RETAIL

MARKET ENVIRONMENT

Significant increase in property portfolio resulting from the Acucap and Sycom transaction

Apart from property fundamentals, retail property’s performance in rental levels, vacancies and arrears is chiefly dependent on the quality and growth of consumer spending at a specific property. While consumer spending may vary from location to location depending on the spending dynamics of the shoppers in the catchment area, overall growth in consumer spending on a macro scale is a function of disposable income growth, household credit extension and consumer confidence.

Household consumption expenditure showed some improvement in the beginning of 2015, increasing by 2.8% in Q1:15 from 1.6% in Q4:14.

There are several factors that will affect real disposable income growth for the rest of 2015, and possibly into 2016. These include a potential interest rate increase, higher food inflation and increases in administered costs.

Private sector credit extension remains lacklustre. This is unlikely to improve as household indebtedness increased in Q1:15.

The South African BER Consumer Confidence Index for Q2:15 registered the worst reading in almost 15 years at -15 and is substantially lower than the -6 reading during the 2008/9 recession.

PERFORMANCE

Growthpoint’s retail portfolio increased to 58 properties with a total GLA of 1 410 461m², valued at R28,2 billion after the Acucap and Sycom transaction.

Net property income for the financial year was R1,5 billion, representing a 23.9% increase. This is mainly attributable to the income from acquisitions for part of the year. On a like-for-like basis for the Growthpoint portfolio it increased by 7.9%. However, after normalisation for revenue attributable to capital projects in the year under review, net property income increased by 7.2%. It was slightly below budget owing to the demise of Ellerines impacting our rental income and delays in redeveloping certain vacancies.

Overall, vacancies improved during the year to 3.3%. This was positively affected by selling Arcadia Centre and acquiring the Acucap and Sycom portfolios. Most of the former Ellerines-occupied stores were let during the year but, on average, six months’ rental income was lost. Included in the listed vacancy is 11 240m² currently under development. This is made up of Lakeside Mall (4 500m²), River Square (1 800m²), Greenacres (3 300m²) and Hillcrest Corner (1 640m²). Excluding the area under development our vacancy factor is 2.5%. Office and storage vacancies included in the retail portfolio amount to 8 900m² and, if excluded, results in a core retail portfolio vacancy of 1.9%.

Our renewal success rate for the year was 87.0%, up from 75.6% in the last year when it was negatively impacted by the non-renewal of two cinema leases. We continue to aim for a renewal success rate of above 90%. The average increase in renewal rentals was 6.0%, lower than the previous year’s 6.9%. This is mainly a result of negative rental growth in leases renewed at City Mall, Klerksdorp. The lease period of renewals has remained stable at an average of 3.8 years.

Portfolio arrears, including Acucap and Sycom, amounted to R35,6 million, representing 10.2% of collectables. This is up from the previous year’s 9.0%. Included in arrears are outstanding deposits of R4,2 million, mainly in the Acucap portfolio because of new developments opened in the latter half of the financial year.

Legal arrears total R16,8 million and a provision of R14,7 million is in place. Trading arrears were R12,5 million. Some R2,5 million of arrears are attributable to the Platinum Group. While the reletting of the stores occupied by the group will not be problematic, the chance of any recovery on this debt is unlikely. The Post Office remains two months in arrears across our portfolio. We have not noticed a broad deterioration of payment performance among non-national retailers.

Trading performance at our centres was mixed with a marked deterioration in growth rates during Q2:15. The centres trading in affluent areas performed well, reporting year-on-year growth in trading densities of 7.7%. However, La Lucia underperformed with its Woolworths expansion interrupting trading. While our Western Cape centres generally outperformed other regions, the overall portfolio trading densities increased by 4.7% year-on-year. This lacklustre performance was driven by a noticeable slow-down in trading in lower income and commuter centres where consumers are more exposed to adverse macro-economic conditions and lower levels of unsecured lending.

The continuing development of new competing shopping centres is eroding trading densities. In the past year the trading density at City Mall in Klerksdorp declined by 15% as a result of Matlosana Mall opening. In the prior financial year, Waterfall Mall was in a similar position after Platinum Junction opened. The centre has recovered strongly since showing 9.4% year-on-year trading density growth in Q2:15. At this stage, the May 2015 opening of the 82 000m² Baywest Centre in Port Elizabeth has had limited impact on our centres in the city. We expect both Walmer Park and Greenacres to substantially hold market share.

Generally, trading densities remain healthy within our top 10 centres where we average monthly trading densities above R2 500/m². Several smaller centres are achieving trading densities above R3 500/m², with Constantia Village at R6 400/m².

Key performance areas

	FY15		FY14		Increase/ (decrease)
Gross property revenue (R’million)	1 995		1 645		350
Property expenses (R’million)	(525)		(459)		66
Net property income (R’million)	1 470		1 186		284
Property expense ratio (%)	26.3		27.9		(1.6)
Vacancies (%)	3.3		4.5		(1.2)
Arrears (R’million)	35,6		19,3		16,3
Bad debt provision (R’million)	14,7		8.3		6,4
Average gross rental (R per m2/month)	156		149		7
Forward yield (%)	7.7		8.2		(0.5)
Average in-force escalation (%)	7.4		7.7		(0.3)
Weighted average lease period (years)	3.8		3.8		–
Asset value (R’billion)	28,2		15,8		12,4
Number of properties	58		41		17
GLA (m2)	1 410 461		907 746		502 715
Value (excluding bulk) per m2 (R)	19 996		17 347		2 649
Capital expenditure (R’million)	352		270		82

ENVIRONMENTAL COMMITMENT

Water efficiency, renewable energy, energy security, energy efficiency, and waste management are the environmental focus areas for our retail sector. During the year we advanced various innovative sustainable projects at our shopping centres.

Waterfall Mall in Rustenburg continues to lead shopping centres in our country for commercial solar energy harvesting to minimise impacts on the environment and generate clean energy that responds to South Africa’s electricity shortage.

Installing a R10 million utility scale solar power plant on the rooftop of the mall has provided it with 876 746kWh hours of clean energy over the past
12 months. This is enough power for 2 884 households (at 304kWh per house) and offsets 868 tonnes of CO₂ a year.

The continuing electricity load shedding has necessitated accelerating the roll-out of our solar programme at other shopping centres. Solar power plants installed at our centres will be limited to around 1MWp in size, covering 10 000m² of roof area per centre. The installation of a 1.16MWp at Northgate (50% owned) has been approved at a total cost of R23,3 million and will render a commercially acceptable yield on capital cost. We anticipate installations at Brooklyn Mall, Kolonnade and Constantia Village will be approved this year. Growthpoint plans to introduce similar installations at our
15 major shopping centres over the next two years.

Unfortunately, until battery storage technology improves and becomes more affordable, solar energy cannot fulfil its role as an effective alternative to grid-supplied power. While the quickest and easiest solution for addressing the electricity supply problems seems to be installing diesel back-up generators, we see this as a poor solution for costs, supply certainty and sustainability. We will therefore limit back-up generation to produce enough power for restaurants and service operators, such as hair salons.

We have negotiated preferential agreements for our smaller tenants to buy inverters and battery systems that enable them to trade for periods of up to three hours during load shedding. This is a more cost-effective alternative, and substantially more environment friendly.

After partnering with Eskom to install energy-efficient lighting in all of our malls over a three-year period from 2012 to 2014, we have now introduced an energy efficient lighting life cycle replacement system. This ensures we uphold the achieved savings of 5,1 million kWh per year in our malls.

We continued our successful recycling programme, recycling 167 364kg of cans, glass, cardboard, paper and plastic at our shopping centres. Recycling collection points for our shoppers and the public to use are now in several of our shopping centres. We encourage shoppers to actively take part in recycling at source by replacing mall refuse bins with bins for different waste types.

A sustainability project to produce solar energy, harvest rainwater, and convert waste into energy was successfully completed in 2015 at Bayside in Cape Town. The aim of this project is to be more self-sufficient by generating our own energy and reducing our waste to landfill. As part of the redevelopment and extension of Hillcrest Corner, an integrated grey water harvesting system will be installed. This will result in the reuse of most of the water consumed at the proposed Virgin Active gym.

The unintended consequences of the deterioration in services delivered by local authorities includes the forced installation of mass water-storage at several of our shopping centres. While we are harvesting rainwater as part of our water-efficiency, the intent is to introduce grey water harvesting where possible, over time.

PROSPECTS

Macro-economic factors do not support increasing consumer spending, yet retail space continues to grow, albeit at a slower rate. Several new shopping centres have opened in the past year, some competing directly with Growthpoint centres.

Without exception the bigger new shopping centres are substantially underperforming industry benchmarks for trading densities. Developers had to resort to unusually generous allowances and turnover-based leases to tenant these centres. The supply and demand equilibrium has been distorted, leading to cannibalisation of turnover among some retailers.

For retailers, lacklustre growth in sales means higher occupancy cost ratios, a decrease in sales per employee and margin erosion. However, as retailers are tied into five-year leases, and sometimes longer, in new underperforming shopping centres, they are forced to mitigate the situation by trying to reduce costs at existing shopping centres. Retail landlords are subjected to extremely difficult renewal negotiations, especially where existing shopping centres were adversely impacted by new competing centres. Also, turnover rentals, which make up a small portion of our income, are coming under pressure because of weak sales growth nationally.

We are still seeing some interest from international retailers new to our country.

While the performance of retail in the Cape Town area looks promising, Gauteng retail remains under stress. Growthpoint is well positioned to benefit from the more favourable dynamics in the Western Cape with our increased geographic diversification and exposure in the area, achieved in the Acucap and Sycom transaction. These acquisitions have also gained us exposure in otherwise inaccessible nodes.

There is some work to do on the new shopping centres acquired from Acucap and Sycom. We believe there is value that we can unlock. Except for Watercrest, which is newly opened, we are confident of the quality of the portfolio in terms of its revenue, tenant mix and market position. The newly acquired centres are very much in line and compatible with our existing portfolio. All the Acucap and Sycom centres have gone through a cycle of refurbishment. With the exception of N1 City where we are minority owners, most centres were extended and upgraded in the last few years. That said, we always work to improve and refine each of our malls and continuously consider new tenants. Our centres are never a finished product.

Growthpoint’s retail portfolio remains relatively insulated by serving the upper end of the market. However, even South Africa’s top-end consumers are not immune to the tough economic landscape and face pressures like double-digit increases in the cost of education.

We will focus on vacancies in the coming year. While we are aware that everything is going to be more difficult in this economy, unless we experience a national retailer failure, we should be able to reduce vacancies even further over the next 12 months. Our only big pocket vacancies are the former cinema areas at Lakeside Mall and Hatfield Square, and we are exploring several plans for these areas. We’ve made good inroads in filling the former Ellerines space, which is now effectively all let.

The coming year will be a consolidation phase for our retail division. We’ll bring the Growthpoint, Acucap and Sycom portfolios onto the same system and physically consolidate the management of all three portfolios. We’ll also assess each acquired asset for suitability for our core portfolio, and identify anything we need to trade out of.

Growthpoint will continue to find opportunities for growth, both within our retail portfolio and through acquisition. We remain interested in the Western Cape in particular. While it is almost impossible to find assets of a significant size, we will consider smaller retail properties that match our investment criteria. We will also continue to improve and extract value from all our assets.

Renewal success rate of 87.0%

We will continue to improve and extract value from all our assets

Growthpoint’s retail portfolio remains relatively insulated by serving the upper end of the market

Top 10 retail tenants

	Tenant	GLA* m2	% of total retail GLA
1	Edcon Holdings Proprietary Limited	129 046	9.5
2	The Foschini Group Limited	53 860	3.9
3	Shoprite Holdings Limited	149 133	10.9
4	Mr Price Group Limited	55 921	4.1
5	Pick n Pay Stores Limited	115 430	8.5
6	Pepkor Holdings Limited	49 325	3.6
7	Truworths International Limited	32 653	2.4
8	Massmart Holdings Limited	66 900	4.9
9	Woolworths Holdings Limited	85 872	6.3
10	Clicks Group Limited	27 922	2.0
Total of Top 10		766 062	56.1

* Ranked in terms of gross monthly rental.

Top 10 retail properties by value

	Property name	Location	Value Rm	% of total retail portfolio	GLA* m2	% of total retail GLA
1	Brooklyn Mall & Design Square (75%)	Pretoria	2 079	7.4	55 935	4.0
2	Festival Mall	Kempton Park	1 730	6.1	81 146	5.7
3	Waterfall Mal	Rustenburg	1 361	4.8	49 196	3.5
4	Lakeside Mall	Benoni	1 274	4.5	67 536	4.8
5	Vaal Mall (77.9%)	Vanderbijlpark	1 239	4.4	38 337	2.7
6	Bayside Centre	Cape Town	1 159	4.1	45 646	3.2
7	Key West	Krugersdorp	1 144	4.1	52 245	3.7
8	Greenacres	Port Elizabeth	1 134	4.0	40 424	2.9
9	La Lucia Mall	Durban	1 123	4.0	36 424	2.6
10	Kolonnade (50%)	Pretoria	1 033	3.7	38 098	2.7
Total of Top 10			13 276	47.1	504 987	35.8

RETAIL PROPERTIES TOP 10 BY VALUE

1 410 461m2 total GLA

R2,0 billion total revenue

The monthly trading densities of our Top 10 centres average above R2 500/m2

BROOKLYN MALL & DESIGN SQUARE (75%) PRETORIA Brooklyn Mall is nestled in the affluent suburbs of Pretoria’s cosmopolitan area of Brooklyn, surrounded by established upmarket residential homes, corporate offices and a large contingent of embassies and diplomatic properties. Brooklyn Mall, measuring 74 580m², is the premier shopping destination in Pretoria. It offers shoppers a full complement of national retailers, specialist boutiques, restaurants and coffee bars and the best of home and décor shops. The centre is visited by more than 12 million shoppers a year and has consistently exceeded national retail sales growth.
FESTIVAL MALL KEMPTON PARK This 81 146m2 regional centre is close to the CBD and near the residential areas of Kempton Park. Due to the mall’s close proximity to public transport, the centre also benefits from strong support from the Tembisa area. The tenant mix covers a wide range of categories, with a strong national representation. Trade is growing steadily, with an average monthly trading density of over R2 000/m2 with foot counts averaging 800 000 visitors a month. The centre also includes a Ster Kinekor cinema complex and an ice rink.
WATERFALL MALL RUSTENBURG Waterfall Mall, with its adjacent value centre, forms a 60 000m² regional shopping centre that draws shoppers from as far afield as Botswana. Located in the upmarket suburbs of Rustenburg, the centre has easy access from the R24 and N4 highway. The size of the centre allows for an extensive representative tenant mix which includes most national retailers as well as a variety of specialised retailers. The mall has an average monthly trading density of over R2 800/m² which ensures strong demand for space.
LAKESIDE MALL BENONI Located on the southern banks of the Civic Lake in Benoni, Lakeside Mall regional shopping centre is a local landmark due to its distinctive design. The two-level centre incorporates several different retail areas including 5 000m² of usable outdoor space. With 67 536m² of lettable area, the centre features all the major retail anchors. The popular centre attracts more than 10 million shoppers a year.
VAAL MALL (77.9%) VANDERBIJLPARK At 49 000m2, Vaal Mall is the dominant regional centre in the Vaal area. Its catchment area extends to Sasolburg. The mall also benefits from domestic tourism, being near the Vaal River. It has a strong tenant mix with a high percentage of nationals anchored by all the traditional South African majors. The average monthly trading density exceeds R3 000/m2, with the fashion category being particularly strong.

BAYSIDE CENTRE CAPE TOWN Bayside is a regional shopping centre of 45 646m2, in a growing residential node on the western coastline of Cape Town. It serves the greater west coast suburbs of Cape Town including Tableview, Parklands, Bloubergstrand, Sunset Beach and Melkbosstrand. The BRT public bus route has its second largest bus station next to the centre which has resulted in an increased foot traffic to the centre.
KEY WEST KRUGERSDORP Key West Shopping Centre is a 52 245m² regional shopping centre serving the greater Krugersdorp area including Randfontein and Kagiso. It has a full component of national fashion retailers and banks. Its entertainment is anchored by a Nu Metro Cinema complex and supplemented with a food court, family restaurants and a Virgin Active gym. The centre attracts 9,6 million customers and grew its visitors by 5.8% in FY15.
GREENACRES PORT ELIZABETH The 40 424m² Greenacres Shopping Centre is part of a larger retail node of 88 000m². It attracts an average of 950 000 customers a month. The mall is linked to the adjacent Bridge Shopping Centre. It is surrounded by established residential suburbs, offices, educational institutions and a hospital.
LA LUCIA MALL DURBAN This 36 424m2 small regional centre is in the heart of one of Durban’s most affluent suburbs, La Lucia. It serves an upmarket LSM 9 and 10 shopper. In recent years it has attracted more young and aspirant professionals. The centre’s tenant mix encompasses many top national, local and some international retail brands and is strongly focused on convenience, lifestyle, food, and the health and beauty categories.
KOLONNADE (50%) PRETORIA The 76 196m² Kolonnade Shopping Centre was developed in 1995 and has been extended numerous times as demand for retail space at the centre continues to grow. It is located to the north of Pretoria, serving a wide catchment area. Annual retail sales at the centre exceed R3,1 billion and trading densities are substantially higher than comparable shopping centres. Kolonnade attracts around 11 million shoppers a year and is coowned with Sasol Pension Fund.