Shopping has emerged as a major pastime in South Africa over the past few decades – with the retail property sector outperforming almost every other property class in terms of returns and investor interest.

In spite of the recent economic downturn in South Africa, which has come in the wake of electricity supply problems and an unstable labour situation, the retail property sector has given every indication that its success will continue.  In this article, we take a look at the recent trends in retail property and at the challenges and opportunities that the future may have in store for this evergreen property class.

How retail became the king of SA property

Over the period between the 1990s and the late 2000s, South Africa witnessed a fundamental change in the structure of its economy: moving from a mining and export-based country, operating under the burden of economic sanctions, to a service-based economy with consumer spending as a major driver of growth.

The effects of South Africa’s economic transformation were felt especially strongly by the property sector, as consumers flexed their newfound spending muscles and made large purchases in the residential property sector while spending an increasing portion of their disposable income at retailers lifestyle businesses across the country.

This new shopping culture created a huge demand for retail property, which has culminated in South Africa having the sixth-largest number of shopping centres in the world.  Considering that South Africa ranks 29th in the world in terms of GDP and 115th in terms of per capita income, the number of shopping centres across the country speaks volumes where the strength of the retail sector is concerned.

Will retail property continue its winning streak?

Over the past ten years, the retail property sector has consistently out-performed other asset classes to provide investors with a 20% annual return from 2005 to 2015 – but is this stellar performance set to continue?

This question was at the heart of discussions held at the South African Council of Shopping Centres annual convention last month.  One of the event’s keynote speakers, Kundayi Munzara of Sesfikile Capital, was cautiously optimistic about listed property returns over the next two years.  With economic conditions in South Africa predicted to be subdued until 2017 or beyond, the average of 25% foreign assets that make up most listed property funds will have to perform well in order to keep returns high.  For investors who are thinking of entering the market, this may be the time for caution.

Opportunities in the SA retail property sector

Risks of a cooling down in the red-hot retail property sector aside, there are several noteworthy trends in the sector that investors should take note of.

One of the biggest fundamental shifts in retail over the past few years has been in consumer tastes.  Traditional shopping centres which house big retailers and franchised restaurants may still attract their share of customers, but the trend is decidedly moving toward unique retail offerings and shops that cater to the specific tastes and needs of customers in a given area.  Locally-specific shopping centres are fast becoming a hit with their local communities, with road-fatigued consumers enjoying the convenience of shops that sell exactly what they need and are just around the corner.

Consumers may still make special trips to large generic malls and bulk retailer, which wholesale to the public, to buy items that aren’t readily available at local shopping centres, but this is becoming an exception.  Most customers feel more at home shopping in their own suburb, often meeting friends and neighbours for coffee or a meal as they cool their heels or stretch out their retail therapy session just a little longer before heading home.

The shopping centre as a public meeting place and heart of the community is an important new trend that South African property investors should take into consideration: shopping centres like these represent the future of South African retail.

Beyond SA: listed property makes inroads in Africa

Investors who may be concerned about the short-to-medium term economic forecasts for South Africa needn’t pull out of the retail property market just yet – Africa continues to grow, and its rising middle class is showing a keen interest in retail.

Many South African property companies have expanded their operations into the rest of Africa with some success, and this trend is set to continue.

While the risks involved in doing business on the continent shouldn’t be denied, the returns that are possible in other African countries may do much to keep returns buoyant in the listed property sector, even as growth in South Africa remains subdued.