OPINION: Retail apocalypse narrative might be over-exaggerated

By Amelia Morgenrood Time of article published Oct 14, 2019

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JOHANNESBURG - There are two sectors on the JSE that have fallen out of favour - Property and Retail. 

There is this “belief” that malls will close down soon amid a shift towards online shopping. This narrative is somewhat exaggerated, and malls are not dying out.

The South African consumer is indeed under pressure and property fundamentals are deteriorating due to the depressed economic environment and lack of growth drivers. The trading densities are decreasing, retailers are contracting floor space, and tenant failures are growing. Due to all these factors, Vukile ventured into offshore markets and is now enjoying success in Spain. When it entered Spain two years ago, it was met with scepticism, the first and so far only South African property fund to go to Spain.

The Spanish assets are held via Madrid-listed subsidiary Castellana Properties, which is already the ninth-biggest real estate investment trust in Spain by market cap. The Spanish portfolio consists of 17 properties (15 retail and two offices).

Vukile owns 72percent of Castellana and this holding now accounts for 45percent of Vukile’s total property portfolio value.

Property fundamentals in Spain are improving significantly, following the extended recovery after the double-dip economic crisis in the preceding six years. As a result, capital values and rentals have substantially increased and have not yet reached levels before the crisis, meaning there is room for extensive rental growth.

The southern African portfolio consists of 45 retail properties. The top 15 properties comprise 59percent of the total portfolio value and 46percent of the total portfolio gross leasable area. The top five assets, by value, include East Rand Mall, Pine Crest Centre, Phoenix Plaza, Maluti Crescent and Gugulethu Square.

The southern African portfolio value increased by 6.90percent to R15.50 billion. They acquired Pretoria Kolonade Retail Park and disposed of Hillcrest Richdens Shopping Centre. Of the total southern African portfolio value, 92percent is in the retail sector, 3percent in the industrial area, 3percent in the office, 1percent in the motor-related industry and 1percent in the residential sector. Nationally, retail sales are down overall. As a result, the rent-to-income ratio deteriorated to 6percent. Despite this, it is still an industry-leading ratio.

Tenant retention on the total portfolio was 81percent, with retail retention at 87percent. Total portfolio vacancies decreased to 3.60percent. The group is participating in the Edcon recapitalisation and restructuring programme. The Edcon footprint in the Vukile shopping centres has been reduced, and management is working on reducing it further. The group's exposure to Edcon amounts to 4percent of total portfolio rental income.

Vukile considers selling its stakes in JSE-listed Gemgrow Properties and Atlantic Leaf Properties as they are regarded as non-core holding. The proceeds of a disposal will be used in Spain, according to management. They remain positive on the Spanish economic growth outlook. Consumption is rising and is expected to grow further in the current year.

Additionally, inflation has been increasing and is expected to grow at the end of the current financial year. Employment growth is high, driving households to increase their spending power. The unemployment rate decreased from 26percent in 2012 to 14.30percent at the end of 2018; it is forecast to decline further. The primary driver of the economy is tourism.

Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Vukile shares are not held on behalf of clients or personally.


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