Retail projects move forward in South Africa despite challenges

New mall developments and low vacancy rates should create opportunities in South Africa’s retail sector, though economic headwinds could restrict growth prospects in the short term.

A first quarter retail market survey by real estate consultancy JLL, published in early June, said new retail projects are continuing to break ground despite a weak economic climate.

Ongoing activity, JLL noted, indicated a competitive retail market, strengthened by relatively low vacancy rates – especially in smaller shopping centres, where they had fallen from 9% to 5.2% year-on-year (y-o-y) by the final quarter of 2016.

Recent and future openings

One mall opening its doors in the near future is the 66,000-sq-metre Cornubia Shopping Centre. Set for completion in September, the project is part of the larger R1.8bn ($140m) Cornubia mixed-use development of housing, commercial and industrial sites being developed by Investec Property.

A month later the 20,000-sq-metre Hebron mall, which is being built by domestic firm Billion Group, is scheduled to open its doors in North-west Province.

More recently, local developer Pareto inaugurated a R2bn ($150m) expansion of Menlyn Park Shopping Centre in Pretoria’s Tshwane district last November, bringing its total floor space to 170,000 sq metres. This was followed in March by the R500m ($39m), 30,000-sq-metre Alex Mall in Johannesburg – joint owned by the local chamber of commerce, McCormick Properties and Valumax.

These followed the inauguration in April 2016 of Mall of Africa – developed by Atterbury Property Group – in the Waterfall precinct between Johannesburg and Pretoria, the country’s largest single-phase shopping development to date, at 131,000 sq metres.

In a positive sign for such outfits, data released by local bank Investec in mid-June showed retail sales were up 1.5% y-o-y in April, an increase from the 0.9% y-o-y growth posted the previous month and beating market expectations by 100 basis points.

The expansion was driven by food retailers (+13.6%), general dealers (+5.1%) and pharmaceuticals (+2.7%) for a joint growth contribution of 3.3 percentage points, though this was partly offset by contractions in all other segments, which weighed headline growth down by a combined 1.7 points.

Challenging environment

Progress on retail developments suggests medium-term confidence in the sector, though prolonged recession may weaken this or cause some proposed projects to be delayed.

The cooling economy, along with political uncertainty, is affecting consumer sentiment in more discretionary spending categories like clothing – down 4.7% y-o-y as of mid-June, according to Investec Bank – and durable goods (-3.7%), thereby impacting the broader performance of the retail sector.

The South African economy slipped into recession at the end of the first quarter, with GDP down 0.7%, having contracted by 0.3% in the fourth quarter of 2016, partly due to poor performance in retail, according to the official statistical bureau, Statistics South Africa.

Retail sales rose by 1.9% in 2016 on demand for textiles, clothing, footwear and leather goods, but eased by 1.1% quarter-on-quarter in the first three months of this year.

This reflected a sharper fall in household spending – down 2.3% in the first quarter – which contributed to a 5.9% drop in trade, catering and hospitality, a category that includes retail and wholesale activity.

In a 2017 survey published in June, consultancy Deloitte warned that retail was one of three sectors facing greater downward pressure, alongside agriculture and construction. Experts polled for the survey expected an increase in volatility across the economy in the next 12 months as low growth, higher import prices, rising inflation and income tax hikes affect consumer spending.

“This, coupled with increased competition from overseas retailers,” the report said, “has made for challenging conditions in this sector.”

The bigger picture

Many of the challenges the retail sector faces can be attributed to macroeconomic conditions, which have prompted debate over possible central bank measures to stimulate lending.

On June 10 Moody’s announced it was downgrading South Africa’s sovereign credit rating to “Baa3” – one notch above junk – with a negative outlook, citing rising debt levels and a lack of political consensus for reforms needed to stimulate investment.

Relief from the South African Reserve Bank (SARB) – in the form of lower benchmark interest rates, which could boost credit and lift sales – looks unlikely.

In early June Brian Kahn, a member of the SARB’s monetary policy committee, said reducing rates was not the route to lifting the economy out of recession, adding that structural weaknesses and political uncertainty needed addressing before monetary policy could be loosened.

“We would not want to reduce rates and then be forced into a premature reversal of policy,” he told an industry seminar.

The central bank’s key repo and prime lending rates have stood at 7% and 10%, respectively, since March 2016, and the risk of creeping inflation remains a concern: the consumer price index stood at 5.3% as of May, near the top of the SARB’s target band of 3-6%.

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