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5 Key economic drivers for the retail sector continued 05

6 Drivers of trading density growth On an aggregate level, trading density growth of -0.2% comprised a 0.6% growth in sales while occupied trading area was up 0.8%. Looking at it from another perspective, trading density growth was a function of spend per head increasing by 6.7% while aggregate footcount/sqm declined by an estimated 6.5%. Over the long term, the growth in the amount spent per shopper is the primary driver of trading density growth (Fig 4 below). For the 15 years ended Q1 2018, spend/head growth accounted for ~85% of total trading density growth while the impact of footcount growth is secondary (~15%). While the amount spent per shopper is growing at a rate above inflation, footcount continues to decline at around the same rate. Since mid-2016, negative footcount growth has detracted from trading density growth suggesting that -on aggregate- consumers are currently visiting malls less frequently but spending more per visit when compared to the same month last year. Given the above, the successful centres will be the ones who can succeed in not only attracting shoppers for the majority of their mall trips but also maximising their dwell time and spend when they do visit. 06

7 Sales Performance While the South African consumer remains under pressure as a result of increasing fuel prices there has been signs of recovery over the past 2 quarters with trading density growth perking up across the size spectrum. Encouragingly, annualised trading density growth in the Super Regional segment has been recovering and ended the quarter marginally positive after growth bottomed out at -6.6% in July Regional and Small Regional centres recorded positive year-on-year growths in its annualised trading density of 0.5% and 0.8% respectively for the year ended March. Neighbourhood centres posted its fifth consecutive quarter of negative annualised trading density growth Ð ending the quarter at -0.6% y/y. Community centres, the top performing segment in terms of trading density growth between 2015 & mid-2017, posted the largest decline in annualised trading density growth going from +14.7% in Q to -1.2% y/y as at March Since 2015, community centre trading density growth was aided by a significant improvement in vacancy rate (8.8% down to 2.9%). However, with the vacancy rate of community centres stabilising and starting to edge back towards 3.4% trading density growth has come under pressure. Super Regional trading density growth was mainly a function of a reduction in trading area since 2017 as vacancy ticked up. This suggests that the segmentõs vacancy rate was driven by a higher proportion of store closures among higher density trading categories with predominantly smaller trading formats. Among the five largest merchandise categories, Food service & Electronics have seen above-inflation growth in their sales per square meter while apparel and department stores have lagged. The next section of this report takes a deeper look at Super Regional trading performance & what has been driving its underperformance since Q and recent bounce back. 07

8 WhatÕs driving the underperformance of Super Regional centres? As illustrated in Figure 5, the Super Regional shopping centre segment has been underperforming the other retail segments with regards to its trading density growth since Q1 of The declining trading density has been closely correlated to a weakening occupancy rate albeit with a 2-4 quarter lag. The fact that trading density growth recently perked up while the segmentõs occupancy rate has continued too weaken suggests that the Super Regional vacancy rate may bottom out soon. The performance of Super Regional centres have been contrasted by an outperformance in the Community centre segment which suggests that consumers might be preferring the convenience offered by the smaller retail formats for an increasing number of mall visits. On an index basis, the Community centre segment has outperformed all other retail segments since In addition to a declining occupancy rate, Super Regional centreõs underperformance was further driven by a structural shift in the underlying merchandise category composition. The two largest Super Regional merchandise categories - Apparel and Department stores (a combined 50% of GLA) Ð has seen trading densities decline significantly since 2015 as sales failed to keep up with space growth. Fig 7 illustrates the annualised trading density growth of apparel and department stores together with the change in average store size since While the average Super Regional department store is now 69% bigger than it was in 2015, the average turnover per store only increased by 53% during this time resulting in annualised trading density declining by 16%. The same applies to the apparel category which has seen store sizes increase by 30% since 2015 with only a 16% increase in sales to show for it Ð the net result a 14% decline in annualised trading density. 08

9 WhatÕs driving the underperformance of Super Regional centres? 09

10 Retailer cost of Occupancy RetailerÕs cost of occupancy, as measured by the ratio of gross rental to sales, was only marginally up on the quarter before with a 10bp increase. Given that overall sales per square meter grew by 0.6% y/y, it can be deduced that the gross rental increased at a slightly faster rate. Though the aggregate rent to sales figure was stable there were some divergent moves in the underlying segments. The Super Regional segment has seen a pronounced increase in its cost of occupancy since 2016 to end the current quarter at 11.0%. (Figure 9). The Community and neighbourhood segments saw only marginal yearon-year hardening in their rent to sales ratios courtesy of vacancy rates ticking up on the year before. The Small Regional segment recorded the largest year-on-year increase in the latest quarter with an increase of 80bps. Drilling down into a category level, Accessories/Jewellery/Watches, Sportswear and Books/Cards/Stationary were among the categories recording softening cost of occupancy ratios on the back of declining trading densities. Among the main categories from a usage perspective, The Homeware/Furniture category saw its cost of occupancy deteriorate by around 50bps over the past 12 months Ð bringing the increase in its gross rent to sales ratio to 130bps since mid

11 Retail Vacancy Rates The current retail sector vacancy rate of 4.1%, is above its long term average of around 2.7%. The latest quarter saw year-on-year increases in the vacancy rate of all retail segments with the exception of Small Regional centres which recorded a 20bp improvement over the last 12 months. The Super Regional vacancy rate is now at its highest level since the series started in 2003 and more than triple its long term average. While the Super Regional vacancy rate trend traditionally has had a seasonal element to it, the movement since mid-2015 has been a departure from its longer term trend. During this period, the Super Regional vacancy rate converged from other retail segments as illustrated by Fig 10 below. The community centre vacancy rate has declined from 8.8% in 2015Q3 to end the latest quarter at 3.4%. The neighbourhood centre segment (centres between 5000sqm and 12000sqm) vacancy rate has declined from 9.0% in 2016Q1 to 5.8% as at the end of March Community & neighbourhood centres have followed a similar trend since 2009 with both segments experiencing noticeable Òdouble dipó moves in vacancy rate. Post the 2008/09 recession these segments have gone through two clear cycles. Super regional and regional centres meanwhile have tended to have a shallower trend through the cycle, by virtue of a larger & more diverse tenant base and more drawn out expiry profile. The next section compares the different retail segments in terms of the 12-month change in their vacancy rate. Interestingly, the current quarter is the first period where the vacancy rate of Super Regional centres exceed that of Neighbourhood centres (Figure 11) Ð Note: since 2010 when history for the Neighbourhood centre benchmark starts. 11

12 Retail Vacancy Rates continued 12

13 Merchandise Category Trends An ongoing trend is the wide spread with regards to in annualised trading density growth on a category level. Merchandise category trading performance is not tied to centre type and in fact there were no merchandise categories that recorded positive growth across all retail segments. This suggests that consumers may be preferring to visit specific retail formats for certain types of purchases with factors such as convenience, drive time and comparative shopping potentially playing a role. When analysing the five largest categories (measured as a percentage of spend), no category recorded a positive trading density growth across all segments. An analysis of the department store category reveals some interesting insights. While the average Department Store in centres larger than 25k sqm has increased in size, this has been in the absence of a commensurate growth in sales which has resulted in declining trading density. Meanwhile, department stores in Community shopping centres saw a 24.9% y/y trading density increase to March 2018 on the back of a 15.3% decline in average store size. Other notable insights from the table below is the reversal in fortune of Super Regional food retailers. For the year ended March, it was the only segment which saw positive trading density growth for the food/grocery category. (see figure 13). Interestingly, the trading density growth of Community centre food retailers has been sliding since 2016 amid the resurgence of Super Regional food traders. Apart from Community centre based grocers, those in Small Regional centres were also particularly hard hit as consumers seem to be favouring either smaller convenience centres or large Super Regional centres for food purchases. 13

14 Merchandise Category Trends continued 14

15 Merchandise Category Trends continued Some merchandise categories have been outperforming- thereby gaining market share as a percentage of total sales within these segments. Among the major merchandise categories, Apparel and Health & Beauty have gained market share across all retail formats seemingly at the expense of the Department Store category, which lost market share across all segments during the last 3 years. Figure 14 illustrates the three year change in the percentage of total sales per retail segment. Notwithstanding the high profile wind-down of Stuttafords and the ongoing restructure of Edcon there does seem to be a structural change where landlords are favouring specialist apparel and health & beauty outlets over department stores across all retail formats. The benefits of this structural shift may be two-fold in that the Apparel and Health & Beauty categories add variety to the centreõs tenant mix but could also be yield enhancing given these categoriesõ higher average gross rental per square meter relative to Department stores. For the three years ended March 2018, food retailers increased its share of sales in Community centres by 4.8%. This roughly mirrors the market share losses reported in the Regional & Small Regional segments suggesting that community-centre food retailers have been gaining market share at the expense of food retailers tenanting mid-tier centres that perhaps no longer dominate their catchment area in the same way it might have done in lieu of ever increasing competition. As illustrated in the previous section, Super Regional food retailers have seen a resurgence since Q suggesting that consumers are mixing the convenience offered by smaller centres with the convenience offered by Super Regional centreõs all-in-one offering. 15

16 About the Sample The IPD Retail sample consists of around 100 shopping centres across all geographies & centre types owned by listed real estate investment trusts, life & pension funds as well as private property funds. The full quarterly results from 2003 onwards are available for 24 merchandise categories across 5 retail formats Ð from super regional down to neighbourhood centres. To subscribe to this quarterly publication please contact sa@ipd.com SHOPPING CENTRE DEFINITION TYPES Super Regional shopping centreê > 100,000sqm Regional shopping centreê 50, ,000sqm Small Regional shopping centreê 25,000-50,000sqm Community shopping centreê 12,000-25,000sqm Neighbourhood shopping centreê Ê 5,000-12,000sqm 16

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