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Tougher trade puts pressure on retail property

Cape Town - Retailers face a tougher environment despite real retail sales growth reaching quite healthy rates in 2015 and early in 2016 relative to "non-existent" economic growth, John Loos, household and property sector strategist at FNB, said on Thursday.

There were some indications of an increase in financial pressure in the retail property sector over the same period. Research by the Investment Property Databank (IPD) points to a rise in bad debts from 70c/m²/month to R1.35/m²/month.

Liquidations data for the retail, wholesale trade, catering and accommodation sector also shows an increase over the past year. Loos' calculations indicate liquidations for this sector rose by about 10.94% year-on-year for the 12 months to June 2016.

"It seems like retailers are facing a tougher environment, although insolvencies are still relatively low. Household disposable income has slowed, so there is a bit of weakening in the household sector," Loos told Fin24.

Retail property

He pointed out that it is not yet clear if the second quarter of 2016 was a worse quarter than the first for retail property from an “economic fundamentals” point of view.
 
Real retail sales growth for the second quarter tracked the direction of real household disposable income growth and was down to 2.6% year-on-year from 3.5% in the first quarter.

"For some time, we had been witnessing a weakening in economic fundamentals that are important to the strength of the retail property market," Loos said.

"Any sign of slowing retail sales growth should raise the risk of an increase in retail property vacancy rates."

During the second and third quarters, the combined short and long term interest rate situation had switched to becoming mildly supportive of the retail property market, as did the recent rand strengthening, he pointed out.

"This, along with a probable slightly improved economic growth rate in the second quarter, may have offset the negative impact of slowing retail sales growth at least temporarily, and prevented any further rise in capitalisation rates for the time being," he said.

"Although there is an economic slowdown, nothing severe is happening in the retail property sector. There is no sharp shock like in 2008."

READ: Beware of retail cannibalisation in SA - CEO

Retail developments

Loos added there could probably still be too much retail building activity, which can raise vacancy rates a bit more over the short term.

"Development plans passed as well as retail completions have been high, but the pace of new developments looks like it is about to subside. So there is no catastrophe," explained Loos. "With the economy not growing, however, one should expect some slow softening in the near term."

IPD research shows that in 2015 there was already a slight increase in the national retail property vacancy rate, from 4.5% in 2014 to 4.7% in 2015. This is despite real retail sales growing at - what Loos deems - a relatively healthy 3.3% for 2015 as a whole.

Despite not much economic growth, he said there is still significant building activity in all three commercial property sectors.

READ: Risk of rising retail vacancy rate

"The the retail property sector might be helped temporarily by interest rates being on hold for now from a capitalisation point of view. We are not thinking of repo rate cuts any time soon, but some people are starting to speculate about it."

Statistics point to a still brisk pace of retail space building activity for the second quarter as a whole. About 216 627m² of additional shopping space were completed in the second quarter of 2016, which represents a growth rate of 314% on the second quarter of 2015.

"However, it must be borne in mind that the small number of relatively large scale projects in the retail building sector means that from month-to-month and even quarter-to-quarter the completions figures can be extremely volatile," cautioned Loos.
 
The level of retail building plans passed measured 915 900m² for the 12 months until June 2016.

"While still high compared to the post-recession low of 558 006m² for the 12 months up to January 2012, it does appear that retail projects in the planning stages are beginning to subside in total magnitude, and the 12-month total to June 2016 for plans passed, represents a year-on-year decline of -30.2%," said Loos.
 
"Given that real retail sales growth has been slowing recently, it is important that the level of retail building space planned and completed does taper off in the near term, should the sector wish to avoid significant vacancy rate increases. Fortunately, the retail plans passed data has begun to provide a clearer indication of such a slowdown in the making," he said.

ALSO READ: SA May retail sales beat expectations

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