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Risk of rising retail vacancy rate

Jul 14 2016 18:00
Carin Smith

Cape Town - The risk of rising retail vacancy rates has been on the increase early in 2016 despite solid real retail sales growth rate of 3% year-on-year for the first four months of the year, according to John Loos, household and property sector strategist at FNB.

This is based on declines in real retail sales/square metre of new space planned/passed ratios calculated in the early stages of 2016.
 
"It has been more the brisk pace of new recorded retail development that has led to some decline in these ratios and both ratios have still remained positive in recent times. But the risk is that tough economic times lead to a retail sales growth slowing in the near term," said Loos.

"The question would then be to what extent retail building activity slows, in order to maintain a supply-demand balance and limit any potential rise in the national vacancy rate?"

Real retail sales growth has remained solid, relative to economic growth in 2016 to date, averaging a still-healthy 3.3% year-on-year for
the 3 months up to and including May 2016. While this still appears healthy, and the 3.3% year-on-year growth for 2016 to date remains
in line with 2015’s 3.3% growth for that entire year, whether we will see under-supplies or over-supplies of retail space developing also
has much to do with the level of new retail development activity.

READ: Property sector a catalyst for growth - expert

Building activity

StatsSA Retail Building Statistics point to very high levels of retail space plans passed for the 12 months up to and including April 2016 - to the tune of 1 405 425m². This was the highest 12-month total for plans passed since the 12 months to December 2008, which was the back end of the pre-2008 boom period. This level also represents a very significant increase since 2014.

"It isn’t obvious that retail sales growth will contain vacancy rates in retail space on a national average basis, because the pace of new development of space has also been quite brisk, and much will depend on the future pace of both retail sales and retail building activity," said Loos.

He pointed out that, while not all retail building plans translate into completions, normally building completion trends track trends in plans passed.

"In recent times we have seen some major high profile completions. In short, the indications in recent years have been a very significant level of new development activity," said Loos.

He uses two ratios to provide a broad indication as to whether the risk of a rising national vacancy rate could be changing as a result of changes in either the levels of retail sales growth or due to new space development.

It shows that since a high average of R3 178/m² (at 2012 prices) in additional real retail sales/new square metre of retail space planned per month for the 12 months to December 2015, the ratio has declined to R664/m² by the 12 months to April 2016.

Simultaneously, the additional real retail sales/new square metre completed ratio declined from R6 335/m² to R1 664/m² over the same period.

READ: SA May retail sales beat expectations

Factors at play

Loos told Fin24 that when developing a retail mall or shopping centre the success is not only based on insufficient space in a particular region or nationally. It is also based on a development's ability to beat other centres, for instance on superior location, design or a better tenant mix.

"So confidence in the ability to out-compete other centres in a given area makes sense in many cases, despite the weak economy," said Loos. "One should also keep in mind that there is usually a long time line from the initial planning of retail space until completion and during that time the market could have changed."

He said his research shows that at the moment, on average, the retail property sector is not doing too badly. The question raised, however, is whether a slight increase in the vacancy rate last year could be seen as an early warning sign.

"At the moment I do not think there is a major issue regarding vacancies. For the time being real retail sales are not bad, but looking forward, I do think there is an impression or expectation I get that the rate of building activity in the sector is going to slow down," said Loos.

"I think that is healthy as retail sales growth should slow too, despite still being reasonably good. Our feeling is there will be a slower level of building activity too."

He anticipates that with the SA economy the way it is and retail sales expected to slow down, that the vacancy rate increase. Shopping centres not well located and not having a great tenant mix could then take a harder hit. take a hit harder.

"In tougher times, as a rule of thumb, your prime property holds up better and marginal ones take pain. I think you often have stronger tenants in the better centres," said Loos.

"It is often about a better location and not about the size of a centre. Some neighbourhood centres do well these days. So, it is not about size anymore, but about quality."

ALSO READ: Transformation of property sector 'essential'

fnb  |  john loos  |  property  |  sa economy  |  retail
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