Does SA have too many malls?

Triggered by comments made by Famous Brands CEO Darren Hele during the company’s results call, and the subsequent reaction on X, a closer look at South Africa’s shopping centre sector reveals some interesting dichotomies.

Retail property and shopping centres are big business, particularly since the formalisation of the real estate investment trust (Reit) structure on the JSE.

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The Reits on the JSE have a collective market cap of approximately R350 billion to R400 billion.

While this includes many assets, ranging from offshore property to local office and industrial, if we zoom in on the local retail split of these assets, retail still makes up the largest single exposure in this sector – around 38% of the listed exposure (or as high as around 60% if we look only at SA-focused Reits).

JSE-listed Reits estimated exposure to the SA retail space

Source: Published Reit data, Gemini and analyst workings

Now a simple macro way of looking at the saturation of the retail property sector is to take the amount of shopping centre space (retail space) and divide it by the number of people in a country (per capita).

This can then be stacked up in a chart for each country in the world and, furthermore, split into richer developed markets (DMs) where richer consumers should be able to support more retail space, and poorer emerging markets (EMs) where the opposite is more likely.

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If any country has too high or too low per-capita retail space, that is a clue that it is overpenetrated or underpenetrated.

Retail space per capita around the world

Source: Published Reit data, Gemini and analyst workings

On this basis, South Africa appears overtraded and has far too much retail space per person in our country (i.e. lies above the linear regression).

But – as highlighted by another account on X – this is only based on an average.

No person in South Africa experiences the average, but rather the uniqueness of where they live. Detail matters.

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South Africa effectively has a dual economy, with a formal urban-based sector coexisting alongside an informal semi-urban-to-rural economy.

And if we dig deeper (this is when AI is particularly useful as it would be painstaking work for an individual to calculate), the underpenetrated and overpenetrated parts of South Africa start to become particularly clear.

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Retail space per capita within South Africa

Source: Published Reit data, Gemini and analyst workings

It is clear that most of Gauteng is overtraded, a likely consequence of being a small, densely populated urban province with traditionally higher LSM groups, while the lower-population-density provinces are clearly underserved by retail space (except for certain parts around the larger cities in these provinces).

While there is clearly an opportunity to build more malls in the informal and rural markets, will there be a sufficient return for this to ever be done at scale?

Lower population density is its own challenge as a mall’s catchment area (people who are close enough to it to shop there regularly) will be sparse, and this changes the economics of the assets.

Likewise, does Joburg, Cape Town or Durban really need another super regional shopping centre?

Generally speaking – no, it is unlikely.

If Gauteng, with its 0.72m² per-capita measure, was a country, it would be the equivalent of Japan (0.75m² per capita) or South Korea (0.62m²).

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Thus I am left with a few general conclusions and some thoughts …

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Firstly, be careful of what listed retail space you are invested in. Marginal malls will likely only become more marginal as time goes on, and thus there could be downside in parts of the more overtraded sections of this sector.

The Reits won’t tell you this as every management team argues that their retail space is not marginal.

Secondly, the large informal market offers an opportunity, but it won’t be unlocked the same way that shopping malls in Joburg have unlocked urban retail.

Maybe it is a fleet of subsidised buses that extend retail catchment areas vastly? Maybe it is e-commerce with a fleet of scooters? Maybe it is something else?

I don’t know, but the solution will be unique and unlock a massive undertraded market.

Finally, there will likely be an opportunity to repurpose abandoned shopping malls in the future (much like a lot of Sandton office space is being converted into residential units).

May I suggest converting marginal shopping centres into low-cost schools?

The malls are already surrounded by communities, the various old shops can be converted into classrooms, and the parking lot into astroturf/sports fields. Plus our country needs more education, and probably fewer boutique clothing shops.

Keith McLachlan is CEO of Element Investment Managers.

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