Shopping centres have been the dominant driver in the retail sector of South Africa’s commercial property industry showing the best results during the global economic meltdown.While the retail market remains strained as a result of reduced consumer spending and highly indebted households, global research shows that South Africa’s retail sector remains buoyant despite changing market conditions and consumer behaviour. In the 2010 Broll Property Annual Report, Chief Executive Officer Malcolm Horne comments on global property returns to have continued its downward trend with the exception of retail property, which has remained stable since 2008. His prediction is that retail property will come out of the recession faster than industrial properties and offices.The retail sector of the local economy represents 14% of the total GDP, employs almost a million people in South African stores, and annual retail sales exceed R524-billion. Shopping centres facilitate a large contribution to South Africa’s economy, and the SA Council of Shopping Centres’ (SACSC) current statistics reflect approximately 1,619 formal shopping centres ranging in size from 1,000m² to 150,000m², representing around 17-million m² of an estimated 37-million m² of all retail facilities. Shopping centres - heavily reliant on shopper loyalty - are the major driving factor behind the consistent performance of retail property investment funds. Johan Engelbrecht, director at JHI Retail Properties says that with retail property funds outperforming offices and industrial funds it is fair to assume that shopping centres largely contribute to this market performance. “Due to the fact that through consolidation, because of substantial change in the ‘fit out’, i.e. Johannesburg’s CBD moving to Sandton, of traditional high street shopping nodes, consumers have favoured newly built shopping centres as an alternative, and for all the right reasons including security, availability, proximity, simply because of their offering to the consumer.”Yet, nominal growth in regional shopping centre market rentals is reflected in the Rode 2010 third quarter SA property report. It reflects year-on-year percentage growth in regional shopping centre market rentals that peaked at almost 18% growth in 2001 during the Internet bubble, showing approximately 16% growth in 2005, steadily declining to 7% during the global economic meltdown in 2008, further reduced to 6% in last year’s crisis, and precipitating to below 2% in 2010. Possible saturation of the market as a result of huge oversupply and dwindling consumer spending has sparked lively debate among industry specialists. Amanda Stops, SACSC General Manager says: “There will always be opportunities and demand within the shopping centre industry in general. Certain areas may be presently saturated when it comes to specific kinds of retail centres. However, taking into account new communities which are developing as housing needs escalate, evolving consumer needs, identifying and meeting the needs of different markets and communities is essential.”JHI’s Engelbrecht believes the local shopping centre market to be saturated and retailer driven. “Currently, the recovery in retail sales is prompting retailers to take a fresh look at their expansion strategies; retailers remain cautious to open in new shopping centre developments, preferring to look at expanding some of their existing stores in selected, well-performing retail centres where they already have well established and successful outlets.” He says this motivates shopping centre owners to invest in expansions and refurbishments of existing shopping centres, as opposed to new developments. But, Engelbrecht says, ideal sites remain available where successful performance results come from intense planning, matching centres’ sizes to market demands. This will ensure an ideal critical mass that, combined with an astute tenant mix, can result in a shopping centre which dominates the market, reducing the owner’s risk on investment returns.Developer Pat Flanagan, of Flanagan and Gerard recently dismissed talk of South Africa being over shopped: "We are nowhere near saturation in terms of shopping centre development." He said about 60% of South Africa is urbanized, that there are almost 20-million people in rural areas who could benefit from regional shopping centres, and that a further eight to 10 regional malls – large centres exceeding 50,000m² typically housing 150 to 250 stores - are likely to be added to the local retail industry over the next few years. Dr Dirk Prinsloo of Urban Studies for SACSC says one of the drivers in the increasing demand for more shopping facilities is growth in the market’s middle segment as shown by the increase in Living Standards Measure (LSM) 5-7 in the upper end of the market. In 2002 the LSM 3 group had the highest percentage of total market, and LSM 10 only 5% of the total market. But in 2009 LSM 6 represented the highest proportion of 20% of the total market, and LSM 10 only 7% of the total market. Increased demand resulted in an 8% annual growth rate, reflecting a total number of 36 shopping centres totalling a floor area of 1,879,246m² in 1993, 58 shopping centres of 2,772,949m² in 1999, 88 centres of 4,746,069m² in 2007, and 116 centres measuring 5,994,847m² in 2009.Urban Studies show such visitors to be from the LSM 6-10+ categories, and 50% of super regional centres’ shoppers visit centres on a monthly basis for ±130 minutes. Typical facilities at these centres include widest possible tenant mix with at least six anchor tenants including groceries, clothing, household goods and entertainment. Prinsloo says that in the last 8-10 years these centres have either been developed as a single entity (Gateway and Canal Walk), or the expansion of regional centres into large super regional centres (The Pavilion and Menlyn Park). Gary Hardisty of Old Mutual Property Investment Group confirms that large shopping centres are more resilient in down cycles and that nodally dominant (often larger) malls respond well in both up and down cycles, whereas the smaller, while non-dominant, centres struggle during recessions. He says a prospective retail tenant looking to let in a Regional or Super Regional centre would currently have less than 60,000m² to choose from across SA, compared with around 800,000m² in smaller centres. Hardisty says research indicates that super regional and regional centres have the resilience to recover from a demand shock in half the time of neighbourhood/community centres. JHI’s Engelbrecht says the nodally dominant performance of larger shopping centres during economically slow periods is reflected in astute consumers’ knowledge of retailers placing best performing stores in larger shopping centres, resulting in direct impact on availability and the differentiation of exclusive products.Commenting on how shopping centres contribute to property values in communities, SACSC’s Stop says convenient proximity to amenities to shopping centres, similar to schools, contribute to an area’s value in a community. “As testimony to these dynamics, very often shopping centres, in fact, catalyse the development of entire surrounding areas – for example Sandton City, which has seen today’s Sandton business and residential hub grow around it. Similarly Canal Walk in Cape Town was the catalyst for Century City, with the Gateway Theatre of Shopping in KwaZulu-Natal another prime example,” said Stop.Urban Studies explains trends in consumer patterns through visitor frequency to be largely determined by the tenant mix. Shopping centres smaller than 10,000m² and those between 10,000m² and 30,000m² have weekly and more regular visits by shoppers from the immediate vicinity of which between approximately 65-80% are largely supported for anchor grocery stores. Centres between 30,000m² and 50,000m² as well as between 50,000m² and 100,000m² are supported by approximately 65% of their shoppers on a weekly basis. Large super regional centres of 100,000m² are supported less frequently than regional centres with weekly support of around 50%. This trend has been very consistent over an eleven-year period. The weekly support for regional centres has decreased slightly from 68% to 64% and for super regional centres from 53% to 50%.Article courtesy of 