Global Credit Ratings (GCR) continues to view the retail property segment positively despite the weak consumer market and other economic challenges present in the retail operating environment.
Eyal Shevel, Head of the Corporate Sector at GCR, says most retail funds have the benefit of being defensive in a tough economic environment due to long term leases with generally high quality tenants and above inflation escalations.
“Retail property will continue to outperform other subsectors as a result of strong demand for space from South African and international retailers alike, however investors are more discerning now than they were in 2012, about the quality of the properties,” explains Shevel.
He says the key to a successful retail fund portfolio, is ensuring you have the correct location from which will allow the property to dominate the local retail environment. “Under such circumstances properties are able to attract the large national retailers which further cement their position as the shopping venue of choice.”
Shevel says the leader in this segment has been Resilient Property fund, whose portfolio includes some of the largest regional mall in South Africa, outside of the main urban areas. In addition to dominating the regional retail environment, Resilient has successfully tapped into the growing spending power of the lower LSM population segments. “Given the strong growth in the portfolio and the outperformance in profitability, GCR recently affirmed the resilient rating at A(ZA) and placed it on Positive Outlook.”
Similar trends have been evidenced by Fortress, although the fund has tended to target small centres than Resilient. “By shedding smaller, non-core properties and securing larger, yield enhancing acquisitions, the fund has achieved progressive appreciation in average values and rentals per square metre over the review period. This has been supplemented by international diversification through its shareholdings in NEPI and Rockcastle. Having cemented its position in the mid-tier of the property sector, with the LTV remaining moderate at 32%, GCR upgraded Fortresses rating to A(ZA),” explains Shevel.
He says these trends have spurred a number of prominent listing over the past six months. “Both Accelerate and Attacq were listed with the prospects of large retail developments, which ensured strong support for their listings. More recently Safari Property fund listed. While its portfolio is small, it has very well located properties that have demonstrated trading densities above the industry average.”
When it comes to levels of activity in the retail property fund sector, Shevel believes property acquisitions and developments will be slow in 2014. “The market for quality retail assets is saturated at the moment. As such most funds are focussing on optimising their existing properties through extensions and refurbishments.”
Shevel believes interest rates will be one of the most important underlying forces for this sector. “The direction interest rates have made transactions more expensive. Thus many smaller funds who had listed during the boom are funding it’s increasingly difficult to grow their portfolios. Thus further consolidations amongst smaller funds can be expected”.