Despite a slowdown in consumer spending across South Africa in recent months, opportunities still exist for new retail developments, particularly for developers and investors willing to consider smaller convenience focused centres in peri-urban and rural areas.

Second quarter retail spending was weak, with retail sales data pointing to a sharp decline in year-on- year growth to 1.7% at the end of June 2016. This was markedly down from the 4.5% year-on- year growth recorded for the end of May and clearly indicates that the combination of ongoing weak domestic economic activity, low consumer confidence and upward inflation and interest rate cycles is now having a definite negative impact on the country’s retail sales figures.

Some analysts may argue that the sharp decline in sales figures for June was to be expected given the abnormally high figure recorded in May, but the negative impact of challenging economic fundamentals on retail activity cannot be ignored.

As a result, there is evidence that the pace of retail property development in South Africa has begun to slow. Approximately 216 000 sqm of retail space was completed in the second quarter of 2016, which brought the total space completed over a rolling 12-month period to end-June to around 661 000 sqm. While this still represents year-on- year growth of about 25%, the almost 30% decline in approved retail building plans over the same rolling 12- month period indicates the real likelihood of slower future growth.

NCIB Property Finance are seeing first-hand evidence of this slowdown. Over the past three years they have funded the development of several major retail centres that are now complete, open and trading. Among these number Newtown Junction in Johannesburg CBD and Mall of Africa in Waterfall, Midrand by Attacq and Atterbury, Forest Hill in Centurion, Pretoria and BT Ngebs Mall in Mthatha by Billion Group, and Bay West Mall in Port Elizabeth by Billion and Abacus.

However, while they are currently funding several retail developments — including some retail space within larger, mixed-use projects — they have not recently been approached for funding of pure retail developments of a similar scale to the malls listed above. That said, large-scale development certainly hasn’t ground to a halt, as there are a number of relatively big malls in the course of construction or at various stages of the planning process. But even taking into consideration these few larger-scale developments, the reality is that regional-scale mall development growth is on the decline for now.

This slowdown is not surprising. As growth in the retail space being developed in recent years has outstripped real growth in retail sales, the risks associated with new large-scale retail developments have increased significantly. Now, unless the rate and scale of development slows down — or at least until there is a sustainable uptick in consumer spending — the likelihood exists that retail vacancies could increase noticeably.

Despite this growth challenge for large-scale malls, opportunities still exist for retail developers willing to shift their focus from ‘big-ticket’ investments to smaller, convenience-type developments. The historic backlogs in access to a quality retail experience in peri-urban and rural areas mean that demand in these areas still largely exceeds supply. For savvy developers, these niche developments in carefully-selected, growing nodes present real opportunities for sustained return on investment.

There are numerous developers and investors who have already recognized this fact, as evidenced by the relatively large number of smaller-scale shopping centres currently under construction and due for completion in the next calendar year. Interestingly, many of these centres are being developed in historically under serviced areas, examples of which include: Ascension Mall in Dwarsloop, Alex Mall in Gauteng; Groutville Mall in Shaka’s Kraal, KwaZulu-Natal; Hebron Mall in Hebron, North West; and the Mall@Mfula Community Centre in Mkhondo, Mpumalanga.

Success in retail development involves more than profitability

To fully capitalize on the opportunities presented by these peri-urban and rural developments in the long-term, however, the investors and developers have to adopt a broader view of the value of what they are building. Rather than thinking solely about the mechanics, aesthetics and economics of the centres they plan to develop, they need to consider the multiplier contribution that these developments can, and should, make to the upliftment of local communities and growth of regional economies.

In NCIB’s experience, embracing this important aspect of retail property development is imperative for the sustainability of any centre, for the developers that build it and the financiers that fund it. For us at NCIB, providing finance for these types of retail developments that contribute to the socio-economic wellbeing of South Africa and its people, not only reaffirms our commitment to delivering on our social responsibility, but it also makes proven business sense.

By helping to bring shopping convenience, as well as temporary and permanent employment opportunities and consequential related investment, to people in secondary towns and previously disadvantaged communities, developers, investors and financiers are able to deliver real and lasting social and economic upliftment. More than that, they directly support the development of the very consumer markets they will need to ensure their own business sustainability for years to come.

It’s a win-win scenario in the truest sense, and the reason why NCIB never compromises when it comes to assessing each retail funding opportunity against stringent and responsible investment criteria. It’s also why all NCIB-funded developments are premised on indepth sustainability and feasibility studies and binding lease agreements — preferably from national retailers — to ensure that the shopping centres we finance have the best possible chance of remaining relevant and successful, so as to keep serving the communities that will come to depend on them.

Looking forward: Expect consolidation, renovation and a northward view

While rapid and ongoing urbanisation will continue to drive some retail centre development in major metropolitan areas, it’s unlikely to be at a growth rate anywhere near what has been seen in recent years. That same urbanisation will be accompanied by large-scale densification as city planners are forced to make better use of the limited urban space still available to them. For existing dominant regional malls and shopping centres, this presents an opportunity for a second wave of development that is likely to be characterized by large- scale consolidation. This is already evident in examples like the substantial extensions and refurbishments at major centres such as The Pavilion in Durban, Fourways Mall in Johannesburg, and Ilanga Mall in Nelspruit.

Also, in the coming years, many of these existing centres will need to revamp their buildings to maintain a fresh customer experience, meet the discerning needs of a growing and aspirational middle class, and compete with new players in the market.

And while retail development and refurbishment continue in many areas of South Africa, a whole new world of opportunity has opened up just north of the country’s borders. Africa has emerged as the next exciting frontier for shopping mall development and, in response, large numbers of South African developers have already extended their activities into countries like Namibia, Mozambique, Ghana, Nigeria, Kenya and Zambia.

The prognosis remains positive

All in all, while growth in large regional mall development may tread water until consumer confidence in South Africa is restored, the outlook for retail property as a whole remains positive. The sub-sector has shown its mettle in recent years — as has been demonstrated over the years by the IPD results — and there is no reason quality retail property won’t continue to be a very sound investment avenue and highly bankable lending proposition for the foreseeable future. All that may be required is a slight shift in focus.

via PropertyWheel — http://ift.tt/2cJ9AmD