Shopping centre boom faces challenges

South Africans' devotion to the shopping centre has been a driver for retail property developments for decades. This desire to shop in large malls now permeates other parts of Africa too.

SA Commercial Prop News has learned that South Africa now has the sixth highest number of shopping centres of any country in the world, boasting almost 2,000 shopping centres with a floor area covering a whopping 23 million square metres.

Consumer spending forms the engine of SA’s economy, accounting for some 70% of economic activity in the country every year. This realisation was reiterated at the South African Council of Shopping Centres (Sacsc) conference held recently.

Addressing the conference, Director at Sesfikile Capital, Kundayi Munzara, says the listed property sector shone from August 2005 to August 2015 and was the top performing sector consistently.

Much of this was thanks to the strong performances of shopping centres across the country.

Mr Munzara says August to August each year, listed property has managed returns of around 20% each year for ten years.

If you invested R100 000 at the end of August 2005, that number would be R600 000 at the end of August 2015,’ he says.

“If you invested in listed property over the past decade, then you can sit with a smirk on your face. Your financial manager made a good decision to get into the sector,” he says.

This year to date, listed property has been a very strong performer, again outdoing equities. However, with SA’s economic growth prospects in a very sorry state, its stellar run will probably lose lots of gas at the end of this year and into next year.

“Domestic demand is weak in South Africa, pressure on costs and profitability persist, while policy uncertainty, particularly threats to private sector property rights, undermines confidence and private sector fixed investment, with employment weak to lower. Business confidence is likely to remain suppressed this year and next, on high levels of uncertainty,” Investec’s chief economist Annabel Bishop told investors this week.

Many investment banks have on average forecast less than 2 percent gross domestic product growth for SA this year.

Investec has forecast 1.4% in real terms year-on-year in 2015. It grew at 1.5% last year. They expect it to reach 1.7% in 2016. They say it will manage 2.2% growth in 2017. Their prediction is 2.7% growth for 2018 and 3% growth in 2019. This, she says is quite alarming for an emerging economy.

Listed Property Perfomance
 
Munzara says current property returns could be unjustified given the shoddy economic conditions. He says the listed property is very expensive currently compared even with bonds.

“Things have run ahead of themselves a bit. The yields are now lower than they are on bonds,” Munzara says.

He says 24% of South Africa’s listed property sector is offshore.

“Some of the SA listed property sector companies are getting returns of about 12% which are not that sustainable given weak South African conditions,” Munzara says.

“You need to be super cautious. Interest rates are starting to rise in South Africa and they soon rise in the US too. That will place pressure upon South African property stocks,” he says.

Grindrod Asset Management’s chief investment officer, Ian Anderson, says individual stock picking could be more important than buying the sector now.

“Over the past few years, I have picked out individual stocks buying as an investment strategy that works as opposed to buying an entire index,” he says.

Mr Anderson may have hit the nail on the head as the gap between the top performing property stocks this year to date and those at the bottom end has been immense.

For the first nine months of the year to the end of September, equities achieved a 3.39% total return, bonds managed a 2.67% return, the return on cash was 4.76% but the return on South African listed property was 13.26%.

Fortress Income Fund’s B-unit was the best performer, managing a total return of 86.30%, followed by Hospitality’s return of 70%, Resilient’s of 41.39% and Capital and Counties’ return of 37.97%. The worst performer year to date is Freedom Property Fund which has suffered a minus 55% return, followed by Delta International which lost 17.35%, Acsion which got minus 13.46%, Rebosis suffered minus 8.3% and Accelerate Property Fund struggled with minus 7.36%.

Old Mutual Investment Group’s Evan Robins says he thinks that listed property will struggle going forward into 2016.

“I think we are seeing too many shopping centres being built. A poor economic environment with limited prospects to improve strongly into the near future means that malls just won’t be sustainable. Offices remain under pressure and have bad vacancies and I think it makes sense that so many funds have bought overseas exposure in big markets such as the UK and Germany. Of course, these large economies are under pressure themselves and that will eventually hit the South African companies which have exposure to them,” he says.

There are also concerns that the rand could strengthen which would weaken the returns enjoyed by companies like Redefine International, Sirius Real Estate, Stenprop and Texton which are listed on the JSE in a primary or secondary fashion but have significant ownership of European property.

“It may be better for funds to start looking at buying or building shopping centres in African countries including Nigeria, Ghana, Zambia and Kenya, which have strong growing middle classes, economic growth and an undersupply of shopping centres. It takes time and there is risk but it could be well worth it,” Mr Robins says.

Resilient Property Income Fund and Hyprop Investments are building and buying shopping centres in Africa.