It’s been a steady slog by shopping mall landlords to get footfall – the number of shoppers visiting centres – back to levels last seen in 2019 pre-COVID. And still they’re not quite there. Across major property groups, the foot count remains as much as 15% below those seen pre-pandemic. Even the V&A Waterfront, arguably the country’s most iconic retail destination, has seen footfall recover to 90% of ‘historical last normal levels’. Trading densities, or sales per square metre, are above pre-COVID levels, but inflation has certainly been a help. Typically, we are all still visiting malls – just less frequently.

There are multiple reasons for this. There has been structural change affecting a portion of the market, with online shopping penetration in (especially) the general merchandise and clothing categories increasing since COVID. Add to this a subdued consumer, with interest rates at their highest levels since 2009, and persistent elevated levels of load shedding, and the environment is not exactly sunny. Still, most retail property owners have seized the opportunities presented by the COVID-19 shock to reinvest in repurposing and refocusing their shopping mall assets. They’ve introduced experiential retail, self-storage, events venues; and some are planning to add elements such as rooftop gardens. Regional and super-regional malls are becoming destinations in their own right.

Retail property assets are generally owned by pension funds, insurance companies (using policyholder funds) and listed property funds. Over time, there has been a trend for pension funds and insurance companies to demerge their property assets into standalone companies with specialist management. This allowed the market to ‘price’ these assets,  and the long-term oriented funds to make investment decisions across a larger universe (versus being stuck with a set of specific physical assets). In the case of listed vehicles, which saw an explosion of listings in the early 2000s, there are both diversified funds (which own retail, office and industrial assets) and sector-specific funds.

While JSE-listed retail-focused real estate investment trusts (REITs) on the bourse rebounded following the pandemic knock, the sector remains trading well below levels last seen in 2019. Together, the 15 stocks in this retail REIT sector have a market cap of just more than R100 billion.

The REIT structure, which was introduced in SA only in 2013, is intrinsically a tax regime that provides ‘flow through’ on a pre-tax basis of the net property income of a property company, explains independent global real estate analyst Garreth Elston. To maintain their REIT status, listed property companies have to pay out a minimum of 75% of their total distributable profits to shareholders. These distributions are not taxed within the REIT; rather, investors pay the tax. Effectively, ‘earnings can flow through to investors without attracting income tax at the company level’.

UK-based Hammerson, with a primary listing on the London Stock Exchange and secondary inward listing on the JSE, is the largest group, by market value (R28.8 billion), in the sector. It owns 13 flagship assets across the UK, Ireland and France with a further nine ‘value retail’ centres totalling 1 million m² of lettable space. Last year, it had more than 180 million shopper visits across its centres in 17 cities. The largest, and most well-known, of these is the Bullring in Birmingham. In recent years, it has been working to reposition its ‘city centre destinations in some of Europe’s fastest-growing cities from traditional retail-anchored footprints to a broader mix of uses’.

Three REITs, Resilient, Vukile and Hyprop, all with market values of between R11 billion and R15 billion, have very sizeable SA portfolios of well-known retail assets. Of these, Resilient REIT has a portfolio of almost entirely SA-based assets (it owns stakes in malls in Nigeria and in four French properties). Domestically, it has 37 malls across seven of the country’s provinces.

Its strategy is to ‘invest in dominant retail centres’, typically in regional markets, ‘with a minimum of three anchor tenants and let predominantly to national retailers’. Its three largest assets are Boardwalk Inkwazi, Galleria Mall (both in KwaZulu-Natal) and Mall of the North in Limpopo.

Of the listed retail shares, it has been among the most aggressive in deploying solar PV generation solutions at its centres. By the end of June, it had solar systems totalling 45.8 MW (peak) of capacity. It has also been trialling large-scale battery storage solutions at the Grove in Pretoria and Irene Village Mall. It is busy expanding these two systems and evaluating batteries for a further six of its centres.

Vukile has 34 centres focused on the urban, commuter, township and rural markets in SA. It was listed on the JSE in 2004 and has been steadily growing this portfolio over the past two decades. It has also been increasing its stake in Madrid-listed Castellana Properties Socimi – which owns 16 centres – and now holds more than 90%. Today, the Spanish assets comprise 52% of its overall portfolio (by value).

Hyprop has a portfolio of eight malls in SA and four in Eastern Europe. While it owns stakes in a further four properties in Nigeria, it is in the process of disposing of these assets. Its crown jewel is Canal Walk, the super-regional mall in Cape Town (it owns 80% of the property). This mall has nearly 10 million visitors annually, making it one of the largest and most popular in the country. Other well-known centres that it owns include Rosebank Mall, Clearwater Somerset Mall and CapeGate. The local portfolio comprises 64% of its total value (and nearly three-quarters of its total space, by lettable area). Foot count at its SA malls is about 5% lower than in 2019, though Canal Walk reached record turnover of more than R1 billion in December 2022.

Liberty Two Degrees, majority-owned by Liberty – which is now a subsidiary of the Standard Bank Group – owns stakes in the Sandton City and Nelson Mandela Square malls, arguably as iconic as the V&A. Together with this, it owns Eastgate, Liberty Midlands Mall, the Sandton Convention Centre and hotel assets surrounding this property. It will delist in early November. Its performance has differed from that of many other landlords. So far this year, footfall at its malls has been higher than 2019 levels.

According to Jonathan Sinden, chief operations officer of Liberty Two Degrees, the company continues ‘to create experiential spaces that evolve with the changing consumer demands and transforming technology advancements. By proactively adapting to this evolution, we meet current and future needs, and ultimately create sustainable spaces that offer unique customer experiences and ensure long-term relevance’.

In a bid to create sustainable value for its stakeholders, he adds, the company consistently improves the quality of its assets by ‘introducing innovative and unique experiences that attract tenants, customers and visitors to our spaces […] paving the way for industry trends, accommodating discerning consumers, and empowering our portfolio’s malls to assert their dominance in their respective locations’. Occupancies are also close to the numbers achieved pre-COVID, which likely speaks to the quality of its assets. Sandton City, as an example, has a trading density 69% higher than the benchmark for super-regional shopping malls.

Two REITs on the JSE sit apart from the rest as they are focused on specific regional markets. Deutsche Konsum REIT-AG, which listed on the local market in 2021, owns 184 local retail properties in Germany. The bulk of these are what one would typically think of a neighbourhood shopping centre.

Capital & Regional commenced a secondary listing on the JSE six years earlier and owns five community-centred shopping malls in south-east England. Together, these have more than 550 retail units that are visited by 850 000 shoppers a week.

Castleview, which debuted on the market in 2017, has a portfolio of seven community centres in SA as well as a joint venture with Redefine in Poland. It also has shareholdings in Emira REIT (listed on the JSE), an industrials portfolio and a small residential fund.

Of the rest, Exemplar, Heriot REIT and Safari Investments have portfolios of retail assets centred on the township and rural markets. These companies have market values of between R1.3 billion and R3.5 billion. Their assets are either supermarket-focused properties (think Shoprite Athlone or Kempton Park) with a few smaller ‘line’ shops, or shopping centres located in township markets such as Mamelodi, Atteridgeville, Diepkloof, Soweto and Tembisa. Exemplar, with 26 assets, was created from McCormick Property Development, which has been developing centres for four decades.

Despite being listed in the sector, Heriot has diversified beyond retail into industrial  and offices. This is similar to Octodec Investments, which originally invested in the CBDs of Tshwane and Johannesburg. It now has a portfolio spanning retail, residential, office, mixed use and light industrial properties.

Smaller Oasis Crescent Property Fund, Accelerate Property and Rebosis have market values of around R1 billion or lower. Accelerate’s major asset is Fourways Mall in Johannesburg.

Wayne McCurrie, investment professional at FNB Wealth and Investments, says that ‘investors would typically select property funds to supplement other investments and make sure they have a diversified portfolio’. Investing in these funds means they won’t need to directly own physical property and have the benefit of professional management in place to generate returns.

He adds that the sector would be especially attractive for investors who have a positive outlook on SA in the medium- to long-term.

Even if their views of the country are not particularly rosy, most locally listed counters (including REITs) have a not-insignificant portion of their assets overseas. In some cases, this can be close to 50%, which provides a useful hedge against SA-specific risk.

However, says McCurrie, if you’re of the view that the ‘future looks better than the current’ with interest rates, economic activity, the impact of load shedding and government’s fiscal situation all likely to improve – an outlook that he shares – then the sector is appealing at current levels. He says the downturn, driven by the commodity cycle, is cyclical and, therefore, temporary.

The sizeable discount between the net-asset value of many of these companies and their market capitalisation ‘is sizeable and presents a good buying opportunity’. This is the difference between what these companies’ assets are valued at versus what the market currently says they are ‘worth’.

REITs and other property funds ought always to trade at a slight discount, say 10% to 15%, to net asset value due to risk.

For now, sentiment in the retail sector has lifted. The Bureau for Economic Research retail trade survey, released in September, shows that confidence among retailers jumped to 32 in Q3/2023, from 20 in the preceding three months. Semi-durable goods, in particular, grew strongly.

While still low, the outlook is likely to improve even further in coming quarters as inflation moderates and interest rates ease, which can only be positive for landlords.

By Tristan West
Images: Gallo/Getty Images