But the forecast is that the sector is likely to continue to be under pressure for most of the year
Retail conditions appear to be improving in Durban, but landlords will need to keep bearing down if they hope to survive continued financial pressures ahead.
While nationally and even globally, this property sector has been severely challenged by the emergence and growth of online shopping, landlords will also continue to face pressure on rents and escalations for the “better part of the year”, says Broll senior retail leasing broker Laura Timms.
The good news is that, despite this, inquiries for retail space have improved in the past three months. “Most of the ‘mom and pop’ retail inquiries emanate from those who have immigrated to South Africa from places such as Pakistan and other African countries,” says Timms.
“Mom and pop” retail refers to small, independent businesses that are usually family-owned and not franchised. Timms says vacancies in Broll’s managed retail portfolio are below 2% of Gross Leasing Area (GLA), although some service-orientated stores, such as hairdressers, have opted to relocate to standalone sites offering lower rents. Although branded fashion and health and beauty retailers generally continue to deliver good results, restaurants and luxury goods retailers are under pressure.
The biggest challenge for local retailers, Timms says, is managing their total costs of occupying space. “For example, restaurants are faced with rising electricity and employment costs.”
Rising operating costs are a hurdle all business sectors are grappling with. In 2018, total commercial property operating costs accounted for 35.7% of gross income, according to the South African Property Owners Association’s (Sapoa) latest Operating Cost Report. The retail sector reported the highest cost-to-income ratio.
According to the Sapoa report, total operating costs by retail store size were:
● Retail warehouse: 26.5%
● Unit shop: 36.2%
● Community shopping centre: 41.1%
● Regional shopping centre: 35.8%
● Small regional shopping centre: 37.9%
● Super regional shopping centre: 37.1%
The affordability challenge has become huge for retailers, says FNB commercial property economist John Loos in a new Property Insights report. He says it is just as much of a challenge as the emergence and growth of online shopping.
“In addition, the retail space affordability challenge has become far more acute in recent times which, it could be argued, contributes in part to a drive to cheaper retail alternatives (including online retail), because retail space affordability has deteriorated sharply over the past two decades.”
Examining commercial property values per square metre from 1996 to 2018, Loos says retail property has increased by 883.3%. By comparison, office property value increased in value by only 511.7% and industrial and warehouse property by 612.6%. In real terms (adjusting for inflation) retail property has grown by 110%, which is more than double its real value in 1995.
“All commercial property/square metre values became significantly less affordable over a 23-year period from the 1995 base year, but retail property’s affordability deterioration was far more extreme than the other two major categories,” Loos says.
For tenants, the increase in rental per square metre and operating costs has been just as extreme. A major portion of operating costs is the various municipal rates and charges, and utilities tariffs, notably electricity.
“In real (inflation-adjusted) terms, retail property saw its operating cost/square metre rise by 129.7%, compared to 93.4% in the case of industrial space and a far lesser 19.9% for office space.
“A strong consumer period, however, especially from around 2000 to 2008, enabled retail tenants to absorb strong operating costs and rental inflation for much of the time.”
But this is no longer the case. The fact that retail space affordability has deteriorated significantly over the past two decades or so “likely contributes in part to the drive to find more affordable retail alternatives regardless of technological advances”, Loos says.
“More affordable alternatives include the shift to greater use of online retail, but also include traditionally cheaper retail trade and consumer services alternatives, which include smaller community or neighbourhood centres, or even retail warehousing.”