As counterintuitive as it may seem, surging food and fuel prices, higher debt servicing costs and ever-higher unemployment rates haven’t dented spending in township and rural economies.
In fact, they appear to be in pretty good shape judging by the upbeat retail trading metrics released last week by major JSE-listed mall owners.
Vukile Property Fund, Fairvest and Resilient Reit have all reported inflation-beating sales growth with foot count and turnovers having rebounded ahead of pre-Covid levels.
The three Reits, all key players in South Africa’s nonmetropolitan shopping centre space, are also seeing a renewed race for space among retailers.
Vukile, whose R35bn retail-focused portfolio is split 44/56 between South Africa and Spain, has reported a 16.8% year-on-year uplift in dividends for the six months to September.
Both the company’s local and Spanish portfolios posted a decent operational performance. In fact, Vukile CEO Laurence Rapp referred to the South African retail environment in lower-income areas as “tremendously positive’’.
While average trading density (turnover/m2) and sales turnover in Vukile’s 34 malls increased 7% and 7.8% respectively, trading densities in Gugulethu Square in Cape Town, Thavhani Mall in Thohoyandou, Limpopo, and Phoenix Plaza in Durban posted double-digit growth.
Rapp says sales turnover is now 8.3% ahead of pre-Covid levels while foot count is up 11% over the same time. In addition, Vukile’s South African vacancy rate has reached a multiyear low of 2.3%, down from 2018’s six-year peak of 3.9%.
Rental growth on lease renewals in the six months to September turned positive again for the first time in three years, at an average 1.6%
Importantly, as Rapp points out, rental growth on lease renewals in the six months to September turned positive again for the first time in three years, at an average 1.6%. That compares with rentals dropping by 3.3% and 2.4% in 2020 and 2021 respectively.
Rapp believes the robust metrics in its mall portfolio have been supported by the supply of new retail space drying up. In addition, retailers are aggressively trying to increase their market share in lower-income areas where consumers are often not as cash-strapped as their debt-laden, higher-income counterparts.
He says Vukile’s townships and rural malls have been insulated from tougher times due to the vibrant “cash economies” in these areas.
Retailers’ renewed appetite to grow their footprints is underlined by six of Vukile’s top 10 tenants having opened 40 new stores across its portfolio in the past six months.
TFG, Mr Price, Pepkor, Pick n Pay and Checkers are leading the charge. Dis-Chem and Clicks, which traditionally didn’t have a presence in township malls, are also on an aggressive growth path.
In addition, Vukile has repositioned the tenant mix in its malls to focus more on nondiscretionary retail categories. Restaurants, coffee shops, jewellery, electronics and department stores have been replaced by grocers, fast food, bottle stores, value fashion, athleisure, accessories, health and beauty, and home furnishings and décor.
Rapp now plans to aggressively grow Vukile’s township portfolio. “We want exposure to the top 20 biggest townships — we’re now only in the top six.’’
The company is already closing two new deals: the Pan Africa Mall in Joburg’s Alexandra, which it bought for R421m, and BT Ngebs City Mall in Mthatha, Eastern Cape, of which Vukile is buying a 50% share, for R400m.
In a preclose trading update for the year to December, Resilient CEO Des de Beer shared an equally bullish sentiment on the nonmetropolitan retail market.
A number of Resilient’s 27 malls are located in South Africa’s prime mining and agricultural belts such as Kathu and Kimberley in the Northern Cape; Northam, Burgersfort, Polokwane and Tzaneen in Limpopo; and Brits, Klerksdorp and Mahikeng in North West.
Resilient also has stakes in large township malls such as Jabulani Mall in Soweto and Mams Mall in Mamelodi, Pretoria. De Beer says extensions and redevelopments are under way (or have recently been completed) at several of its malls to accommodate increased tenant demand.
While grocers are particularly keen to roll out new stores, fashion retailers are also in expansion mode. At Mvusuludzo Mall in Thohoyandou, Limpopo, for instance, a new Truworths Emporium is taking up a hefty 1,900m2 while new entrants include Fabiani and G-Star Raw.
“When you start getting multinational fashion brands opening shop in a place such as Thohoyandou, you know how well rural centres are performing,’’ says De Beer.
Year to date, Resilient has notched up rental growth of an impressive 17.2% on new leases, while renewals have achieved growth of 3.4%. Comparable sales growth of 10.1% was recorded for the 10 months to October 2022.
Referring to the relative strength of rural and nonmetro economies, De Beer believes the performance of Resilient’s malls are supported by being close to some of the world’s largest platinum group metal mines. “Malls in these areas can sustain more difficult times,’’ he says.
Fairvest’s portfolio of 77 mostly smaller and midsized centres in nonmetro areas has also started to stage a turnaround. Dividend payouts to B shareholders for the year to September exceeded guidance by 4.4%.
The company now has a dual share structure after its takeover of Arrowhead. The move expanded Fairvest’s mall bias to the office, industrial and residential sectors. However, management plans to recycle out of these sectors to refocus on the lucrative lower-income retail market.
Riaz Kader, COO of Fairvest’s retail portfolio, says though retail renewals for the 12 months to September are still marginally in negative territory, they are “trending in the right direction’’.
However, rentals achieved on new deals clocked in at 5% more than existing rates, which Kader says speaks to the strength of retail leasing activity in rural and township malls. Sales growth has picked up by an average 8.3% in the year to September, with food and textiles the standouts.
Shopping centres in the markets in which we operate also act as transport hubs and community meeting areas, which further entrenches their defensive nature
— Riaz Kader
Kader believes the attraction of township and rural centres as an asset class is that they’re more than just places where people buy things.
“Shopping centres in the markets in which we operate also act as transport hubs and community meeting areas, which further entrenches their defensive nature.’’
Analysts expect Reits with a bias towards township and rural centres to outperform those exposed to higher-income, urban malls that cater more to nonessential spending.
Ridwaan Loonat, senior property analyst at Nedbank CIB, says there’s no doubt trading metrics in township and rural centres have been propped up by their large exposure to value-focused tenants.
Despite a recent wobble by retailers such as Mr Price, he says: “Value retail has outperformed in the current environment and is expected to continue to do so,’’ he says. “Consumers have also benefited from pandemic-related social grants which have supported tenant sales.’’
Rentals finally turning the corner is a big plus as rental growth ultimately drives earnings and dividend growth.
Loonat says: “Rental reversions have now turned positive for township and rural assets compared with flat to negative growth for urban centres.’’
Craig Smith, head of research at Anchor Stockbrokers, agrees that township and rural malls are a better bet for investors than urban malls right now, as rental growth prospects are muted for the latter.
“Township and rural malls have materially lower rent-to-sales ratios on average, so landlords have a greater ability to increase rentals.”
He says strong demographic growth and social grants in lower income areas will also continue to support spending on need-to-haves, as opposed to nice-to-haves.
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