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Township Retail – the New Growth Engine for South African Property

Property is often viewed as a homogenous asset class, but every asset presents a unique balance of risk and reward; the decision to allocate between domestic and offshore markets is complex and demands thorough deliberation.

Township Retail – the New Growth Engine for South African Property
Nesi Chetty, CFA

Nesi Chetty, CFA

STANLIB Portfolio Manager and Head of Property

Ahmed Motara

Ahmed Motara

Analyst and ESG

A modern South African township, or ‘kasi’, has a dynamic economy of informal cash businesses, which fulfil the daily needs of its residents: spaza shops, street hawkers, barbers, taxis and taverns. Even though little of this kasi economy is captured by the official data, it is widely accepted that township GDP has grown at a staggering rate over the last decade. South African listed property companies with retail assets serving lower-income communities can confirm that their retail tenants have better weathered the economic difficulties that have followed Covid than their higher-LSM competitors.

 

Retail in SA’s townships and rural areas was historically dominated by small informal traders (‘spaza shops’), some of whom operate out of shipping containers. They stock the basic necessities of life for low-income consumers. Many families in these communities have prospered since the start of SA’s democratic era.

 

However, as their incomes have risen, so have their aspirations. Retail habits are a concrete expression of social status: the things we buy and the places we buy them from tell the world which economic tribe we belong to. There is a clear appetite among increasingly affluent township communities for formal retail within easy reach, which creates a strategic growth opportunity for larger retail chains who are battling for share in saturated higher-income markets. To penetrate the township environment successfully, these retailers will need to learn new skills and overcome many challenges. But the potential dividend for the local community is significant: an influx of formal retail will create employment and offer consumers greater choice and lower prices.

 

This shift in economic and demographic boundaries is one of the factors that has benefited formal retail trade performances in urban areas where upper- and middle-income consumer groups tend to reside.

 

For investors in listed equities, Vukile, Resilient, Fairvest, Fortress and Exemplar are the property stocks with the greatest exposure to retail assets in townships and rural areas.

 

Vukile’s retail tenants in township areas report 10% growth in trading density overall. Activity in grocery and food is even stronger, up 12%. Rents remain very affordable for tenants in Vukile’s township malls: their assets like Phoenix Plaza, Gugulethu Square, Dobsonville Mall, Daveyton Shopping Centre and Atlantis City Shopping Centre continue to show strong growth metrics. One of the most compelling data points for rural consumers’ demand for more formal retail is the occupancy of Vukile’s rural retail portfolio: its vacancy is less than 1%.

 

Resilient has a strategy of investing in dominant retail centres that have a minimum of three anchors and are predominantly let to national retailers. Assets span Tzaneen Crossing in Limpopo (15 662 m2), Circus Triangle in the Eastern Cape (33 784m²), Mahikeng Mall in the North West (22 911m2), Galleria Mall in KwaZulu-Natal (87 322m2) and Mams Mall in Gauteng (74 916m2). Resilient is reporting positive sales growth across this portfolio, with the strongest growth in the Northern Cape at 7% and the largest portion of its assets, by value, in Limpopo. Again, vacancies are as low as 1.9% across its portfolio and aggregate rentals for “renewals and new leases” are at 10%, highlighting the strong appetite for its assets. It has grown by 24% compared with pre-Covid trading.

 

Fairvest owns assets such as Sebokeng Plaza, Orange Farm, Bara Precinct, Mpitshane Shopping Complex, Masingita Shopping Centre and Sibilo Shopping Centre. The largest tenant by revenue is Shoprite Checkers, followed by Pick ‘n Pay, Boxer and Pep. The story is one of national retailers seeking more space, with vacancies at 4.3% and rising rents being achieved on lease renewals. 

 

Exemplar is solely focused on township and rural retail, with assets such as Diepkloof Mall in Soweto (15 447m2), Alex Mall in Alexandra (29 137m2), Maake Mall in Limpopo (14 394m2), Katale Square in Mpumalanga (8 734m2) and Bizana Mall in the Eastern Cape (6 892m²). Exemplar is the purest listed play on township and rural retail. The performance of its portfolio indicates that fundamentals continue to remain strong for future growth in township retail assets: Exemplar is achieving 5% rental growth on renewals while vacancies across the portfolio are below 3%.

 

While the national chains contemplate a strategic move into lower-LSM areas, there is a universe of successful township retailers who see the opportunity to expand but are constrained by a lack of financing. At a recent township retail conference, many of these retailers voiced their frustration at being unable to access unsecured loans. The banks’ hesitation to back these entrepreneurs is a major stumbling block for potential township success stories.

 

The stereotype of a ‘township’ as a community of low-income residents content to be served by informal retail is out of date. The spending power of the residents of SA’s townships can no longer be ignored by formal retailers, and the performance of the listed REITs with exposure to these areas confirms the opportunity, particularly for the supermarket operators. As a careful deployer of capital, the property sector’s growing activity in this space further corroborates the underlying demand for better quality retail delivered in a variety of physical formats. Exemplar’s township centres are a particularly good example.

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