2023 – A toughening year for the Retail Property Market

By John Loos, Property Sector Strategist at FNB Commercial Property Finance

March Retail Sales, released today by StatsSA, showed another month of year-on-year decline in real inflation-adjusted terms. Actual retail sales value for March rose by 6.7% year-on-year, but when adjusted for high retail price inflation into “real” terms, sales declined by -1.6% year-on-year, following on a -0.7% year-on-year decline in February, the 4th consecutive monthly year-on-year in real retail sales.

The real inflation-adjusted sales level is also -1.6% below the March 2020 level, the month just preceding the hard Covid-19 lockdowns. This means that real retail sales have battled just to fully recover to pre-Covid-19 levels, a reflection of a tough economic period even subsequent to the hard Covid-19 lockdown period.

A key cause of weak real retail sales has been the sharp surge in retail price inflation, from only 3.8% year-on-year in March 2022 to 8.5% in March 2023. But it is also about the underlying state of the economy, a growth slowdown being caused by a combination of rising inflation and interest rates, a global economic slowdown affecting South Africa through its trade with the world, and heightened electricity load shedding disruptions since late 2022.

While interest rate hikes have contributed to a slower economy, which slows total household income growth, they also contribute directly to a purchasing power constraint because increased cost of servicing debt means less disposable income available for cash purchase of consumer goods and services.

The recent inflation surge’s impact on real demand can be witnessed in real sales growth rates for major retail categories. We know that food price inflation has been one of the key drivers of overall inflation. And so we see that the “General Dealers” category, where much food and grocery shopping happens, has seen a -1.0% year-on-year decline despite the more essential nature of this retail category.

The Specialised Food, Beverages and Tobacco Retail Stores have seen a more severe -4.8% real sales decline. Pharmaceuticals and Medical Goods Retailers, too, saw a real sales decline to the tune of -3%. Home improvements appear to be taking a back seat in tougher financial times, with the Hardware, Paints and Glass Retail category seeing sales decline by -5.7%, while Household Furniture, Appliances and Equipment sales are down -1.2% in real terms. At the other end of the spectrum, Clothing, Textiles and Footwear Retailers benefited relatively speaking from relatively low price inflation, and managed to see real sales grow positively by +4.7% year-on-year in March.

The real sales decline comes at a time when retail property tenants have already been financially constrained for quite some time. Since Covid-19 lockdowns commenced, credit bureau TPN reported retail landlords as having the lowest percentage of tenants in good standing with their rental payments, when compared with the Office and Industrial Property Sectors. By early 2022, TPN reported a still-lowly 62% of retail tenants in good standing, and renewed decline in the percentage starting after a partial post-lockdown recovery. In short, retail property tenants experience significant financial pressure, and declining real retail sales are an additional source of pressure on top of higher interest rates.

Therefore, while MSCI data had reported some decline in the elevated national retail property vacancy rate in 2021 and 2022, recording 4.7% in 2022 (down from a 5.7% multi-year high in 2020), we expect a renewed rise in the national retail vacancy rate in 2023 as tenant incomes come under greater pressure and financial pressures escalate.