Vukile Property Fund surprises on the upside

The shopping mall in SA is not yet dead, despite the galloping pandemic.

Vukile Property Fund owns a R36bn retail-focused portfolio, split between SA and Spain. It is the latest among a bevy of JSE-listed mall owners to emerge from pandemic-induced trading restrictions in better shape than anticipated.

This week, Vukile reported a fairly robust recovery in foot count, spending and rental collections across its 45 SA malls and 18 Spanish malls for the six months to September. Though its largest SA asset is the East Rand Mall in Boksburg, most of its centres, in rural areas and townships, cater to lower-income shoppers.

These include Dobsonville Mall in Soweto, Gugulethu Square in Cape Town and Mdantsane City near East London.

Vukile CEO Laurence Rapp describes the interim set of results as "very interesting", given how significantly ahead some numbers are compared to management’s earlier forecasts.

He says while there’s no denying that the past six months have been the most tumultuous in the company’s 16-year history — distributable earnings slid 47% year on year, due mainly to rental relief granted to tenants — trading metrics have surprised on the upside.

Foot count in SA and Spain was, respectively, at 86% and 84% of the levels recorded in September last year — up from lows of less than 35% in both countries during April’s hard lockdown.

Rental collection rates in both portfolios are back to more than 90%. Vacancies have been well contained: in SA at 3% and in Spain at 1.5%.

Rapp notes: "Given how foot count has already recovered, surely we should get back to full pre-Covid levels as soon as a vaccine becomes available?" He says most encouraging is that the average rental reversion on lease renewals signed in the six months dropped by only 2%, well ahead of expectations.

Consider that, unlike Spain, SA was already in a recession before the onset of the coronavirus in March.

For instance, annualised sales per square metre in the SA portfolio rose 1.3% for the 12 months to September.

That suggests that though South Africans are making fewer trips to malls, they are spending more per visit, says Rapp. In addition, only 9,044m² (about 1% of total gross lettable area) in the SA portfolio was vacated in the six months to September, of which 8,738m² has already been re-let.

Clearly, some retailers are using the downturn as a chance to aggressively grow their footprints. Rapp says an exciting growth story is emerging among local, unlisted fashion retailers in particular, which are more nimble than their large, listed counterparts and have acted quickly to bring new retail formats to the market.

He refers to brands including Power Fashion, Choice Clothing, Jam Clothing and Studio 88: "They may not necessarily be household names but they are well-run companies with high growth prospects."

Despite the better-than-expected recovery in retail trading metrics, Rapp concedes there is still an element of trepidation about how the threat of further Covid-19 infection waves, both in SA and in Spain, will play out.

"We remain cautious as the overall environment remains fragile and unpredictable," he says.

Other industry players agree that the retail sector is not yet out of the woods. Some believe many tenants that have proved resilient until now may only start showing real distress over the next six months as rental relief packages unwind.

Craig Smith, head of research at Anchor Stockbrokers, expects a general uptick in rental arrears and vacancies over the coming months as the full impact of the lockdown filters down.

"But it’s dangerous to paint all retail with the same brush," he says. "We are already seeing a big divergence in the performance of centres depending on size, format and location."

For instance, Smith refers to suburban convenience centres that cater to daily shopper needs, as well as centres in townships and rural areas aimed at lower-income households, having held up better than their glitzy regional counterparts that rely more on discretionary and leisure spending.

The big question is what will happen when temporary government-funded grants filter out of the system.

FNB commercial property strategist John Loos believes there will be inevitable closures. He refers to retail operating costs that have risen at a much faster pace over the past 20 years than for offices and industrial buildings, which he says has made it far less affordable for retailers to keep shop fronts open than before.

The 10.3% drop in third-quarter employment implies a further loss in consumer purchasing power over the coming months, he says.

Loos adds: "We do not believe that a recovery in economic activity in 2021 will be strong enough to stem the tide of rising property vacancies and resultant downward pressure on property incomes and values."

FNB forecasts average GDP growth of -8% for 2020 as a whole, followed by a recovery of 3.3% and 0.5% respectively over the next two years.

But as Loos points out: "That means real GDP will only be back at about 95% of its 2019 level by 2022."