A Retailer’s Market: What Does That Mean?
By Dr Dirk A Prinsloo
Business confidence in South Africa is currently at an all-time high. Car sales have reached record levels, house prices are the highest ever, inflation is within the target set by Government, interest rates are the lowest in 20 years, construction of new houses in all categories is exceeding all previous records. Depending on the area, new residential building plans passed are up by between 30 and 50 per cent, the recently floundering office and industrial markets are starting to pick up, retailers are reporting record sales, and the share prices of retailers such as Edgars, Foschini, Truworths and Woolworths are reaching new heights.
The CBDs of our major metropolitan areas are showing very positive development and revitalization trends, with more than R12 billion being spent on investment and development in the Cape Town CBD alone. A recent study of the Johannesburg CBD shows most indicators are very positive. The survey measured certain levels of performance of the CBD and they indicated that the overall index has risen to 57 per cent – an increase of 32 per cent on the 2002 baseline figure. Safety and security has increased, residential accommodation has shown major changes, upgrades and sales of loft apartments have increased, transport issues have improved, as has urban design, city marketing, the property market in general, and increases in rentals.
Except for cricket and soccer, our sports’ teams are performing better, and there is huge anticipation and excitement on all levels regarding the World Cup Soccer Finals in 2010.
The question that now arises is this: how are all the above-mentioned positive aspects reflected in the economic indicators, and what is the impact on retail and office development in our major metropolitan areas, cities, and large towns?
The GDP figures for the second quarter of 2004 reached a high of 3,9 per cent. The property industry and markets in general are strongly associated with the GDP growth of the country. Prior to the Atlanta and Sydney Olympic Games those two cities were growing at more than 6 per cent per annum. It is expected that our GDP will continue growing at a rate of between 3 and 4 per cent, which will also stimulate further office development. Vacancy rates have started to drop in most metropolitan areas and construction of new office blocks is under way.
The fluctuating trend of inflation is clearly demonstrated in Graph 2 (alongside) and it is very dependent on Rand/Dollar exchange rates as well as on the cost of imported goods. The target set by Government of between 3 and 6 per cent, however, has been reached at least for the last 12 months.
As indicated alongside here, the interest rate at 11 per cent is at its lowest level in more than 20 years. This is one of the major factors contributing to the very strong demand for residential units, new residential building plans passed, and house prices that are increasing by more than 25 per cent year-on-year.
Building plans passed clearly show a steady increase from the beginning of January 2000.
The Business Confidence Index is by far the best monitor of what is happening in the South African economy on a month-to-month basis. The index clearly indicates very specific events occurring every month and the latest upswing from January 2003 reflects the positive mood in the country as mirrored in all the figures. Most of the other economic indicators used in the country are also showing improved levels.
The general trend in retail trade sales is strongly upward. The current performances of the retailers will further stimulate this index and new highs are expected this coming December.
The South African property media is known to cling to certain clichés. The impact of cell phones, gaming, and the lottery has been in the spotlight for many years. ‘The bubble is going to burst’ is the current catch phrase, and the cliché that has been used the longest revolves around the overtrading and oversupply of shopping centres in the country.
In a property survey published in the Finance Week of February 20 – 26 1986 the following statement was made: “South Africa is fast becoming overtraded. A number of centres came on stream in times of massive employment, boycott actions, high inflation and weak Rand leading up to high prices of imported goods.” Similar comments were made about the shopping centre industry in 1969 when the level of shopping centre space reached the level of 200 000m². Today similar comments are being made with regards to the very bullish trend in shopping centre development and especially during the last 18 months.
The comments about overtraded shopping centre space in 1986 were made only at the beginning of a huge upswing during 1985 – 1989. This was followed by major growth until the year 2000. Retail space completed in South Africa between 2000 and 2005 will exceed the 1 million m² mark. A figure that compares very favourably with the high levels during the late 1980s and early 1990s.
An examination of the trend in the last part of the 1990s indicated that all major regional centres have shown internal growth. In total more than 130 000m² was added to these centres during the period 1993 – 1999. The developers capitalized on the success of the regional centres, added new retail components, and built on the existing critical mass on offer.
The picture for the leading centres in 2004 is totally different from what was on offer in 1999. New super-regional centres have moved up to head the list of the top 15 centres in 2004, with Clearwater in Roodepoort still under construction.
Most of the large regional shopping centres currently under construction (a number of which will be opened before the end of 2004) have three characteristics in common that will increase their viability and success. In most cases the location of these centres offer very high accessibility and visibility. Capegate in Brackenfell/Kraaifontein is a good example of a centre directly adjacent to the N1 as well as other major arterial routes. The second common denominator of these centres is that most are located in new growth areas such as Woodhill Boulevard in the south-eastern suburbs of Pretoria where the market is currently growing at ±3 000 housing units per annum. The same applies to Clearwater Centre in Roodepoort where the adjacent suburbs are also expanding at a rate of 2 000 and 3 000 housing units per annum. The Durbanville market, close to Capegate, is also growing at a level of 1 000 and 1 500 housing units per annum. The Garden Route Mall in George has been predicated on the high growth taking place in the Southern Cape.
The third common denominator amongst some of these new centres is a combination of changing demographics and changes in shopping behaviour.
All new shopping developments must focus on their good locations, new growth areas and how to accommodate changing demographics and shopping behaviour.
Shopping centre retail space will in future mainly be influenced by the following broad trends:
- changes in shopping patterns;
- changes in life style with an increased emphasis on convenience shopping. The trend world-wide is to offer a better and more specific shopping experience to its customers;
- extended shopping hours will also influence shopping behaviour;
- new retail formats will come on stream, offering a much wider variety as well as a very specific shopping experience;
- e-commerce in South Africa is still very limited but will increase in importance and therefore shopping centres will need to utilize websites and e-mail facilities to drive up sales; and
- the general increase in the middle and top end of the market will further stimulate the demand for retail facilities.
There are a large number of middle-sized shopping centres that are in desperate need of major redevelopment and upgrade. There is also a need for these centres to get a better understanding of their current customers and to refocus themselves to ensure they still remain attractive.
The one outstanding aspect in the current retail market is that the market is retailer-driven and not market-demand driven. Although economic conditions are very positive, and the growth is in the middle and top end of the market, with retailers adopting a positive view of the future, developers must be cautious not to over-build new centres. Many of the proposed new centres will depend on residential growth and densification in the proposed trade areas. In most cases the proposed size of new shopping centres appears to be between 40 and 60 per cent larger than the market can warrant.
In conclusion, it was mentioned that the shopping centre market was overtraded in 1969, the market was saturated in 1986, and currently analysts indicate an overtraded market in 2004. Growth, however, will continue, mainly because of new traders, new retail formats, and exciting new retail components. The growth in the middle and top end of the market will continue and the bullish outlook for the South African economy seems destined to persist for the next few years. The warning, however, is not to overbuild in some areas but rather to phase in developments once the success of new centres has been established.
YOUR PARTNER IN MARKET RESEARCH