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South Africa: Retail projects move forward in South Africa despite challenges

2017/06/30

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

A initial 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 – particularly in smaller shopping centres, where they had fallen from 9% to 5.2% year-on-time(y-o-y) by the final quarter of 2016.

Recent and next openings

One mall opening its doors in the near next 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.

Additional 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 major 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 increase 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 increase contribution of 3.3 % points, though this was half offset by contractions in all other segments, which weighed headline increase down by a combined 1.7 points.

Challenging environment

Evolution 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 additional 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 initial quarter, with GDP down 0.7%, having contracted by 0.3% in the fourth quarter of 2016, half due to poor performance in retail, according to the official statistical bureau, Statistics South Africa.

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

This reflected a sharper fall in household spending – down 2.3% in the initial 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 better 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 increase, higher import prices, rising inflation and gain tax hikes affect consumer spending.

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

The bigger picture

A lot of 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 deficit 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 again 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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