The return to the malls

QUOTE: Our balance sheet is still under pressure, mainly because of higher-for-longer interest rates — Growthpoint CEO Norbert Sasse

To say that shopping centre owners have gone through the wringer in recent years is an understatement.

First it was the pandemic, which cost JSE-listed landlords millions of rand in rental relief packages to help struggling tenants survive repeated trading restrictions. That was followed by the looting and arson of township and rural malls during the July 2021 riots. Then came relentless load-shedding and the associated cost of keeping the lights on and the tills ringing.

Mall owners have also been hit by higher-for-longer interest rates, which have pushed up finance costs and forced consumers to cut back on retail therapy. 

However, the sector appears to be through the worst. Last week, four real estate investment trusts (Reits) released surprisingly upbeat trading metrics for their mall portfolios (see table). Most have seen inflation-beating growth in sales turnover for the six months to December. Foot count and spend per head are generally up while vacancy rates are down.

Some have even reported vacancies dropping to record lows on renewed demand for space from local retailers, many of which are in expansion mode.

The upshot is that Reits are starting to see positive rental reversions in many of their malls for the first time in years. Post-pandemic, retail landlords have typically had to drop rentals when leases come up for renewal — or risk losing tenants.

The trend is good news for Reit investors as rental growth ultimately drives earnings and dividend growth. Granted, JSE-listed heavyweights Growthpoint Properties and Hyprop Investments last week both reported an overall decline of just more than 8% in earnings for the six months to December year on year.

Both counters still expect double-digit declines in distributable income for the year to June — notwithstanding a resilient performance from their underlying shopping centres. 

In contrast, Attacq and Fortress announced increases of 2.8% and 18% respectively in earnings for their interim reporting periods.

Growthpoint group CEO Norbert Sasse says the company’s latest set of results points to something of a dichotomy: “On the one hand, operational performance metrics speak to a marked improvement. But our balance sheet is still under pressure, mainly because of higher-for-longer interest rates.”

Hyprop CEO Morné Wilken shares a similar sentiment. He says in Hyprop’s case, the strong performance of both its South African and Southeast European mall portfolios was dampened by the “unprecedented” devaluation of the Nigerian naira against the dollar.

This drove up finance costs on dollar-denominated debt and income from Hyprop’s Ikeja City Mall, whose tenants pay rent in dollar. That translated into a foreign exchange loss of R33m — a key reason Hyprop isn’t paying an interim dividend.

Its South African shopping centre portfolio — eight shopping centres valued at R23.4bn — notched up an annual increase of 5.8% in foot count and 5.6% in sales turnover.

Shopping centres in Cape Town and surrounds have generally outperformed Hyprop’s Gauteng malls, buoyed by semigration and a sharp rebound in tourists.

These include Canal Walk at Century City, Hyprop’s largest (157,000m²) and most valuable mall, Capegate in the northern suburbs and Somerset Mall in Somerset West.

The company recently bought its ninth shopping centre, the 64,143m² Table Bay Mall near Blouberg. The R1.625bn acquisition is in line with its strategy to increase exposure to the Western Cape.

Wilken says Table Bay Mall is well positioned in a “high-growth node, underpinned by strong residential demand, driven by relocation trends towards the Western Cape”.

The mall, which will transfer to Hyprop this month, notched up turnover growth of 16% in December (year on year) compared with an average 8.1% uplift for the existing portfolio.

Sales turnover at Capegate was up nearly 10% for the six months to December. At Canal Walk sales reached a record R1.1bn in December. Vacancies at all Hyprop's Cape Town malls are below 1%.

Five years ago, South African mall owners were very reliant on the entry of international brands. But the focus has shifted back to local retailers

—  Michael Clampett

Rosebank Mall in Joburg posted equally impressive sales growth of close to 10%. Importantly, Wilken says Hyprop recorded a “significant” improvement in rental reversions of an average 3% in December compared with a drop of 9.3% in June. That is the first time since 2019 that Hyprop’s reversions are in positive territory.

Notably, new leases have been signed at an average 24% reversion rate, underscoring strong demand for space in Hyprop’s malls.

New tenants include Takealot and Heydude at Canal Walk; Vida e Caffè, Freedom of Movement and Checkers at Somerset Mall; Edgars Beauty and Flight Centre at Hyde Park Corner; Krispy Kreme and BagWorld at Capegate; Steve Madden, Nando’s and Xpresso at Clearwater Mall; and Toys R Us, Wimpy and Uniq at Rosebank Mall.

Wilken says another key metric reflecting the strength of the retail trading rebound is that turnover rentals are finally starting to kick in across the portfolio (up 18%). This refers to tenants being required to pay a percentage of sales to landlords on top of their normal rent when a pre-agreed turnover threshold is breached. 

Turnover rentals are also starting to boost revenue streams at some of Growthpoint’s malls, most notably at the V&A Waterfront, the R20bn jewel in its crown.

Sales at the shop, work, live and play precinct were up a hefty 18%, with a record monthly turnover of R1.2bn reached in December. Turnover rentals (retail and hotels) at the V&A surged 109% in the six months to December. 

“Historically only five or 10 tenants at the V&A would hit the turnover rental threshold. That has increased to almost 30,” says Estienne de Klerk, who heads Growthpoint’s South African business.

Sales growth has been underpinned by the return of international tourists and cruise ships. De Klerk adds that the harbour at the V&A has benefited from the war in the Middle East as more ships opt to sail around Africa rather than through the Suez Canal and Red Sea where Houthi rebels have attacked vessels. 

Trading density (sales per square metre) grew at a more modest 4.2% for the six months to December in the rest of Growthpoint’s mall portfolio, which comprises 37 centres valued at R25bn.

The retail vacancy declined marginally, from 6.3% to 5.7%, but De Klerk says a large portion sits in one centre — Bayside Mall in Milnerton, Cape Town. More than a third (18,2910m²) of the centre’s 45,000m² has been vacated due to an extensive redevelopment.

He says if one strips out Bayside Mall and the vacant office space that forms part of some of the group’s shopping centres, Growthpoint’s retail vacancy is closer to 3%. 

De Klerk expects Bayside Mall to be fully let when the upgrade is completed in November. New tenants include Checkers, Shoprite, Dis-Chem, Pick n Pay Clothing, HiFi Corp, The Hub, Pep Home, Rochester and Zone Fitness. 

Growthpoint’s rental reversions on renewals have also improved markedly, from an average -9.1% to -3.2%. Though still in negative territory overall, almost 40% of all lease renewals (202 of 366) were concluded at an average 3.1% higher rental, which De Klerk says reflects a “much better” trading and leasing environment.

Attacq, which owns Mall of Africa at its flagship Waterfall City precinct in Midrand, and Fortress, which owns a large portfolio of malls that cater to lower-income shoppers, released equally upbeat trading figures last week. 

Attacq’s trading density grew by a healthy 9% across its eight shopping centres in the 12 months to December. Its R9.48bn retail portfolio also includes Eikestad Mall in Stellenbosch, MooiRivier Mall in Potchefstroom, Garden Route Mall in George and Brooklyn Mall in Pretoria.

Mall of Africa recorded trading density growth of 11% and a 10% increase in foot count. Sectors that recorded double-digit sales growth include food grocers and food services (restaurants and takeaways), department stores (Woolworths and Checkers Hyper), entertainment and luggage.

Attacq has also seen a big improvement in retail rental reversions — from -4.1% to +5.5% in the six months to December. Michael Clampett, Attacq’s asset and property management executive, says it’s the first time since 2019 that the company is seeing rental growth again.

Attacq’s retail vacancy rate improved from 4.4% to a five-year low of 2.5%. Clampett says that’s a reflection of increased demand among restaurants and other food outlets and the trend among national retailers to introduce new product categories in standalone stores. 

“Five years ago, South African mall owners were very reliant on the entry of international brands. But the focus has shifted back to local retailers, many of whom are bringing new brand and product concepts to the market.”

They include Mr Price Kids, Dis-Chem Baby and Woolworths Cellar. Clampett says there are also local start-ups that opened at Sook at Mall of Africa, a 130m² space that offers flexible lease terms for smaller businesses that are keen to take up larger permanent stores.

They include Somizi Mhlongo’s kids apparel brand Sompire Kids, Thando Thabethe’s Thabooty’s and streetwear brands Galxboy and Thesis Lifestyle.   

He adds: “We see potential to grow the presence of some of these home-grown brands to 15-20 stores across our malls.”

Pick n Pay’s rent is fully paid to date and they haven’t given us notice of any store closures in our malls or asked for any rental concessions

—  Morné Wilken

Sales turnover in Fortress’s R10.4bn retail portfolio, including several malls in rural areas and CBDs on public transport commuter routes, grew by 6.9%. Grocery and liquor stores, health and beauty tenants and pharmacies lead the pack with double-digit sales growth.

The group’s retail vacancy rate dropped to 2.3% in December, down from 3.6% a year earlier. Vuso Majija, head of retail, says the vacancy rate is closer to 1% if one strips out the empty offices that form part of the centres.   

He says recent uptake includes a big chunk of empty space at Central Park in the Bloemfontein CBD, which stood vacant for almost 10 years. New tenants at the centre include Boxer, Studio 88 and Mr Price. 

Empty space at Morone Shopping Centre in Burgersfort, which had a vacancy rate as high as 45% at one stage before the pandemic, has shrunk to 3%. “A few years ago, it was a mall you couldn’t sell. But we’ve now managed to turn it around,” says Majija.

Fortress has also seen negative rental reversions turn positive, with an average 0.2% increase across its portfolio for the six months to December. Majija says the group has done a lot of work to enhance, refresh and expand its existing centres, “which should support a further recovery in rentals”.

Despite the improved retail trading landscape, industry players warn that mall owners still face general economic and political headwinds. There’s also talk of Pick n Pay potentially closing or downsizing as many as 40 of its underperforming stores. Game stores and cinemas also aren’t entirely out of the woods.

Any closures in this regard will push retail landlords’ vacancies up and rental income down.      

Pick n Pay is one of the four biggest tenants in Hyprop’s and Growthpoint’s portfolios and takes up 7.5% and 10%  of the two counters’ gross lettable area. 

Though Hyprop flagged Pick n Pay as a risk in its results announcement, Wilken says: “Pick n Pay’s rent is fully paid to date and they haven’t given us notice of any store closures in our malls or asked for any rental concessions.”

 In fact, Wilken says Pick n Pay supermarkets have recently been upgraded in four of Hyprop’s malls and are generally trading positive. Still, he adds that Hyprop has met with Pick n Pay’s senior executives on and off over the past five years to raise concern about the underperformance of the group’s supermarkets compared with other food anchors.

“But the group’s liquor and clothing stores are performing exceptionally well.” Besides, Wilken says Pick n Pay’s supermarket leases in three of its malls are structured purely on a turnover rental basis, effectively already providing a sizeable discount.

Growthpoint’s De Klerk appears less concerned about Pick n Pay potentially closing or downsizing stores. He says: “We’ve looked at their trading figures and they don’t seem to be in a dire state. But if they decide to close some grocery stores where leases are coming up for renewal, they are likely to fill the space with their liquor or clothing brands.”

De Klerk adds: “If not, we expect other food grocers to beat each other down for the space.” 

Fund managers believe the rebound in retail performance has improved the investment case for local Reits with sizeable mall portfolios. Evan Robins, head of listed property at Old Mutual Investment Group, says the group has increased its exposure to retail, which he believes offers the best growth potential from a South African sectoral perspective. 

“We see this subsector recovering now that the downward rebasing of rentals is mostly completed. We anticipate landlords being able to once again participate in any sales growth achieved by their tenants.” 

However, the rate of recovery for various types of shopping centres could differ. Robins says small regional malls, typically covering between 25,000m² and 50,000m², should continue to underperform, which is what they have been doing on many trading metrics.

“They may be caught in the middle — too small for the flagship stores and destination appeal of super-regionals, but too big to be convenient.”