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Retail vacancies a challenge in Cape Town

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Stubborn landlords are seen as being behind the problem in Cape Town

Commercial property landlords who are not willing to budge on their rental expectations are responsible for key retail vacancies in Cape Town. And this, in addition to the regional season change, is putting the local retail sector under pressure. Retail property rentals across the city have regulated over the past 18 months.

Chad Shapiro, commercial property expert for Lew Geffen Sotheby’s International Realty on the Atlantic seaboard and city area, says the average reduction is about 30%.

However, many landlords do not accept these lower price points, leading to “a number of vacancies in key retail areas”. “Local retailers, specifically larger national and supernational retailers, are aware of these price reductions, though, and are expecting amortisation of pricing from these landlords.”

Apart from retail vacancies, Shapiro says the biggest challenge in the city is winter and the subsequent lack of high-end shoppers. While it helps that Cape Town has been voted the best city in the world to visit for the sixth consecutive year, the weak rand and world economic climate are playing a “big role” in putting the retail sector under pressure.

However, Shapiro adds: “We are all hoping for better numbers in summer.” Nationally, rising operating costs are a hurdle all business sectors are grappling with.

Last year, total commercial property operating costs accounted for 35.7% of gross income, says Sapoa’s latest Operating Cost Report. The retail sector reported the highest cost-toincome ratio.

The report says 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 is huge for retailers, says FNB commercial property economist John Loos in a new Property Insights report. It is just as much of a challenge as the emergence of online shopping.

The rising costs of retail space have contributed, in part, to the growth of online retail. Picture: Supplied

“In addition, the retail space affordability challenge has become far more acute recently 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 last year, Loos says retail property has increased by 883.3%, compared with an office property value increase of 511.7% and industrial and warehouse property which has increased by 612.6%.

Adjusting for inflation, retail property has grown by 110%, more than double its real value in 1995.

“In short, all commercial property/square metre values became significantly less affordable over 23 years 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 rent 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 inflation-adjusted terms, retail property saw its operating cost/square metre rise by 129.7% – compared to 93.4% in industrial space and a far lesser 19.9% for office space… A very strong consumer period, however, especially from around 2000 to 2008, enabled retail tenants to absorb strong operating cost 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 20 years or so “likely contributes in part to the drive to find more affordable retail alternatives regardless of technological advances”.

“More affordable alternatives include the shift to greater use of online retail, but also… community or neighbourhood centre.”

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