Pandemic boosts rural and township malls

SUREN NAIDOO: Hello, and welcome to The Property Pod with Moneyweb. My name is Suren Naidoo, and I’ve been covering the broader property industry for more than 15 years.

Izak Petersen, CEO of Dipula Income Fund, is my guest for this episode, and we are talking retail property – more specifically community-focused shopping centres in township and rural areas, which seem to be performing better during the Covid-19 pandemic compared to larger regional and super-regional malls in urban areas. Izak, welcome to The Property Pod.

IZAK PETERSEN: Thank you Suren.

SUREN NAIDOO: Before we get into the topic, give us a little bit of background on Dipula, Izak. I know you are a founder of the company, but how long have you been in the game? Tell us the scale and value of Dipula’s property portfolio and, considering the topic, what percentage is made up of township and rural centres?

IZAK PETERSEN: Suren, I’ve been in property for more than two decades now – to be [more] exact about 25 years. Dipula itself was founded in 2005. It initially had a portfolio of about R300 million, which we managed to grow to about R1.4 [billion] within three years of our founding. In 2011 the company was listed on the JSE.

We acquired a further portfolio, got our portfolio to about R2 billion. And subsequent to that it has grown to about a R9 billion portfolio. We own predominantly retail properties in the convenience and community sector of the retail sector. Our properties are located throughout South Africa and, as I said, we are retail buyers. About 60% of our portfolio is in retail.

We also own industrial and office properties, and of late we have also entered the affordable housing market.

SUREN NAIDOO: That sounds great. A fantastic success story there. More than half of your portfolio is now in retail space. Does this mean the fund is benefiting from the trend that we’ve been seeing since the outbreak of Covid-19? We’ve seen lots of other Reits [real estate investment trusts] that have exposure to retail [but] I’ve seen the smaller community centres, especially the township and rural areas, performing better.

IZAK PETERSEN: I think it’s probably a sort of longer-term story unfolding here. If you look at the amount of development that has been undertaken in South Africa over a period of time, I think there has been quite a lot of development; large super-regional shopping centres – but not necessarily the same amount of tenants – are entering the market. We’ve had massive business failures in the past 10 years or so, Stuttafords, your Edcons. And I think some of that space is not replaceable. We’ve had international guys entering the market and not growing or rolling out stores at the pace that was anticipated. So you kind of find yourself in a situation where you’ve got more space than the tenancies that are required, or demand for space from tenancies.

It’s very difficult to repurpose a space that was specifically built for certain tenants, and I think that problem is more prevalent in your larger shopping centres than in the smaller shopping centres. But if you look at how retail has now been taken to the people in the rural centres, there was massive leakage to bigger centres as the industry started rolling out properties more conveniently located closer to our communities on the rural side of things. I think there hasn’t been overdevelopment there, firstly, and number two, there’s quite a large informal economy that exists that is probably not captured by the Reserve Bank. That hasn’t changed. It’s stayed fairly stable.

There is some support coming from social grants into those markets.

Generally speaking, people have one foot in the city and one food in a rural area, and quite a bit of money is getting sent back home to where their families reside. And I think there’s a level of stability as far as that’s concerned.

And these centres also tend to house only essential retail rather than discretionary retail to a large degree. When it comes to urban convenience community centres, I think the lockdown has assisted quite a bit because people are now working from home, and there’s no point in them travelling to a regional centre to actually go and buy the bare basics. So we see that as quite interesting support for those community-based centres. As you’ve rightfully said, we were one of the few counters whose portfolio stayed stable year on year at our last reporting period.

There was an article [recently] indicating [that] on average the sector had fallen about 8% in terms of asset values; our portfolio was stable, and the only reason our portfolio was stable was because we had maintained our income, our vacancies were stable, and I think that when you look at cap rates and discount rates, super-regional centres have always enjoyed quite a low discount-rate dispensation, because there’s always an assumption that they’ve got better embedded growth. But I think that scenario has been reversed now, where your community-based centres, your smaller centres, are probably embedded with better growth prospects than the regional centres.

SUREN NAIDOO: I know your results haven’t come out and Dipula is in a closed period, but rural centres versus urban community centres – are you still seeing growth there? Is it continuing, considering we are in a lower lockdown period at the moment?

IZAK PETERSEN: We certainly are. We are seeing sustained turnovers from our retailers. I think people eat at home [more]and less frequently at restaurants. So therefore supermarkets are enjoying support from that point of view. And, as I just explained earlier on, I think this whole phenomenon of working closer to home or at home or from home is also providing great support from that point of view.

So our centres are trading very well at the moment. Occupancy rates are sustained. And I think we are quite fortunate from that point of view. We did indicate at our pre-close discussion with the market that our numbers were looking very similar to last year’s in spite of Covid-19, and we are talking here about pre-Covid-19, because we were only hit by Covid-19 in the second half of our financial year last year.

SUREN NAIDOO: So there are some good news stories or relatively good news stories still in the property market. Just on this trend, do you think it’s supported by Covid-19, and will it really continue? I think it sounds crazy to think post-Covid-19, but would this trend continue post Covid-19 because, with my coverage of property over the years, the trend of development in rural and township areas has been quite topical over a number of years. So it’s not really new.

IZAK PETERSEN: Yes. It’s a tenanting story. When you start a new business in the retail space you are probably going to test your concept in a smaller centre or a high-street type setup, rather than a large shopping centre, because the rentals are quite steep in super-regional shopping centres. So I believe that there are a lot of new concepts being tested by great business people. There’s a huge amount of second-tier retailers coming to the market and there’s consolidation in that sector. We’ve seen larger retail groups on the fashion side buying out smaller guys – the Mr Prices and Yuppiechefs and so on. And we’re probably going to see a bit more of that consolidation happening in the market.

But, as that happens, the founders of these businesses and other guys are going to start new businesses and that’s going to go on, and I think we’ll be recipients of that. But we’ve also seen the larger guys testing out smaller formats, and those smaller formats are more suited for your community-based centres, your rural centres.

I think people are adapting the model to also speak more to the majority LSMs in the country, which are the sort of lower LSMs, which implies that we will be recipients of that sort of trend. So I’m very confident that our choice of the retail sector 15 years ago was the right choice and I believe that, if things return to normality, it doesn’t imply that we’ll take a back seat. In fact, I think that we’ll definitely shoot out the lights if that scenario ensued.

At the moment stability is definitely going to be the order of the day as far as our chosen market segment is concerned.

SUREN NAIDOO: That’s great. Just on a concluding note, I know you talked about retailers and changes in the market with big retailers taking over smaller retailers, but the second-tier retailers are almost silent players in your space. You will know their names, the shoppers will know their names, but for affluent shoppers to the super-regional mall – what is this retailer OBC, or the other butchery chains, for example? I’ve kind of put a few names there but, as a concluding thought or comment, which retailers are benefiting most from the better performance of township and rural malls?

IZAK PETERSEN: I think any retailer that has pointed and adapted product, and understands the market segments and adapts product fairly quickly, is better positioned. Some of these second-tier guys are brilliant businesspeople. They don’t sit on product if it doesn’t move, they replace it fairly quickly. They are typically owner-managed and owner-run. If you take the example of an OBC, for example, almost all the stores belong to businesspeople. It’s basically on a franchise basis. And our experience has been that your franchise stores, even the likes of Pick n Pay, tend to outperform your corporate stores because people have skin in the game and work the business a bit harder.

So you’re right about the guys almost operating below the radar here for perhaps the urban super-regional shopper, but those names are household names in the sectors that we play in. In fact, people sort of demand that we have some of that.

The other great thing that I didn’t mention earlier on is that there’s been an relaxation of exclusivity clauses from some of the larger retailers, which then means that we’ve now got the opportunity to take some of these exciting new concepts or existing concepts, sort of mid-tier concepts, into our centres. The customer has more choice and the larger guy also then has to up his game. So it’s great news for a customer overall, and it’s great news for us to have that amount of choice in terms of who we put in these centres.

SUREN NAIDOO: Sounds interesting. Thank you, Izak, for your time. We’ll have to see how things pan out. That was Izak Petersen, CEO of Dipula Income Fund.