Pensioner Barend Swanepoel leaned forward conspiratorially. "I shop wherever parking is free," he whispered. He was standing outside a busy Fruit & Veg City in Hillfox Value Centre in Roodepoort, Johannesburg. Swanepoel, who is from the nearby suburb of Bergbron, said he was surprised by the number of shopping centres along Hendrik Potgieter Road.
"I have been living in Johannesburg for five years now and I am amazed at how many centres have been built in this time along this road. Why do we need so many?"
He, like many others interviewed at Hillfox, shops at small neighbourhood centres or at Cresta Shopping Centre rather than at nearby Clearwater Mall, which he regards as pricy and crowded.
Most people said they do not frequent any of the other centres that pepper the road, although some shop at the new freestanding Pick n Pay further along the road in Little Falls.
Hillfox, apart from the Fruit & Veg City, is a strip mall that has a Cash Converters branch and a number of mass market shops such as Shoe City. On the face of things, it would appear that there is no market for the legion of new centres springing up countrywide. In greater Johannesburg alone, three shopping centres carrying R1-billion price tags are being built, including the R1.3-billion centre in Newtown.
The "mall experience"
Interviews with shoppers at nearby Clearwater Mall, however, paint another picture. Shoppers there were more inclined to say they would consider another mall in the area depending on what shops it had, and whether it was likely to be a pleasant shopping experience.
Ilze van der Westhuizen, who works in Clearwater Mall but lives in Carletonville, said a lot of people from her town and those living in areas such as Randfontein come to Clearwater for the "mall experience". "There is nothing like this in those areas, so they come here for an outing, rather than just to shop."
Joani Johnson, who lives in Fairlands and shops mostly at Clearwater, said she would shop at a new centre if it provided retail shops that were not present elsewhere in the area, and Bill Nash also of Fairlands said that easy access, a a variety of well-stocked shops, and good service were what he valued.
Nash did say, however, that he is unlikely to shop at the new R1-billion Cradlestone Mall that is being built a few kilometres down the road in Krugersdorp because of traffic congestion on Hendrick Potgieter Road. Fortunately for developers Aveng Grinaker-LTA, Sasol Pension Fund and Retail Africa, the 75 000m2 mall is not depending on clientele already catered for by Clearwater Mall, but for large areas of Ruimsig and as far afield as Muldersdrift that do not have access to a large centre.
Despite a weak economy and concerns about South Africa's dependence on consumer spending, shopping centre developments worth billions of rands are springing up all over the country, supported by retail expansion and the banks, and most importantly by the favourable returns being experienced, particularly in the larger shopping centres.
The annual Property Index released by research company IPD and the South African Property Owners Association earlier this year showed that the country's property market sector delivered a 15.2% total return last year.
This is the highest return on property since pre-recession levels, and is a marked upturn on the 10.3% generated by the sector in 2011, according to Stan Garrun, managing director of IPD South Africa. The growth is being driven by the retail and industrial property sectors. Demand for space in shopping centres drove strong rental and capital gains. This research is based on the performance of 1 662 properties, which make up 60% of professionally managed investment property.
What the IPD research has shown is that the shopping centre, as a subset of the overall commercial property asset class, has been the best performing sub-asset class since 1995.
Best performing sector
"Retail was the best performing sector," said Garrun. "Capital value growth was high, which means the underlying value of retail property increased. Growth in the retail sector was driven largely by the larger shopping centres, those known as the super regionals or regional shopping centres."
Retail property produced the highest total return of 17.1%, followed by industrial at 15.9% and office rental at 11.9% for last year. Retail, despite falling out of favour with some fund managers because of fears of unsustainable growth, continues to be a popular stock for many investors if their impressive price-to-earnings ratios are anything to go by; and shareholders like to see growth.
Pick n Pay, despite reporting a 21.7% reduction in diluted headline earnings per share in April this year, has a price-to-earnings ratio of 31.9, which means it is priced at over 31 times projected earnings. Shoprite Holdings has a price-to-earnings ratio of 27.5; Woolworths is 25.3; Mr Price is 22.8; The Spar Group is 19.6; and Massmart 42.4. This is against the JSE price to earnings ratio of 15.
A wave of new shopping centre developments
A Deloitte report titled Global Powers of Retail 2013, which identifies the 250 largest retailers around the world, placed Shoprite Holdings in 93rd place based on its 2011 results, which saw the group showing R10.7-billion in retail revenue. Apple stores held 72nd place at R14-billion.
The Spar Group was in position 165 with R5.6-billion in retail revenue. It is not surprising then with demand and good returns that there has been a countrywide wave of new shopping centre developments. This is unusual in a climate where normally one or two centres break ground in South Africa a year.
Some of the malls that opened last year include the R500-million Nicolway Bryanston in Johannesburg; the R500-milllion Middelburg Mall in Mpumalanga; the Diepkloof and Protea Glen centres in Soweto; and the R245-million Newcastle Mall in KwaZulu-Natal.
The R220-million Elim Mall in Limpopo opened this year, and the R238-million Tembisa MegaMart is scheduled to be open by the end of the year.
Work under way
There is work under way on a number of malls, including the Cradlestone Mall in Krugersdorp, Waterfall City in Midrand, the R600-million Savannah Mall in Pretoria and the R1.3-billion retail and office development in Newtown.
The Newtown Mall will include 40 000m2 of retail space, offices, a hotel and a gym. It plans to link with the Market Theatre precinct, which is also being revamped.
Other new developments will include Forest Hill City Mall in Pretoria West, which is expected to cost about R1.45-billion to build, Bay West City Mall in Port Elizabeth, estimated at R1.75-billion, and the Secunda Mall in Mpumalanga, which is expected to cost about R700-million to build.
Banks and pension funds are also supporting the development of these new malls.
Nedbank Corporate Property Finance, which has the largest market share of commercial property finance business in South Africa, not only provided R255-million in finance for the Protea Glen Mall, but also took a 23.5% equity stake.
Sasol Pension Fund also owns a stake in a number of malls and will be one of the owners of Secunda Mall, among others.
Some of the new centres are being built in rural areas, but the bulk of the large shopping centres are still developed in metropolitan areas.
Growth opportunities in the rural areas
As Amanda Stops — the chief executive of the South African Council of Shopping Centres — said, smaller centres are being built in rural areas, as population statistics indicate that the largest population growth is still in the metropolitan areas.
This means there are still growth opportunities in the rural areas for developers. In the Eastern Cape, JHI Properties in April said that increased demand for retail space in towns such as Sterkspruit, Mthatha and Tsolo indicated there were further opportunities for investors.
There is a downside to the boom, though. Garrun said some of the larger shopping centre growth has been at the expense of the smaller neighbourhood malls that have not been able to compete, leading to a number of vacancies and reduced income in those malls.
An increase in foot traffic at larger malls is being reported, but the levels of spending are lower as "customers become more discerning", he said.
Investors remain "bullish"
Garrun said many investors remain "bullish" about the prospects for malls based on returns from retail properties.
"Development is happening on a large scale and refurbishment of older malls like Rosebank [at a cost of R950-million] is taking place. The sector saw a 9% increase in rental income against an inflation rate of 6%," he said.
Benoni's Northmead Mall, originally built by Anglo American and one of the first malls in Benoni, also announced this year that it would be refurbished. This growth is despite increased costs for things such as electricity and utilities, Garrun said.
Retail property market investors are seemingly not plagued by the same concerns as Kevin Lings, chief economist at Stanlib, who said during a recent Summit TV interview that it was not possible to build an economy on shopping. He was referring to the 60% contribution consumer spending made to gross domestic product.
Another source of growth
"We need another source of growth and we can't keep relying on consumer shopping and spending. Their incomes just won't sustain that. What we need is more consumers, but the way you get more consumers is you need more employment … and we are not getting a sustainable increase in jobs." Some fund managers are also not convinced that retail sector growth as it stands is sustainable.
Nic Norman-Smith, portfolio manager at Lentus Asset Management, said of the major retailers: "The retail sector is looking very expensive on the whole. If we look at the valuation the market is placing on the retail stocks, they would have to perform very well to justify the price."
Norman-Smith is not convinced that the growth will continue. "The profit margins of our retailers are not sustainable. There was significant growth off a low base."
He said the odds of companies paying these kinds of multiples were relatively low. The possibility of African expansion was also increasing positive sentiment to some extent, but he said there will be competition from other companies that have also identified Africa as a potential growth market.
Chris Gilmour, an investment analyst at Absa Asset Management Private Clients, is more optimistic about the retail sector, with Mr Price, Shoprite and Woolworths remaining in their portfolio.
Gilmour said Pick n Pay is "hideously overpriced", but the market may be encouraged by its new chief executive, or by the possibility that there might be a bid for the underperforming company.
He had high praise for Woolworths, which was the top performer last year. "Woolworths have a clear idea of their strategy and they are executing it beautifully." He said Woolworths is doing well in Africa and in Australia.
However, he warned that difficulty getting retail sites could hamper growth for many of the retailers. So serious is the problem, he said, that Spar is proactively buying its franchisees out when they wish to leave and retaining the stores so that they are not lost to the competition.