Retail sales bad news for retail property

04-08-2008

The growth in retail sales has been losing steam for some time now, with the figures for May 2008 revealing that real sales (actual volumes of sales) were down by nearly 4% on the same month a year earlier.

This comes on the back of a recent report in the Cape Argus, which noted the number of Western Cape restaurants, coffee shops, bakeries and butcheries that had already closed shop since the beginning of this year. One Western Cape-based auctioneer reported that his company alone had, since January, sold the equipment of around 70 establishments.

Some shoppers claim shelves of some ‘mom and pop’ stores appeared to be generally under-stocked. Commenting on this, property economist Erwin Rode noted: “During a period of rapidly rising prices, retailers have to restock at the new, higher prices. This puts a strain on the cash flow of the business because of the extra money required to fund working capital. Consequently, cash-strapped retailers may decide to reduce stock on the shelves. This, together with plummeting consumer confidence levels, resulting in slower sales, does not bode well for retail trading densities (sales per square metre) and, consequently, market-rental growth going forward.”

Of course, lower market-rental growth, all other things remaining the same, translates into lower capital returns to landlords. The accompanying graph shows the robust correlation between the growth in real retail sales and real capital returns on retail properties. Evident is the strong tendency for these two variables to move together over time.

However, continues Rode, on a more positive note: “This does not mean that, in the long term, retail property will cease to be a valuable asset; over the past 40 years it has time and again proved to be the best overall property investment. Our female shoppers are, after all, among the best in the world! But in the medium term it won’t be the darling that it’s been over the past number of years.”