Hyprop Investments, with malls in its portfolio such as Canal Walk, Rosebank Mall, The Glen, amongst other, said yesterday in its results for the half year to the end of December, that challenges faced by South African retailers spelt uncertainty, while it also had decided to pull out of Nigeria and Ghana.
Hyprop is a retail focused REIT, owning and managing a R40 billion portfolio of mixed-use precincts underpinned by dominant retail centres in key economic nodes in South Africa and Eastern Europe.
“The challenges facing SA retailers and the recent announcements by Pick n Pay, which is an anchor tenant in all our SA centres” as well as “the potential default of the South African government on its financial commitments and the heightened political and economic risk in South Africa ahead of the elections in May 2024” were key uncertainties.
It also mentioned “the likelihood of interest rates remaining higher for longer” as a risk factor. As a result, Hyprop had skipped payment of an interim dividend.
Hyprop said it was being knocked by the “anaemic performance of the South African economy and pressure on consumer spending”.
Despite these uncertainties, Hyprop’s South Africa portfolio had continued to reflect improvements in most of its key performance indicators, with total tenant turnover rising by 5.6% for the half year, maintaining its upward trajectory since 2022.
Growth in trading density as measured by rands per square metre per month had also gone up 4.9%, as the company’s “well-positioned centres continued to attract shoppers, with average monthly foot count up 5.8%.”
“Our shoppers remained resilient with only a 0.1% decrease in average spend per head to R307.80. The SA portfolio’s weighted average rent reversion rate was positive 3% (2.1% for retail and 14.9% for offices). At 31 December 2023, the retail vacancies were well controlled at 1.3% while the office vacancy rate was 32.8%,” said Hyprop.
This signals that South African real estate investment trusts (REITs) are in for a bumpy ride, battling depressed consumer spending power, with more South Africans switching to value propositions, although Shoprite has been an exception.
REITs have large exposures to South African retail sector risks, as many store operators such as Woolworths, Pick n Pay, Spar, Shoprite and Checkers among others, are anchor tenants to shopping mall owners.
Market analyst Simon Brown told Business Report that many REITs across South Africa were likely to catch a sneeze from the Pick n Pay and retail industry slowdown. Pick n Pay has, however, previously said in an interview that it has not informed Hyprop of any struggles in paying its rentals
“It will be many (REITs being affected) across different degrees, depending on retail exposure. But it will hurt, we just don’t know how much yet,” Brown said.
There has been market speculation that Pick n Pay could be reducing its store footprint to manage costs. South Africans have also been taking to social media to report closures of Pick n Pay franchisee outlets.
Market analyst Dave Hazelwood said yesterday that “the problem with Pick n Pay franchisees closing down, is that Pick n Pay doesn't gain” anything from the closures.
“There are no cost savings. Just loss of fees and scale and bad debts. In fact, if they need to take over stores, also more costs,” he said.
Hazelwood said some investors in Pick n Pay and other retail stocks in South Africa were “incorrectly comforted by low rent to sales ratios, here grocers form a large part of tenant base” like in the case of Vukile.
“Low grocer margins mean tenants' ability to absorb rent is much lower,” he added.
Exposure in Nigeria and Ghana
The REIT, which also has shopping centres in eastern Europe, intends to exit its sub-Saharan Africa operations in Ghana and Nigeria.
It said the quality of these shopping centres (in the two countries) had been overshadowed by macroeconomic events in the region, making the operating environment extremely challenging.
In Nigeria, companies, such as Hyprop and MTN, are facing financial loses due the sharp Nigerian naira devaluation against the dollar in the past year.
Anchor Capital analysts also said yesterday that most South African retailers had also learnt their lesson in Nigeria and pulled out, referring to the incident of MTN Nigeria being slapped by the regulatory authorities with a VAT liability of $47.8 million (R890bn).
For Roy Topol, a portfolio manager at Cratos Asset Management, he said, “The major issue with Hyprop is their Nigerian mall, not their Pick n Pay” exposure.
“The main reason the Pick n Pay share price has been so weak is due to the R4bn rights issue, which has not been finalised,” Topol said in an interview.
Earlier this month Pick n Pay last week announced that it was undertaking a rights offer and spinning off Boxer for a separate initial public offering (IPO).
Meanwhile, Anchor Capital analysts observed looking ahead, that Boxer was a good business and they believed there would be market appetite for the IPO.
Talking about REITs, Anchor Capital observed that Hyprop had mentioned Pick n Pay seven times in their results, while Growthpoint hadn’t mentioned Pick n Pay in their results, released on Wednesday, which raised the question of, “which of them is right?”
However, Hyprop was more exposed to Pick n Pay as a rent-paying tenant versus Growthpoint, analysts at Anchor Capital observed.
It was broadly expected that Pick n Pay’s CEO, Sean Summers, currently would seek cheaper rent from the REITS.
“Pick n Pay, not this result, but the next results will look like hero’s,” the roundtable heard. “He’s kitchen sinked it.” - Additional reporting by Philippa Larkin
BUSINESS REPORT