Surprise for shopping malls in South Africa – but there’s trouble ahead

Vacancy rates in South Africa’s retail spaces are declining – but weak economic growth and high interest rates will cause these improvements to stall.

According to the Q1 2024 FNB Property Broker Survey, the aggregated response showed that vacancy rates in all three commercial property classes—office, Industrial, and Retail—dropped.

“This is interesting because it points to business sector expansions at a time when the economy has been coming under significant pressure from a combination of a slower global economy and significantly higher interest rates compared to just over a year ago,” said FNB Property Strategist John Loos.

“Economic growth slowed to 0.6% in 2023, from 1.9% in 2022. But while there is the issue of renewed economic growth slowdown last year, along with higher interest rates, working against these negatives has been the lagged positive effect of a normalisation of economic life after Covid-19 lockdowns.”

The improvement in vacancy rates could be partially due to the positive normalisation feeding through into the numbers.

The Industrial Sector’s Index for Direction of Change in Vacancy Rate returned a negative value of -51, implying that 51% of respondents reported a declining vacancy rate compared with those who saw an increase.

The Retail Property Sector’s Index level also remained in negative (improving) territory.

It recorded a -65 reading, a mild lessening from Q4 2023’s -76, which still reflects a very significant broker perception of declining retail vacancy rates.

The MSCI Retail data for the final quarter of 2023 showed quarter-on-quarter declines across four of the five major categories of retail space.

All five saw their vacancy rates drop since the highs reached during late 2020/2021 – the height of the pandemic.

Super regional malls, the largest type of mall, saw vacancy rates drop from 7.91% in late-2020/2021 to 6.29% in early 2024.

With the Covid-19 pandemic bringing about an abnormal economic situation, which increased the magnitude of the vacancy rates in the country, a reversal was likely when the country reverted back to its “mediocre growth.”

Two other factors also appear to be assisting with vacancy rates in the country across all commercial property classes.

Firstly, the market is quite accommodating of the tenant population regarding the terms of rentals and recoveries.

MSCI quarterly retail data shows that the “cost of occupation” for tenants, which is basically the gross rent expressed as a percentage of sales turnover, has been a significant decline in the percentage since levels prior to the Covid-19 lockdown spike, suggesting a more “accommodating” landlord community.

“In other words, this percentage is down on pre-Covid-19 levels, significantly so for Super Regional, Regional and Small Regional Centres, and less so for the smaller Community and Neighbourhood Centres,” said Loos.

“This is a change from before Covid-19, when this cost of occupation percentage was rising steadily, especially in the 3 Regional Centre categories.”

Thus, the market appears not to have been sharply raising the costs of occupancy for the tenant population, a key contributor to keeping vacancy rates down in recent years.

Secondly, the nation’s weak economic growth has meant that there have been low levels of development of new space supplies.

Square meterage of Retail Building Plans passed for the 12-month period to January 2024 was 45% lower than the multi-year for the 12 months to April 2018.

“While the market has been seemingly “accommodating” of the tenant population since the end of lockdowns, and new supply of space is slow, we would expect a stalling of the declining vacancy rate in 2024 in lagged response to 2021-2023 interest rate hiking along with renewed economic slowdown.”

“And while the brokers as a group have not perceived such a stalling yet, they have perceived slower rental market activity levels that could soon translate into an end to the vacancy rate decline.”

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