With the retail market remaining a hotly pursued target for investors, particularly by the funds, a good retail centre still presents a long term sustainable income. The 47.8% y/y increase in investment value in this sector in 2015 is a good indicator of its resilience in a tough economic climate.
Interesting times ahead
However, this market is going to be a curious one to observe over the next two to five years. We know a lot of the retail developers have a number of developments in the pipeline. While it’s true that not all of these will break ground with the yields not all painting the right picture, there is definitely evidence that the sector is gearing up for a number of projects across the retail spectrum, from provincial complexes to rural centres. The fact that there are so few retail properties on the market in a prime location is prompting a number of funds to embark on greenfields joint ventures with developers or land owners. In a competitive environment, it’s certainly going to be an interesting space to watch.
Big and small wins
We will continue to see the large super-regional centres come through (Mall of the South, Mall of the North, etc.) and prove a safe investment bet as they hold the dominant position and can secure the right tenant mix for their surrounding demographic. The super-regionals are supported by expanding retailers who trust the larger malls to deliver on their own growth strategies.
At the other end of the spectrum, the supermarket-anchored neighbourhood centre (the one with the Woolies where you pick up your daily bread and milk) continues to retain its vitality. It’s a strong growth asset class with food-based retailing securing positive trade results and driving active investor demand.
Mid-sized centres under pressure
In the metropolitan areas, new developments coming on stream will begin to cannibalise existing centres. It will become increasingly difficult to differentiate against the regional/super-regional centres of 50,000m²+ with a wide-ranging offering and a one-stop-shop experience. This trend will place increased pressure on the owners of medium-sized centres (10,000m²– 30,000m²) that are not well-located or do not have the bulk available to expand to compete against any nearby regional mall. However, with the current shortage of quality retail stock, the situation does present opportunities for investors with an appetite for risk to pick up good deals if they think they have the right recipe to reinvent the tenant mix and reposition the centre.
Rural retail potential
But we are seeing active investment appetite amongst the smaller funds for rural regional developments (6,000m²– 20,000m²) and there is sound financial feasibility in servicing lower-income consumers in rural communities. Where previously it was necessary for rural consumers to travel up to 100km to shop with prohibitive transport costs, the township retail centre offers valuable convenience and a captive market. In 2015, small community shopping centres accounted for 74% of the investment transactions in this sector – proving that they are definitely worth a look.
There is a lot of conjecture that the South African market is over-shopped. If this is true, we can expect further cannibalisation and more movement – and there will be issues. However, the fact remains that the retail property sector still holds the attention of the property investor and continues to be characterised by the lack of good stock, which is translating into lower than expected yields. Clearly, retail investors are taking a long-term view, paying a bit more now , and trusting that escalations, tenant retention and tight management will show that their premium retail investment was a sound one.
For more on commercial real estate investment, view the latest research from JLL South Africa.