Retail property: Bigger is best

Johannesburg - Big, regional malls are defensive must-haves for the portfolios of listed property groups, as opposed to small community centres which should be avoided at all costs, analysts say.

"Property has been a fantastic investment," said Simon Pearse, CEO of Marriott Asset Management. "But every man and his dog has built a shopping centre. South Africa is over-shopped - where are the tenants coming from, where are the consumers coming from for all these malls?"

Retail-focused SA Corporate, with a portfolio consisting mainly of small community shopping centres, underperformed the R112bn sector mainly because of rising vacancy rates. The company reported a 6.9% drop in distribution growth, compared to the sector's average growth of 8%.

SA Corporate's portfolio includes small retail centres like Coachman's Crossing in Johannesburg, Davenport Square Shopping Centre in Durban and St George’s Square in Knysna.

Pearse warned previous years' growth was driven by consumers, and that future development will most likely be powered by government spend and capital growth. There is a greater likelihood that property companies will see a down-rating than a re-rating.

However, according to Anton de Goede of Coronation Fund Managers, the oversupply took place only in certain areas.

"Even the relatively new regional malls should perform well," he said. "These portfolios show the least volatility relative to the sector."

De Goede also said large malls have the benefit of two or three large supermarket anchors which act as a buffer against downturns.

He pointed to property companies like Resilient, which is likely to continue to show strong income growth. The company reported a 14.2% distribution growth for 2009 and focuses on large shopping malls in rural areas, which are expected to benefit from an increase in social grant spending by the government this year.

Investors also need to be selective in choosing an investment. "Look at the size of the centre, the area in which it's located and the landlord," said De Goede.

Old Mutual property analyst Evan Robins agreed with De Goede. "Community centres have taken pain," he said. "But retail is still performing better than the other sectors."

"Big regional centres are regarded as the first prize for any property company," said Robins.