Although yet to recover from Edcon’s woes and downsizing, South Africa’s shopping centre landlords are set to face even more intense rental negotiations with other major retailers.
Massmart CEO Mitch Slape increased the pressure on retail landlords last week, when he slated the retail property sector for its high rentals and escalations, despite tough local economic conditions.
“Rental escalations in this market are ridiculous,” he said during a media roundtable in Johannesburg.
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“You’ve got escalations in this market in the 7-8% range – there is nothing to justify that considering how the economy is doing and where inflation is sitting. There is no way that the retail sector can survive with these kinds of escalations. I think it is time for the market to be reasonable about them,” he added.
Slape, a Walmart veteran who was brought in six months ago to lead a turnaround of the group’s majority-owned Massmart business in South Africa, said the JSE-listed group would be talking to its landlords about reducing its rentals and keeping escalations at least in line with inflation.
Embattled Massmart, which owns retail chains such as Game, DionWired, Makro and Builders Warehouse, is set to report its first full-year loss of almost R1.4 billion for its 2019 financial year this week.
As part of a turnaround plan revealed in January, the group is set to close some 34 DionWired and Masscash stores. Retail analysts expect that it will downsize stores in its struggling Game chain too.
Read: Massmart in need of an ‘Edcon-like’ overhaul?
Keillen Ndlovu, head of listed property funds at Stanlib, tells Moneyweb the sector is likely to see retailers “rationalising” the amount of space they occupy through the “right-sizing” of stores, as well as the closure of underperforming outlets.
Ndlovu predicts that retail rentals will fall.
“We will not be surprised to see rents fall by as much 10% as leases expire in the retail space. We may see annual rental escalations on renewed leases trend downwards from the 7-8% level to 6-7% levels, and maybe lower for the national tenants on long leases,” he notes.
“There’s much more focus on tenant retention, even if it means accepting a lower rent. In this environment, it’s more costly to lose a tenant than to retain one at a lower rent, as it takes longer to find a replacement tenant. In addition, there are other costs such as tenant installation allowances and broker commissions – and costs such as rates, taxes and security even when the space is vacant,” Ndlovu points out.
A few listed property counters have downplayed the potential impact of Massmart closing its DionWired stores. However, calls for lower rentals are likely to add further pressure on the bottom lines of these funds. Massmart is also yet to give details on possible downsizing of its Game stores, which is its largest chain with around 130 outlets.
Estienne de Klerk, chairman of the South African Real Estate Investment Trust Association (SA Reit), which represents the interests of the listed property sector, says many landlords are working with retailers to address some of the challenges in light of SA’s economic woes.
“The story is broader than Game and Massmart. Other CEOs have also been complaining about rentals,” he says. “Rentals will be seen as high if you are trading poorly, but not all retailers, stores or shopping centres are in the same situation.
“This needs to be seen on a case-by-case basis, and landlords are trying to help where they can,” he points out.
“We also have to appreciate the fact that all industries are under pressure. Broadly speaking, the property sector is facing a variety of issues, including the fact that administered costs [electricity, water, municipal rates and so on] have escalated by more than 550% in the past ten years,” he adds.
Read: Rising rate bills adds to commercial property sector woes
De Klerk, who is also CEO of Growthpoint Properties SA, says despite massive increases in administered costs, services from municipalities and government entities have declined.
“The property industry has had to invest in things like road infrastructure and solar generation. This has increased the cost of doing business for us, but also offered efficiencies to our tenants.”
Meanwhile, on Edcon, he says it was an “anomaly” for the retail property sector to deal with. In Edcon’s financial lifeline restructure plan, several landlords took equity in the group while others had to reduce rentals as part of the plan.
Read: Edcon gets a lifeline from the public, landlords and lenders
“The reality is that Edcon was a complex matter,” says De Klerk. “There is no doubt that what we had to do as landlords with Edcon has created a dynamic we have to deal with in the industry.
“Massmart is not nearly as big as Edcon in terms of store numbers, so the impact of store closures will not be the same.”