A 'change for good' narrative: investing in SA's township retail space

South Africa's township retail has proven its dominance, particularly post-Covid-19, where not only has it recovered but on how well its tenants have performed. Added to this, there is an incredible amount of potential coming up through the people, the start-ups and from township businesses. The secret lies within unlocking this.

This was the general sentiment shared at the recent inaugural Township Retail Investment Summit (TRIS) hosted by Exemplar REITail, rural retail specialists who have been operating within this sector for close on forty years.

"TRIS was an idea born from the need for more conversations about the township space - how to improve the development of the township space and how to make it more inclusive. There is a rising interest in this sector of the economy," said Jason McCormick, CEO of Exemplar REITail and MD of McCormick Property Development. "The informal economy in the townships is huge. KasiNomics author, GG Alcock, will tell you that in terms of the cash economy in townships, approximately R150 billion goes through spaza shops, R90 billion or so goes through the food sector and approximately R10 billion goes through the hair care sector each year. We need to assist small township businesses in getting into retail space where we can develop SMEs. With the success of developments in the townships, its my challenge to the industry to continue having these types of discussions."

Township investment: the risks and the rewards

While township retail makes for a compelling investment, why aren't the banks funding more of these developments?

Firstly, we need to look at how SA's property market has performed, particularly over the past four years, said Nesi Chetty, Fund Manager and Head of Property at Stanlib. "Between 2002 and 2007, SA's property market could do no wrong. With almost a 'halo' effect, we were generating returns on investment of between 30% to 50%. Our debt (and funding) wasn't a problem and the economy worked. Shopping centres, and tenants, were doing well. The last four years have been tough with the property market still finding its feet."

Economic growth also remains a challenge. "GDP growth in excess of inflation would produce a much more conducive environment for investment. Currently, with GDP forecast at around 2% for 2023 (well below inflation), there is not enough growth in the environment to support this demand," commented Ridwaan Loonat, Senior Equity Research Analyst at Nedbank CIB. "From a bank's perspective, we need to take in the risk and ultimately the return should come with it. In the listed property space, we look at the interest coverage ratios, as well as the loan-to-value (LTV) and on the back of this, the bank will determine whether they are willing to fund a project. It boils down to the ability to service this debt - which is key. We are also starting to see listed property companies invest offshore because the growth prospects are more compelling there than they are here. A simple thing like load shedding has hampered our growth tremendously over the past five to ten years. Once GDP starts to improve, the investment community may relook at where the opportunities lie within SA."

Nesi Chetty (Stanlib), Andile Fulane (Finlite Investments), Ridwaan Loonat (Nedbank CIB)

'If you build it, they will come' - an analogy often used in the property industry but if we look at the current dynamics of SA's property market, this may no longer be relevant:

"As property funders, when we look at shopping centre development, one of the things we look at in terms of the due diligence and the investment, is what is happening around it - is there a substantial residential development? Is there substantial infrastructure? It is disappointing when we look at the more established centres, like the Mall of Thembisa, where we should have more residential development. It is in place, but on a very small scale. If we look at infrastructure in SA, more money needs to be channelled from listed companies and banks. It's a compelling area and if we get the infrastructure and the residential up, we can get growth up as well. It's simple - the crux of our problem is to fix youth unemployment of 75%, we need trade schools, residential and infrastructure, its being done but not enough is being done," said Nesi.

Another hindrance lies in the fact that there is a lack of up-to-date data on the informal market which continues to widen the gap. "The last data that I read was from around 2015/2016 where it mentioned that the informal markets were about 6% of GDP, a sizeable R250 billion. It is clear that there is a lot of money within this space. As a bank, we rely on this data, and it ultimately boils down to the infrastructure and the ability of government to keep up with what's happening on the ground," noted Ridwaan.

While there has been a lot of talk about the oversaturation of malls in Gauteng, with the number of shopping centres versus people and gross lettable area (GLA) seeming quite high, retail in SA is a two-tiered market and the growth seen at a township level over the past couple of years is very different to what is being seen at super regionals.

"With township retail, an element of aspirational brands is coming through, even more so over the past five years. This is a very powerful mechanism when we look at the collaboration between township shopping centres and their tenants. Township retail has done well to some extent due to the successful food anchors driving this with compelling brands along the fringes and exciting new formats that drive footfall. Township retail is an ecosystem that works," said Nesi.

Dropping fences around our malls

The rural sector is very different to the township sector. Both markets behave differently by virtue of planning and access to 'urbanisation', even though they are classified under 'emerging markets' which includes peri-urban too. While each community has its own idiosyncrasies and characteristics, it is the job of property developers to understand these markets and to best serve their individual traits.

However, there has been a huge paradigm shift with regards to the risk involved in township development. Ten years ago, land tenure was an issue insofar as security where the investor was concerned but now, communities need to see property developers taking the risk for them. "Developers within this space understand that this is an ever-changing environment so their response going forward needs to be community-inclusive," commented Michael Masemola from Rebamoratiwa Property Investment Holdings.

Michael Masemola (Rebamoratiwa Property Investment Holdings)

A rhetoric that surfaced post the July 2021 riots was that township shopping centres were destroying small businesses. While this may have been true in some cases, of the many malls that were damaged during the looting and rioting, approximately 50% were owned by black entities that Exemplar REITail had partnered with and who were backing, to the tune of hundreds of millions of Rands.  

"We need to understand the challenges of pre- and post-development and it is very important that we try to involve our communities by educating them in the process and making sure that they understand what their asset is all about. We are starting to see that it is becoming even more important to engage with our communities than ever before," said Michael. "Over and above the shopping centres as an experience, we have to come together to create sustainability."

From start to finish of a development, there is a whole slew of stakeholders that need to work together, said Itumeleng Mothibeli, MD of Vukile Property Fund with 75% of its portfolio in the township or rural space. "There is the concept of 'dropping the fence around our malls' - there is no bigger team sport than partnering on a development. We need to engage with the communities authentically, with humility, and to understand what it is that they need. The spirit of working together and building together will spread quickly."

However, in as much as property developers are involving the communities pre- and post-development, at what stage do you sustain community engagement so that others do not take advantage of this? The construction mafia is something that is intensifying and getting worse, and the key is to understand where this has stemmed from.

Michael Masemola (Rebamoratiwa Property Investment Holdings), Itumeleng Mothibeli (Vukile Property Fund), Jason McCormick (Exemplar REITail, McCormick Property Development)

"There is nothing more disenfranchising than watching a mall being developed on your doorstep and you haven't been consulted. Community engagement is such an important part of township development, and it is not just about desktop research," said Jason. "On the back of our successes, we can afford to do more - it's incumbent upon us to do more. If we do not do more, then who? Government is not going to assist. It's the small businesses that are going to turn this ship around. It is only through business that we can deal with the current crisis of unemployment. Township retail is an exciting space to be in and through the sharing of education and knowledge, we can empower."

All proceeds from the 2022 Township Retail Investment Summit ticket sales will be donated to local SMEs.