SA heads back to the malls

It’s no secret that shopping centres have been a virtual no-go for property punters for almost two years. But the tide has seemingly turned, with retail-focused property stocks finally back on investor radars.

Mall owners, including former market darling Hyprop Investments, Liberty Two Degrees (L2D), Resilient Reit, Fairvest, Vukile and Attacq, have notched up healthy share price gains in recent months. That follows the release of better-than-expected trading metrics for the third and fourth quarters among a number of retail-focused real estate investment trusts (Reits), which has no doubt boosted sentiment in a sector ravished by pandemic-related lockdowns, curfews and alcohol bans. Of course, the July riots in parts of Gauteng and KwaZulu-Natal dealt a further blow to retail landlords.

The general theme is that sales turnover and foot count at most retail centres are now, by and large, back at or nearing pre-Covid levels.

Waterfall City developer Attacq is a particular case in point.

The company owns stakes in a number of regional shopping centres including Mall of Africa (at Waterfall City in Midrand), Eikestad Mall in Stellenbosch, Garden Route Mall in George and Brooklyn Mall in Pretoria.

In a trading update last week, Attacq said December turnover for its portfolio of eight shopping centres as a whole was up 13.1% year on year. More impressive is that seven out of its eight centres also reported higher turnovers than in the pre-Covid period (December 2019). That brought the effective increase in turnover for Attacq’s portfolio as a whole to 4.9% in December 2021, against December 2019. This is no small feat considering SA was still in the midst of its fourth Covid wave late last year following the emergence of the Omicron variant.

Pretoria lifestyle centre Lynnwood Bridge is Attacq’s top performer with turnover up 27.4% in December (2021 vs 2019), followed by Eikestad Mall with growth of 8.5% and Mall of Africa with a 6.4% increase.

Brooklyn Mall was the only centre where turnover was lower (-2.6%) last December vs the same pre-Covid period. Worryingly, while foot count recovered noticeably in most of Attacq’s malls in December on a year-on-year basis, the number of visitors was still an average 10%-20% below that of two years ago.

Attacq CEO Jackie van Niekerk ascribes the trend to changing consumer behaviour, with shoppers visiting more stores on a single visit these days as against pre-pandemic periods. So effectively, people are making fewer visits to malls but spending more on each trip.

Van Niekerk says last year’s rebound in spending has been particularly noticeable in the apparel, sportswear and outdoor retail categories, no doubt on the back of a resurgence in leisure activities. Sales of electronic goods also fared well in Attacq’s malls. The restaurant category, too, showed signs of recovery last year, with turnovers returning to more sustainable levels. She adds: "We’ve also seen significant turnover growth where retailers have invested in new-generation store formats and upgrades over the past 12 months."

Though Sandton City and Eastgate owner L2D, and Hyprop, which counts Joburg’s Rosebank Mall and Cape Town’s Canal Walk among its flagship properties, have yet to release trading updates for December, latest data also points to a similar recovery trend.

Tenant turnover at Hyprop’s malls was 10.8% ahead in the four months to October year on year but still 4.6% below the same period in 2019. Foot count at Hyprop was up 4.6% year on year but 18% below pre-Covid levels.

At L2D’s malls, foot count for November was up 26% year on year but 5% below the level recorded in 2019. Turnover was ahead of 2019 levels in some of L2D’s malls in November, nowhere more so than at Sandton City, with particularly strong growth recorded among retailers of luxury fashion brands and fine jewellery. However, categories across the L2D portfolio where sales are still lagging behind pre-Covid levels include travel and luggage, books, stationery and food services.

Speaking at the SA Reit Association’s annual conference last week, L2D CEO Amelia Beattie noted that though a recovery in foot count and turnover doesn’t immediately translate into higher earnings for mall owners, it reflects an uptick in consumer optimism. "And we expect that to translate into Reits’ bottom line over time," she said.

However, the retail property sector is not yet out of the woods.

Naeem Tilly, portfolio manager and head of research at Sesfikile Capital, points out that while the recovery in spending is good news for the larger mall operators, it’s important to separate spending and rentals.

He refers to annual contractual rental escalations (for unexpired leases) that have averaged 6%-7% over the past few years, which are still ahead of turnover growth numbers – despite the turn in recent trading patterns.

In other words, rental affordability has deteriorated, which will force landlords to lower rentals in a bid to keep tenants. "As a result, companies like Hyprop and L2D have reported sharply negative rental reversions on lease renewals over the past 24 months, albeit on shorter-term leases."

Tilly says rentals are likely to fall further in the short term, especially in shopping centres in key urban areas. He notes that the non-urban retail sector, where there is less oversupply than in most cities, is quite a different story. "Trading densities [sales per square metre] in townships and rural areas have typically bounced back quicker, rentals are still more affordable and reversions are comparably stronger."

There is also lingering concern about the long-term outlook for retail spending on the back of rising inflation, which affects lower-income households more, and higher interest rates, which Tilly notes tend to hurt middle-to upper-income consumers’ pockets.

John Loos, property sector strategist at FNB Commercial Property Finance, has a similar view. At a quarterly briefing last week he said the outlook for the retail property sector has improved significantly of late but the structural challenges facing the SA economy suggest that "we are returning to mediocrity at best".

Citing latest retail tenant payment data from credit bureau TPN, he says retailers are worse off financially than their office and industrial counterparts. While 66% of retail tenants were in good standing with landlords (paying rent in full and on time) by July 2021 — up from only 41% in May 2020 — the level remained well below the 71% in March 2020, pre-Covid.

In addition, Loos says while economic activity should continue to recover this year, with positive spin-offs for physical retail, especially the entertainment and dining sectors, consumers’ disposable income is likely to be eroded by "very weak" employment growth, rising interest rates and higher effective personal tax rates. He forecasts real household disposable income growth to slow to a miserly 0.2%, this year, down from an estimated 2.8% last year.

That doesn’t bode well for retail spending, and the pace at which mall owners can grow their earnings through higher rentals.