Big squeeze on malls
Stuttafords’ shutdown may be only the tip of the iceberg for mall owners, who are facing further tenant failures and store closures as consumer spending tightens. But it’s not necessarily all bad news
The demise of Stuttafords and the looming closure of a number of Edcon stores will bite into the earnings of shopping mall owners, who increasingly face rising vacancies and falling rentals.
JSE-listed mall owner Hyprop Investments expects it will take six months to find new tenants for the 11,000m² of space left empty following last month’s closure of Stuttafords stores in three of its flagship shopping centres.
Hyprop CEO Pieter Prinsloo says it’s too early to say what the impact will be on the company’s bottom line.
"It will depend on how long the stores stand empty and what rental levels we can achieve on new leases."’
However, he concedes that the Stuttafords store closures will negatively affect dividend payouts to shareholders for the year ending June 2018.
Hyprop is the JSE’s largest specialist retail-focused real estate investment trust (Reit), with a market cap of R30bn. It has in recent years consistently outperformed the sector, both in terms of income and capital growth.
In March, when the company reported results for the six months to December, Prinsloo said Hyprop was on track to achieve dividend growth of 12% for the full year ending June — well ahead of the 7% sector average. That level of growth appears unlikely to be repeated in the 2018 financial year.
Hyprop is already in talks with various retailers to fill the space vacated by Stuttafords. Prinsloo says international retailers, including Swedish fashion retailer H&M, and Zara, are still keen to expand their SA footprints. "Turkish fashion brand LC Waikiki is also interested in establishing a presence in SA."’
The problem, says Prinsloo, is that it is likely to take six months to negotiate lease agreements with new tenants and fit out new stores. And there is a chance that Hyprop may have to let the vacant space at lower rentals than Stuttafords was paying. Says Prinsloo: "The reality is that trading conditions are tough, with retail sales under pressure across the board. So everyone wants to pay lower rentals."
Though Stuttafords has paid its rent until the end of May, Hyprop will claim damages equal to the amount owed for the unexpired portion of the three leases. The Rosebank Mall lease was the longest and has four years remaining. But Prinsloo doesn’t expect to recover much. "Creditors are unlikely to get back more than 3c in the rand."
Other JSE-listed mall owners that will be affected by Stuttafords store closures are sector heavyweight Growthpoint Properties and Liberty Two Degrees. The latter owns stakes in Gauteng megamalls Sandton City and Eastgate. The Stuttafords store in Growthpoint’s Brooklyn Mall in Pretoria shut its doors last month.
It’s not clear if and when its Sandton City and Eastgate stores will close. Liberty Two Degrees declined to comment on the issue.
Stuttafords’ shutdown may turn out to be only the tip of the iceberg for mall owners, who are facing further possible tenant failures and store closures. International fashion brands Mango and Nine West, which were brought to SA by House of Busby, closed their stand-alone stores in March. British retailer River Island, which has a presence in Rosebank Mall, Sandton City and Mall of Africa in Gauteng, Canal Walk in Cape Town, and elsewhere, exits SA this month.
Of particular concern are the looming store closures by the struggling Edcon group, the largest occupier of retail space in SA through its Edgars, Jet, Jet Mart, CNA and Boardmans brands.
Edcon CEO Bernie Brookes said last month the group plans to shut a number of stores when leases come up for renewal, in a bid to stem losses from falling sales and cannibalisation (when a new store lures customers away from an existing one in the same "catchment area").
Though vacancies in the retail portfolios of larger property stocks are still relatively low at less than 3% typically of gross lettable space, vacancies are bound to tick up over the next 12 months.
Trading densities (turnover/m²), another key measure of retail performance, are already under pressure. Trading density growth in the mall portfolios of both Growthpoint and Hyprop slowed to the low single digits in the six months to December, from 7%-8% achieved 18-24 months ago.
Growthpoint head of retail Stephan le Roux says Edcon store closures will affect all mall owners, given how difficult it is becoming to replace tenants. "Everyone’s growth is flat or falling, so very few retailers are looking to expand in the current weak economy."
Le Roux believes there is also an increased risk of tenant failures among smaller, independent "mom and pop stores" as they often don’t have the financial resources to keep afloat amid continued pressure on retail sales.
The perfect storm has been created by developers’ and retailers’ overzealous expansion in recent years, amid dwindling consumer spending, says Le Roux. "Over the past decade the amount of new retail space added to the market grew at a much faster pace than retail sales. Until a year ago, it was mostly lower-and middle-income shoppers who were under strain. Now upper-income consumers are also tightening their belts as higher taxes and overall living costs erode disposable income."
Property analysts say store closures by underperfoming retailers is not necessarily all bad news. Meago Asset Managers director Jay Padayatchi says Stuttafords closures could be a blessing in disguise as vacant space may be taken up by international retailers who could trade better and bring in more feet.
Stanlib head of listed property Keillen Ndlovu says the upside of tougher trading conditions is that SA landlords will be forced to improve the shopping experience for consumers. He says this is already happening in the US and UK, where mall owners have had no choice but to adapt to changing shopping patterns and the advent of online shopping.
In the US, he says, department stores seem to be a thing of the past. Landlords are converting big spaces into smaller, specialised outlets.
Ndlovu says globally the focus is increasingly shifting away from fashion/apparel to food, beverage and entertainment offerings. This has already delivered rental upside for large US-listed Reits such as Simon Property Group and General Growth Properties.
Ndlovu notes that SA retail landlords will, similarly, also have to become more innovative to stay ahead of the game. "There’s huge room for SA property owners to improve the tenant mix in local malls as well as to embrace new technology through apps, free WiFi and use of data analytics to better understand shoppers’ changing needs and preferences."