Online retail activity

The pandemic and resulting lockdowns of non-essential retail stores resulted in an increase in online retail activity. The FMCG basket categories in South African retail have held up well.

Although SA’s ecommerce activity has grown steadily from 0.5% about eight years ago, it remains low at just under 3% of all sales. Globally, online sales flourished as a result of COVID-19, especially in developed markets, where they represent around 15% of total sales and continue to rise. In the US, 18% of total sales are through online platforms, while China continues to dominate with 25%.

SA has to overcome three key challenges to grow online sales:

• High data costs and limited internet access
• Insufficient adequate payment selections
• Trust in the distribution or delivery process

Retail shopping space

Trading density has grown in rural and township shopping centres since the outbreak of COVID-19. This is mainly due to a larger share of spending being allocated to essentials such as food, and a slight increase in social security grants.

In contrast, trading densities in SA’s super regional shopping centres have come under pressure, as some were previously over-rented. The situation is starting to improve, with both footfall and spending levels improving in the third quarter of 2020.

Over the next few years, there will be a deliberate focus on less space, as there will be an oversupply of retail space at both the regional and super-regional levels. This should increase competition and drive trading density growth.

We expect future retail development in SA will probably fall into the 10 000m² to 30 000m² category, with reduced office exposure, since working from home has created a surplus of office space. SA has a large informal retail market that is still growing, and we expect developers will be able to raise capital at attractive yields to fund these developments.

New challenges for brick-and-mortar retailers

Brick-and-mortar retailers will have to adapt their businesses to incorporate omni-channels in their value proposition to deliver a seamless, consistent experience for the in-store and device shopper. We are seeing this approach emerging in the UK.

Recently, brick-and-mortar retailers have invested in ‘buy online and pick up in store’ and ‘ship from store’ initiatives. It remains to be seen if these will be durable strategies. Key challenges still need to be addressed, including inventory tracking, unit economics, or the scalability of these solutions.

It is clear that the flexibility to deliver to consumers across channels and when convenient for the customer will require retailers to demand more of their supply chains. South African retailers are responding to these challenges and in attempting to future-proof their businesses by re-basing rentals, optimising floor space – as Edcon has done – and focusing on core retail anchor tenants within the food and clothing segments.

Subsectors bucking the recessionary trend

Apart from retail shopping, sub-sectors like data centres, towers, storage, and logistics have experienced very little disruption in rental collections and continue to maintain their long-term secular growth drivers.

Within our South African listed property portfolio, we find good value in Equites property fund, with its strong pipeline of logistics opportunities in SA and the UK. Offshore, and on the back of the surge in demand from ecommerce which increased the need for quality distribution centres, we continue to back the long-term growth prospects of Prologis, a logistics real estate business. The firm rentals in some of these sectors mean we would also expect some capitalisation rate compression.

Outlook for local and global REITs

We are cautious about property funds with retail exposure. A few years of underperformance in the retail sector have put pressure on company balance sheets and increased gearing, which is evident primarily in rising loan-to-value (LTVs) rates.

Retailers with diversification across multiple jurisdictions will do well, but some will need to raise capital to bring down debt and re-purpose their businesses. In the short term, we may see further impairments of retail assets as companies re-set and re-base. The retail exposure in global property benchmarks is significantly lower than it was a decade ago.

We expect the global REIT market will deliver sustainable 10% US dollar growth over the next five years. Despite the lacklustre growth seen in retail, growth sectors like storage, logistics, residential and data centres continue to support this upward trajectory.

In SA, REITS will emerge from COVID-19 with much stronger balance sheets and a focus on resuming normal distribution growth. We expect 15% total returns on a compounded basis will be delivered by the SA listed property sector over the next five years.