Advice and Opinion

The effects of digitisation on the listed property sector

Online Digital

The South African property market is not immune to the worldwide consumer trend of choosing online shopping instead of local retail outlets. What are the implications of this trend for South Africa’s listed real estate sector and for the investors who hold this sector within their investment portfolios?

South Africa’s rapid rise of online retailers offer a convenient and safe shopping experience with better choice than what is available at the local mall at times. Traditional sit-down and quick service restaurants face similar headwinds to conventional retailers.

Retailers need to adapt to incorporate the online user’s experience. Suppliers and distributors that service these establishments are finding that their customers require less frequent or fewer deliveries. Equity analyst at Foord Asset Management, Daniel Gerdis believes that the challenge which these retailers face is how to earn a reasonable return on capital invested in inventory and fitting out and refurbishing stores which are frequented by fewer customers.

“Traditional retailers are having to adapt their offerings to incorporate aspects of the online user experience into physical stores. One such initiative is Click and Collect — the process by which an online order is collected at a physical store. It offers the convenience of online shopping with faster availability and flexible collection times, while driving footfall into the store to facilitate cross-selling opportunities. The downside for mall owners is that retailers require less store space.

Restaurants and food retailers are also making changes to their business models. The new trend is dark stores — restaurants distributing entirely via food delivery apps with no shop front.”

For mall owners, digitalisation is an added headache that did not exist just a decade ago … Malls must now compete to remain a relevant and attractive destination for shoppers. One approach taken internationally is to create a differentiated shopping environment for the customer by introducing new concepts such as pop-up stores, free wi-fi and unique haptic retail experiences that cannot easily be copied by online retailers. This comes with added cost and risk.”

The office segment space has steadily expanded at an average pace of one percent per quarter for the past fifteen years. Digitisation now offers workers increasing mobility and flexibility in how and where they work with corporates adapting to this changing environment innovatively, with shared workspaces, hot-desking or by allowing their employees to work from home: “This implies divergence in the size and type of office space demanded by prospective tenants from what landlords have traditionally supplied.

These changing consumption patterns are headwinds to the South African listed retail and office property sector and investors should take a pragmatic investment approach in the sector — by choosing property counters that sidestep the retail and office segment risks and instead benefit from the long-term themes of urbanisation, digitalisation and densification. Segments that fit these criteria are warehousing, logistics and self-storage” concludes Gerdis.