RETAIL CENTRES UNDER PRESSURE WARNS FNB
Higher inflation, creeping interest rates and shrinking disposable income was already impacting on consumers in June – and this is without factoring in the massive fuel price hikes in July, a Statistics South Africa report has demonstrated.
The state statisticians reported the steepest decline in retail activity since January 2021 with a 2.5% decrease in June 2022 over the same month a year ago. This quelled positive expectations of continued growth after retail sales inched forward by 0.1% in May 2022.
Sales of hardware, paint and glass exhibited the biggest drop at -8.6% in June over a decline of -7.1% in May followed by general dealers at -5.7% (over a 3.8 percent increase in May and pharmaceuticals and medical goods, cosmetics and toiletries at -4.3%.
John Loos, Property Sector Strategist at FNB Commercial Property Finance said that this meant that the quarterly year-on-year growth rate had slowed from +2.8% in the first quarter of 2022 to +0.5% in the second quarter.
“The slow growth in real retail sales reflects a recent acceleration in retail price inflation, most notably (but not only) in the “specialised food, beverage and tobacco” category (7.6%) of retailers as well as in the “general dealers” category (7%). The latter is where much of the general food and grocery retail is found. A global and domestic food price inflation surge has been a key driver here,” he pointed out.
Loos said this would have significant potential implications for retail shopping centre.
“The rental payment performance of retail tenants is expected to remain the poorest of the three major commercial property categories through 2022. TPN data in the first quarter of 2022 still put retail tenants in good standing with rental payments at a lowly 62% and having weakened on the prior quarter, slightly below the office percentage of 63% and the Industrial Property percentage of 68%. Not only do retail tenants have the challenge of weak real retail sales growth in the face of higher price inflation, but they also have to deal with rising interest rates on debt. The South African Reserve Bank has already hiked interest rates by 200 basis points since late 2021 and FNB expects these to hike by a further 125 basis points this year,” said Loos.
He went on to explain that the weak growth in real retail sales contributed to an expectation that the recent retail property recovery may be “stalled” for the time being, while South Africa goes through this period of higher inflation and interest rate hiking.
“The FNB Property Broker survey had reported the majority of brokers as having seen retail property vacancy rates declining in the first half of 2022 as new business start-up and expansion accelerated following the 2021/21 lockdowns. But the recent renewed financial pressures on consumers, reflected in weak retail sales growth are likely to slow demand for additional retail space for new businesses and existing business expansions for the time being,” he noted.
Loos acknowledged that centres focused more on essential high frequency more essential purchases may still yet outperform the rest, but cautioned that this was not guaranteed.
“Centres focused more on basic necessities such as food and groceries don’t have it all their own way as we had expected, with the “General Dealer” category of StatsSA retail data, along with Health Care and Pharmaceuticals Retail, feeling some sales pressure,” he said.
However, Loos still expects these categories of retail to prove to be more “insulated” against the recent increased consumer financial pressures, possibly remaining more stable than those centres more focused on non-essential purchases such as entertainment and eating out, luxury goods, and “postpone-able” expenditure items.
Postpone-able expenditures were often found in areas such as clothing and footwear, furniture and household appliances or hardware, paint and glass products, he noted.
“Larger regional centre categories may ultimately be at a relative disadvantage compared to many neighbourhood and convenience centres in this regard because they do often have a greater focus on clothing and footwear, fashion, and entertainment along with household furniture and appliances. All can be quite cyclical and experience pressure in tougher times,” he explained.
However, Loos remained optimistic.
The major clothing, textiles and footwear retail category had recovered quite nicely following the pain of the hard lockdowns of 2020 and, at June 2022, was still 6.8% above the pre-lockdown level of June 2019 as households played catch- up on clothing and footwear spend following the lockdown period.
A key risk pressure looks to be for properties with a key focus on the hardware, paint and glass retail category. These expenditure items, often related to home maintenance, can often be postponed in times of increased financial pressure and this appears to be what is happening,” he said.
Loos also warned that low-income area essentials-focused retail centres wouldn’t have it all their own way either.
“It won’t be all plain sailing for those retail centres focused largely on basic essentials such as food and grocery shopping in low income areas. Former township and rural centres outperformed others in many cases during the lockdown period, their essentials retail having avoided lockdown measures to a greater extent. But they now have the challenge of keeping the basic items affordable in an environment where food price inflation may be outstripping income growth,” he said.