PRETORIA – In an area equivalent to just over twenty football stadiums in Pretoria East, there are no less 30 shopping malls and outlets. Starting from Menlyn via Woodlands to Silver Lakes, there are more shops than clinics, schools and recreational parks. The only two police station stations in the area are located in Garsfontein and Silverton.
When I pointed this rather unusual situation to someone, he concurred and directed me to something that often escapes the attention of many, that is access to cheap money in South Africa. Cheap money is your retirement and long-term savings held in both public and private entities.
Basically, funds managers and other investors help property developers and banks to waste money on shopping malls and clustered homes. This goes against the basic investment fundamentals of channeling money to good-value businesses and high performing stocks.
High investment in property development appears very weird in a country whose economy has been struggling to perform for more than a decade. Not to be concerned about sluggish growth, capital appears to be in an extremely good space as it accesses billions of rands at any time at minimal cost.
Professor Thandika Mkandawire of the London School of Economics is of the view that South Africa’s financial sector is way too powerful. The financial sector is a raging bull that must be tamed before it collapses the country’s economy. Looking at the property development space alone one has to agree with him.
It is always argued that South African companies keep too much cash and also refuse to reinvest this money in the economy. Reinvestment will assist to grow new enterprises and generate jobs that will in turn contribute directly to reducing the high unemployment rate, presently at 27.2%.
The conduct of CorporateSA has led to some analysts to accuse companies that they are in a prolonged ‘investment strike’. This is a charge that they not only vehemently deny but they also find every reason under the sun to explain low investments in the economy.
We often hear that South Africa has an unstable political environment and also that it has high corruption, restrictive labour laws, high crime rate, and so on. The companies tend to argue that the cost of doing business is high and that forces them to hold back on new capital projects. This has been their story for a while now.
However, companies deliberately avoid to say South Africa is a very lucrative market which guarantees high growth rates, and fast returns. The conditions have been created by the financial sector for businesses operating in different industries to thrive – they offer them billions of rands cheaply and nobody cares if the money is wasted or not.
The case of Steinhoff comes to mind. The company’s stock crashed and resulted in losses exceeding R200bn, just from savings of state employees. It was reported that much of this money was from pensions of public servants.
To this day, no single public servant has received communication from either the Public Investment Corporation (PIC) nor Government Employee Government Employees Pension Fund ( GEPF) to notify them that their savings were wasted. In any case, employees never get informed about the nature investments, risks and potential returns from these ventures.
StatsSA announced recently announced in early September 2018 that the country had officially entered a technical recession. And, in response president Cyril Ramaphosa announced a package of R50bn to stimulate the economy. Banks, fund managers and scrupulous companies are now rubbing hands in glee at prospects making even more money.
If the South Africa is truly in a recession, then something has to give as far as some business activities in the economy go. It looks the finance and investment sector exists on its own and outside everything else.
But where is the problem?
In South Africa there is just way too much money that is not optimally utilised, which ends up in the hands of private people who have no sense of what the country’s needs are. South Africa has a serious backlog in social infrastructure necessary to provide food, shelter, healthcare, education and other basic necessities.
In a paper titled ‘Pension Funds Evolution, Reforms and Trends in South Africa‘ (2017), Nthabiseng Moleko & Sylvanus Ikhide wrote that in 2012 privately administered pension funds contributed R1.29tn and the GEPF R1.05tn.
Thus, pension funds make up over 85% of the total assets under management in the financial markets. Yes, banks are way too little in comparison to pension funds. Other sources of include cheap money held by both private and public sectors, also running to billions of rands.
All this money is not utilised to grow the economy but to swell pockets of greedy faceless investors and shareholders, whom managers and executives break their backs to please even if means making wrong decisions. The United Nations-supported Principles for Responsible Investment (PRI) Initiative sets guidelines on what it considers ‘responsible investment’.
According to the PRI initiative, responsible investment is “an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.”
One would therefore imagine that the pension funds would be channelled towards investments that would drastically change lives and general standard of living as well as end hunger and poverty. Or, at least towards infrastructure aimed at boosting economy. Instead money goes to building shopping malls.
Steven Nathan, founder and chief executive of 10X Investments, raises a valuable point about a plausible delink between economic growth and investment returns in South Africa. He says, “Over the last 10 years, GDP growth in South Africa has been terrible, a measly 1.8% per year, barely ahead of population growth…yet well-balanced high equity portfolio has given double digit returns over this period.”
This picture is quite disturbing because the present economic woes appear to affect only hard working families. Those in the top end of earnings and retirement funds, for example, always have things easy compared to the general population. But the profits don’t go to beneficiaries.
What is unclear is how do the malls survive in a struggling economy with high unemployment, retrenchments and indebtedness. The United States has seen a sharp decline in retail shops and malls in the past few years. Major retailers like Sears, Radio Shack, Abercrombie & Fitch, Aeropostale and JC Penny continue to shut stores, and large malls have closed shop.
Economists call this a ‘market correction’. As one expert puts it, “We are over-retailed.” But with the advent of technology and online shopping as well as economic hardships both locally and in neighbouring countries, the future of malls and their anchor tenants looks gloomy.
According to Harvard business professor Leonard Schlesinger, malls “were built for patterns of social interaction that increasingly don’t exist.” Changing social patterns and lifestyle in the US impacts negatively on malls.
Credit Suisse estimates that although there were about 1,100 malls in the US in 2017 close to “a quarter of them are at risk of closing over the next five years.” It looks like this phenomenon is not well forecasted in the South African market.
As economic problems deepen, shopping malls will abruptly close but the only challenge is that they will sink with your retirement savings. Already a large retail shop Suttafords has disappeared and this could affect other retailers too who provide guaranteed income streams to malls and property developers.
The cheap money will go down the drain without trace as seen with Steinhoff International. For example, the GEPF is the source of almost 90% of the R1.9tn the PIC manages (in today’s prices). And the PIC is heavily invested in shopping malls in towns and townships. So, the PIC and Liberty Properties, for example, stand to become biggest losers in the event malls get into trouble like in the US.
Even small and midsized areas like Mamelodi, just a few kilometers from Pretoria East, are ‘over-retailed’ too. Very soon the township will have up to four malls, more or less. Again, the PIC is involved in the construction of Tshwane Regional Mall that will compete with Denlyn and Mahube shopping malls.
Already it is reported that tenants now demand lower rent as malls bubble bursts in Kenya. Tough economic times have hit the East African country quite bad, leading to “an embarrassing sight of empty floors and deserted parking lots.”
South Africa continues to struggle but the financial sector runs amok. The sector will obliterate whatever remains in the economy. And shopping malls will be epicenter of the earthquake. They are a ticking bomb waiting to explode under the hard economic storms, and people’s savings will be gone for good.
Siyabonga Hadebe is an independent commentator on socio-economic, politics and global matters based in Pretoria.
The views expressed here are not necessarily those of Independent Media.