days for us. To see people’s hard-earned livelihoods taken away from them in that manner and to see our assets destroyed overnight after all the hard work is not easy
— Izak Petersen
The big worry is that many smaller businesses and mom-and-pop stores that have been forced to shut down don’t have the financial resources to open their doors again.
"We are insured and should recover the immediate losses but some of our tenants will not make it," says Dipula CEO Izak Petersen. "It’s been a tough few days for us. To see people’s hard-earned livelihoods taken away from them in that manner and to see our assets destroyed overnight after all the hard work is not easy."
MSCI Real Estate senior associate Niel Harmse agrees. "The reality is that many tenants will not be able or willing to re-open for business," he says.
Township retail — the MSCI retail benchmarking index’s top performing subsegment through the pandemic — could be the most affected. The upshot is that retail vacancies could potentially rise further over the coming months, which may place downward pressure on rentals.
Harmse says vacancies already increased sharply in 2020 in response to the pandemic, which significantly affected tenants’ ability to service their rental obligations — "notwithstanding the discounts offered by landlords".
The average vacancy of the 100 shopping centres tracked by MSCI’s index jumped to 6.5% in March, up from 3.8% in December 2019 and the highest level recorded by MSCI since the launch of its index in 2003.
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