Retail Property, the “outperformer” over the past 2 decades

Some may perceive the Commercial Property Sector not to have “boomed” to the extent of the Residential Sector over the past 2 decades, with the Residential Market having experienced an extreme price growth boom prior to 2008. Such perceptions may be true in the case of Office and Industrial Property, but not in the case of Retail Property. This Sector appears to have outperformed all other major property sectors over the past 20 years, including the Residential Market.


Taking a view of Commercial Property Sector performance over a 20-year period from 1996 to 2015, using IPD data, the Retail Property Sector appears to run far stronger than the other major property sectors.
Viewing the Average Capital Value Per Square Metre by property segments, Retail Property’s cumulative rise has far exceeded that of the Office and Industrial Segments over the past 20 years, from 1996 to 2015.
Using 1995 as the base year, the Average capital Value Per Square Metre for Retail Property is estimated to have risen by a massive 770.7% over the 20-year period 1996 to 2015.

By comparison, the Industrial and Warehouse Sector had a far more modest increase of 466.7%, and Office Space 464.5%. Although estimates of average house price growth are not exactly comparable, because they are done on a per unit basis instead of a per square metre basis, it would appear that Retail Property has even outperformed Residential Property over 2 decades. The FNB Long Term House Price Index has inflated by a lesser 594.6%. The Retail and Residential segments appeared to be running “neck and neck in the last years of the pre-2008 property boom, but following the 2008/9 recession Retail Property has performed far more strongly.

In real terms, using consumer price inflation (as measured by the PCE Deflator)to adjust for “general inflation” in the economy, Retail Property’s rise in Average Capital Value per Square Metre was an impressive 148.1% from 1996 to 2005, Residential 97.9%, Industrial Property 61.5% and Office Space 60.8%.

Capital growth estimates net of capital expenditure over the 20 year period also show Retail Property to have delivered by far the strongest performance, to the tune of 312.7% in total from 1996 to 2015.
Industrial Property was the 2nd best performer with 139% total capital growth net of capex, and Office Space 68.1%.

There is no measure available for Residential Property capital growth net of capex.

The strong capital growth could be sustained over the period due to a high level of “pricing power” of shopping centres, as reflected in the cumulative inflation rate in retail base rentals to the tune of 536.9% over the 20 year period, compared to 277.5% for Industrial Property and 275.5% for Office Space.

The cumulative result of this strength in Retail Property’s “pricing power” was that it was had the top average per annum total return of all the Commercial Property Sectors over the 1996 to 2015 period.

Strong Retail economic fundamentals explain a large part of the Retail Property Sector’s “out performance”

Retail economic fundamentals over the past 20 year period can explain a large part of Retail Property’s superior performance.

The 1996 to 2015 period was a phenomenal period of strength of the South African Consumer.

The size of the South African economy (Gross Domestic Product, or “GDP”) grew cumulatively by 79.33% from 1996 to 2015.

Over the same period, Real Household Disposable Income grew by a faster 87.69%, an additional boost for retailers.

A key factor contributing to disposable income outpacing GDP growth was a dramatic reduction in interest rates from the late-1990s to early last decade, which lowered the level of net interest payments on household debt significantly. The dramatically lower cost of credit not only boosted disposable income but enabled households to take on significantly more debt, a significant portion of it for consumer spend purposes.

This is reflected in a far higher Household Debt-to-Disposable Income Ratio today, 76.6% as at the beginning of 2016, compared to 57% at the beginning of 1995.

It got even better for retailers, as the bullish Household Sector cut back on its Net Savings Rate from 1.6% of Disposable Income in 1995 to a negative low of -1.3% of Disposable Income Net “Dis-savings” rate by 2013.

This “Net Dis-saving” rate has improved only marginally to -0.7% of Disposable Income by 2015, still implying an extremely high propensity to consume by South African Households.

Furthermore, as the economic boom times ended in 2007/8 and a more mediocre economic growth period set in, some additional support for the Consumer and thus for Retailers was received from above-inflation wage increases, driving a rising trend in the Wage Bill/GDP Ratio from a low of 47.6% in 2007 to 52.7 in 2015.

The cumulative effect of the above-mentioned “support factors” was a Retail Sector whose real sales growth noticeably outperformed GDP growth over the past 2 decades, especially for the period 2004 to 2015.
Whereas cumulative GDP growth from 1996 to 2015 was 79.33%, Real Retail Sales grew by a faster 95.56% over the same period.

This “out performance” by the Consumer, and thus by Real Retail Sales growth, over the past 2 decades goes a long way to explaining the Retail Property Sector’s superior performance compared to the other major property sectors, including, it appears, Residential Property.

In short, the Retail Property Sector has been the strongest performer of the 3 major Commercial Property Sectors over the past 20 years from 1996 to 2015. Although IPD Commercial Property data is not exactly comparable with our long term FNB House Price Index methodology, it would appear that Retail Property experienced a significantly faster increase in Average Capital values than the Residential Property Sector too.

This “outperformance” is not altogether surprising, given that the growth over the past 20 years in Real Household Disposable Income and in Real Household Consumption Expenditure have both exceeded economic growth over the past 2 decades, causing real retail sales growth to outperform the pace of economic growth too.

But now, questions have to be asked over the sustainability of the “outperformance” of Retail Property going forward, as certain key drivers of Retail’s outperformance may have to be curtailed, notably Households’ high propensity to consume which translates into a dismal savings rate, and above inflation wage increase which can ultimately lead to greater levels of job shedding.

Read more here: Property Barometer_Retail_Outperformance_Aug_2016