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Investment case: Township and rural shopping centres

Opportunities for large-scale centres are drying up.

South Africa’s retail property market has focused on shopping centres in metropolitan areas, with hundreds of large- and small-scale centres rolled out over the last two decades.

Retail property investors were comfortable in this market, given that they understood the nuances of urban consumers and the return was lucrative.

How dynamics have changed over the last 14 years.

The market has reached a point of saturation in metropolitan areas, forcing developers, institutions and property companies to look elsewhere for opportunities. The search is pointing towards township and rural areas.

Township and rural retail developments are growing. Figures from MSCI Real Estate and the South African Council of Shopping Centres (SACSC) indicate that about 1.8 million square metres of retail space in township and rural areas has been built since 2000, from 405 000 square metres in the 1990s.

The combined space in this market now amounts to more than 2.6 million square metres.

Growth drivers

Growth has been driven by improving economic fundamentals. Head of capital markets at real estate services firm Jones Lang LaSalle (JLL), Henry Playne says during the past ten years household expenditure has grown, resulting in economic growth.

From 2004 to 2014 South Africa’s average real GDP (adjusted for inflation) grew by 3.1% and employment grew over 11%, fuelling the growth of the black middle class.

The appetite for credit also grew, further driving consumption-led growth in the economy. Playne says private sector credit extension to households increased by 76% from 2010, but has since slowed to 27% in 2014.

Some consumers targeted by township and rural shopping centres depend on the social grant system, which Playne says will pay out a “staggering R155 billion this year”.

“All of these factors have contributed to growing household consumption in the economy, encouraging demand for retail in previously underserviced areas,” Playne explains.

Despite the slower economic growth, township and rural shopping centres continue to perform. According to head of listed property funds at Stanlib Keillen Ndlovu these shopping centres “have benefited from high foot counts. The spend per head is lower than urban shopping centres, but this market is volume driven”.

JSE-listed property companies are taking advantage of opportunities in this market. In 2002, only the Resilient Property Income Fund had exposure into township and rural centres.

Now Vukile Property Fund (Vukile), Synergy Income Fund (a listed subsidiary of Vukile) Dipula Income Fund and Rebosis Property Fund are invested in this market.

Nodes such as Soweto, Umlazi, Mbombela, Giyani, Gugulethu, Khayelitsha, Ulundi, Phuthaditjhaba, Lephalale, Mahwelereng, Mdantsane and other emerging towns continue to see multi-million rand inflows in retail developments.

Institutions such as Stanlib, asset manager of the Liberty Property Portfolio, are also getting in on the act. Stanlib recently announced that it is breaking ground on the 21 000 square metre Botshabelo Mall in the Free State with Khora Investments worth R320 million. Fund manager for the Liberty Property Portfolio Alex Phakathi says this is the first Free State development for the portfolio, which is set for completion in 2016.

Explaining the investment case for Botshabelo, Phakathi says some of the non-metropolitan areas are showing high growth and “there is still some life remaining”.

“Some of the markets we have chosen are largely undersupplied in terms of proper and aspirational retail centres. We do find support in terms of demand [and] there are the right demographics,” he says.

For developments in township and rural areas to become efficient, Broll Property Group’s divisional director of research Elaine Wilson says the offering must be diversified. Wilson says to lure people, retail centres should not only offer retail amenities, but also social grant and pension collection points.

“Otherwise, consumers who live 20 kilometres away will drive into town to collect their pension or grants, often bypassing a centre. So where are they going to shop?” Wilson asks.

Despite the clear opportunities, the market does come with risks. Playne says township and rural shopping centres are vulnerable to economic disruptions such as job losses. Also securing land or getting it rezoned may pose challenges – especially if land is owned by a municipality or tribal authorities.

Opportunities drying up

CEO of Vukile Laurence Rapp says now is the time to become selective as most rural and township retail centre opportunities have been exploited. Rapp – who runs a fund which owns township and rural centres worth R8.5 billion including the Dobsonville Shopping Centre in Soweto, Phoenix Plaza in Durban, East Rand’s Daveyton Shopping Centre and more – says certain areas of the market are starting to reach saturation, although this is not as extreme as metropolitan areas.

The opportunities for bigger shopping centres on the scale of the Maponya Mall and the Jabulani Mall are gone, says Ndlovu. “Every major township now has good shopping facilities with a reasonable mix of food, fashion and entertainment. There is room for shopping centres of smaller size, with a food anchor or a big grocery chain.”

The jury is still out on whether this market can trump shopping centres in metropolitan areas. 

*This article was originally published in the recent edition of Moneyweb’s digital magazine Property Mogul. To view the original, as well as the rest of the publication, please choose one of the following formats:

Property Mogul issue 5 – PDF

Property Mogul issue 5 – Joomag

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“Growth has been driven by improving economic fundamentals … during the past ten years household expenditure has grown, resulting in economic growth … From 2004 to 2014 South Africa’s average real GDP (adjusted for inflation) grew by 3.1% and employment grew over 11%, …”
I’m not sure what planet these guys are from or where and how they get their data, but these statements don’t jive with what I’m seeing on the ground. Most small malls are struggling with lots of empty space. The shops that are still there are mostly selling cheap Chinese junk, or fast foods, mainly franchises, catering to the LSM 1-5 crowd. Most businesses don’t last 2 years before they close doors, due to excessively high rents and relentless 10%pa increases. It will end in tears.
I was at Eastgate Mall yesterday for the first time in about 7 years. I was truly shocked. The place has turned into a dive. Construction, noise and dust everywhere. Weird little alleys dead-ending in scafolding and plastic sheeting. Fast food joints at the one end stinking out the place with greasy oil fumes. Almost all the variety of shops has disappeared. Just expensive brand name clothing or Ackermans type rags and greasy spoons. Disgusting. 90% of the malls out there are in an identical state. It will not end well.

True. A visit to the newly opened Heidelberg Mall, a mere 30km south down the N3 from Eastgate proves this. Big, huge shops filled with junk. No foot traffic to speak of. On the east of it, Carnival Mall is in the expansion process. These new malls……one wonder about their sustainability. People are not going to dump your mega malls for these newbies, they are therefore left to take whatever clients they can get.

End of comments.

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