Why major malls need to continually innovate and invest

You can also listen to this podcast on iono.fm here.

It’s December, and that means retailers, shopping malls and tourist attractions and entertainment venues are bustling. We know how South Africans like to shop and, believe it or not, the latest Consumer Confidence Index for Q4 2022 shows that consumer confidence has rebounded strongly.

Read: SA consumer confidence bounces back to pre-Covid levels

On this latest podcast we chat to the head of retail at Old Mutual Property (OMP), Ahmed Kazi. Old Mutual owns some of the country’s landmark regional and super-regional malls like Gateway Theatre of Shopping in Umhlanga, Cavendish Square in Cape Town and The Zone @ Rosebank. Kazi shares some of his insights on the sector, particularly the performance of mega malls now that Covid is pretty much over and shoppers are back big time.

Highlights of his interview appear below. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts. 

Before we talk about performance and what’s happening at Old Mutual Property, Ahmed, tell us what you do in your role at the company and give us a little bit of your career background? 

“My career background is finance. I served articles with a finance background in accounting and auditing, and then joined Old Mutual in 2001. I’ve always been in property. Even before that, I was the finance manager at the Seeff Property Group listed on the Johannesburg Stock Exchange.”

“I joined OMP in 2001 in the finance team. In 2005 I was seconded with Old Mutual to Saudi Arabia. We had a joint venture with a listed company called the Savola Group, and they were quite big in shopping centres, mainly into supermarkets with their brand, which was called Panda Supermarkets. They basically managed and owned their own centres where these supermarkets were housed, and we kind of used that as a platform to expand their footprint across Saudi Arabia into cities like Jeddah, Madinah, Makkah and Riyadh.”

“I spent two-and-a-half to three years in the Middle East, came back in about 2007, and joined the Old Mutual Property Asset Management team. It’s been a fantastic experience for me, [with] various roles across all sectors within the asset management sector, in finance operations, and eventually this year, 2022, I’m head of the retail division. So I’m overlooking our centres.”

“My day-to-day task is obviously managing the performance of the shopping centres. Our management is completely outsourced to Excellerate JHI. We are quite happy with that arrangement, and we work very closely with them in order to make sure that the malls are run to our standards and obviously that we enhance the shopper experience; overall that would be enhancing to us as Old Mutual.”

“The portfolio I oversee comprises eight retail assets, [with a] GLA [gross leasable area] of about 470 000 square metres. Obviously the biggest one there is Gateway. That’s our flagship asset; it’s about 168 000m².”

“Cavendish Square in Cape Town is 68 000m². Then the Bedford Shopping Centre in Johannesburg is about 87 000m² and has a significant office component of about 27 000m². The one we are really excited about at the moment is Rosebank. That’s about 60 000m².”

“And then we’ve got four other malls in outlying towns and cities. For example, Riverside Mall in Nelspruit – that’s about 48 000m², Vincent Park in East London … and then in Tembisa and Krugersdorp we own malls as well.”

“Old Mutual Property has been invested in property since inception. For example, Gateway – we celebrated its 21st anniversary this year. Over and above that we celebrated 50 years for Vincent Park in East London and Cavendish in Cape Town.

“So that’s the extent of our portfolio. We are very excited about it. We are fully invested in these portfolios for the long term, and we’ve seen quite good returns out of these assets.”

How’s the performance of these retail property assets post Covid, including aspects like vacancies and footfall?

“I think all landlords are kind of holding the pre-Covid period as a benchmark as to where centres were, and I think Covid has kind of reset a lot of the benchmarks and a lot of people’s attitudes to malls and how they actually interact. So what we are experiencing across the malls is that our footfall has not recovered to the extent of what it was pre-Covid. So clearly there’s been a behaviour change in that people are making fewer trips to malls.”

“However, what we are seeing is that our turnovers have recovered. So what people are doing is they’re making fewer trips, but maximising that opportunity and spending more.”

“So if we look at a very high level at our portfolio, I think in terms of foot count we’re probably down [currently] about 10% [of that] pre-Covid. But I think we understand the mechanics of that in people’s behaviour change. But overall, in terms of actual turnover growth from 2019 to 2022, year to date to October, on average across the portfolio, we are probably about 7% higher than we were.”

“So that is quite pleasing for us in that the retail sector has recovered – not to the extent of pre-Covid levels, but I think the upward trajectory is actually quite positive for us.”

Vacancies falling

“In terms of vacancies, what’s growing this turnover obviously is that we have managed to fill our vacancies. During the peak of Covid our vacancies were close to 8% on average, and we are forecasting that that number would be around 1.5% by the end of next year. We’ve gone through our budgeting cycle and that’s where we expect it to be.”

“I think what’s important for us in retail is that we’ve got to be innovative – that’s to keep our centres relevant. In that way we can keep enticing shoppers to come to the mall.”

“So that is why we want to spend on upgrading our centres. Being an accountant, having to replace tiles that are fully functional but probably 15 to 20 years old, is a grudge spend [for me]. But if we need to keep our malls new and relevant and enticing to shoppers, that’s something we’ve got to do. It’s also a value protection exercise that we do.”

“Gateway is a remarkable story. The vision which our previous executives had – to build a shopping centre in what was then purely a massive sugar cane plantation – was extremely exemplary and visionary. When we had our 21st celebration for Gateway [in September], I think it was quite extraordinary to go and relive those experiences in terms of what the area looked like before, and what it is now.”

Read: Gateway Theatre of Shopping to get multi-million rand upgrade

“I think, from an Old Mutual perspective, we are extremely proud that that entire Mhlanga node has grown out of the roots of Gateway … For us that’s fantastic. As you’ve mentioned, we are probably spending close to about R70 million this year in phase one, and probably more in the next two years in terms of completely revamping the centre, giving it a fresh look.”

“And as I mentioned before, our centres have to be relevant. If the malls look tired, the shoppers and tenants actually pick up on that. So that is something which we are very cognisant of. And also, if your centres are new and relevant they attract foreign tenants. So for example, [in early December] Chanel International actually opened the store at Gateway.”

“The shopping-centre environment is extremely competitive, and if you keep your brands new and relevant and attract new brands to your centre, then your centre remains relevant. So in that way we are actually forced to be quite innovative in that space.”

“Following up on that, I think [at] Cavendish we’ve also spent a lot of money upgrading the mall. We started in about 2021 when we introduced H&M, completely revamping that top floor. This year we are busy with the middle floor, just re-looking at the entire internal aesthetics of the mall, and probably next year we’ll look at phase three, where we’ll deal with the lower ground [level]. Now obviously Cavendish was the inception of the We Are EGG store.”

“For your listeners, just to give you some context in terms of what We Are EGG is, it’s a kind of a store-in-store concept, mainly focusing on local South African retailers showcasing their brands. Many of them are actually operating on Instagram, operating online.

“From a size perspective they are not big enough to have independent stores, but I think housing them [under] one roof in a collaborative manner gives the shopper a fantastic experience, a fantastic variety – and also from our perspective a huge opportunity to actually showcase local talent.”

Read: New EGG store welcomes 7 000 shoppers in first two days of trading

“We’ve partnered with them [We are EGG]. They come with great retail experience and also they have access to all these new brands in terms of local entrepreneurs. So it’s a collaboration which we are very excited about, and we are trying to give people an opportunity to showcase where they didn’t have that before.]

“One other concept that we introduced at Cavendish is also a food hall called CHEFS. That is extremely innovative as well, completely app-based.”

“So what happens is you download the app and the entire menu is displayed on your phone, and the menu is extensive. You can get coffee, you can get smoothies, you can get sushi, burgers, poke bowls – so quite an extensive offering. The offerings are all app-based. You can order on the app; you get a notification that your order has been received, and then you get a notification that your food is at the counter. You go and collect, and your account is debited in terms of the cards which you’ve loaded in the system. That also opened about two months ago.”

“Also something very, very new in terms of the shopping centre environment that we have is this food hall concept that operates for about 12 hours purely on our app-based mechanism.”

What’s happening at The Zone @ Rosebank – it seems like that centre has always been in transition?

“Rosebank has been a very interesting node. I think the first major disruption we had there was the Gautrain, when the Gautrain got built. Subsequent to that you are in a kind of a live environment with neighbouring landlords also doing upgrades. So I think you’re right … Over the past 10, 15 years there has always been some sort of development there, either at our centre or neighbouring centres. I think that is the landscape we operate in, and we have to just try to make the best of it.”

“[The Zone @] Rosebank was one of the centres which was particularly severely hit during Covid.”

“We are very reliant on the office sector, on the offices which surround Rosebank, and they were great supporters of the centre in terms of the coffee shops and restaurants and shopping after and before work. So those kinds of offerings have been impacted.”

“But I think post Covid we’ve seen the recovery. And with the filling of the [We are] EGG space, it’s been a catalyst for filling all other vacancies. We’ve introduced a new restaurant there … MamaSamba focusing on mainly South American food, also new, which opened I think 5 December.

“There are a few new vacancies in in the restaurant and food court area. The next step for us is to probably look at that food court and try to make it a bit more user-friendly.”

Is Old Mutual Property looking to add other property uses, like residential, to its major malls?

“As part of the Life company, obviously we operate in terms of specific mandates. So in terms of residential, we at Old Mutual Property just focus on traditional commercial property. So that would be retail, industrial and offices.”

“Just to come back to offices, we made a strategic decision probably at least 10 years ago to get out of offices. That’s been one sector that’s been severely hit by Covid, and obviously now is not recovering as quickly because of work from home.”

“So from a portfolio point of view we’ve got absolutely no exposure to offices in terms of standalone buildings. Some of our retail centres, for example at Rosebank and at Bedford, have sizeable office portfolios, so we manage that.”

“But to come back to your question, we don’t do residential. We’ve certain hotels. We’ve three hotels in our portfolio, two at Gateway and one at Holiday Inn. So we kind of focus on the traditional aspect of property – commercial, not including any residential.”

“But I do think we take the innovation part very seriously. We spoke about EGG in terms of having brands and doing collaboration. I think CHEFS is another one. And we tend to spend a lot of money on marketing our centres, and that’s quite an aspect that sometimes gets overlooked in the way shopping centres get marketed.”

“We’ve been very successful with a very good year this year in terms of our marketing. For example, at the South African Council of Shopping Centres Annual Spectrum Awards we actually won seven out of the 15 gold medals, and a further eight silver and 13 bronze. So we do realise that marketing is important, and understanding your consumers and keeping them informed all the time as to what’s happening at the mall and why it’s relevant to them.”

“As shopping centre owners we want to see that footfall increase because that increases turnover and that benefits our tenants and benefits us as landlords as well in the long term.”

What are your expectations for the year ahead for mega malls? 

“I think our expectations are still positive. To be honest, 2022 has [seen] a spurt in the growth. There was quite a bit of cash with consumers, and as the lockdown restrictions in 2022 were lifted people became more comfortable being outdoors.”

“2022 for us has been a very, very good year in terms of consumer spend at the malls.”

“But we have to look at the overall economic environment we are in. We can see the pressures we have with high inflation and lots of talk about global recession. Interest rates were increased again at the last Monetary Policy Meeting and indications are that they will probably increase again early next year.”

Read:
Interest rates are up 325bps this year; how this affects your debt
Sarb ratchets repo rate by another 75bps [Nov 2022]
Sarb hikes interest rates to above pre-Covid levels

“So I think we’ve got to be realistic and realise that at some point in time the consumer will be under pressure. We still see growth next year, but I don’t think it’ll be anywhere close to the levels which we’ve seen this year.”

“The other elephant in the room is the impact of load shedding on our malls. It impacts retailers, it impacts consumers because when there is load shedding they don’t want to come to the malls because they’re not sure whether the malls are operating; they are kind of stuck in their homes, they can’t get out. So that’s another aspect which does impact how people will actually engage with shopping centres going forward.”