The retail sector has not been spared from the difficult economic environment facing South Africa in 2023.

According to the latest Rode’s Report on the South African Property Market, the retail property market’s strong comeback in 2022 has been diminished by the sector feeling increased pressure in 2023, with retail sales dropping and vacancy rates rising.

The report said this is reflected in the higher capitalization (cap) rates for regional shopping centres.

The cap rate is calculated by dividing a property’s net operating income by the current market value. A higher cap rate indicates a riskier investment.

According to the report, the cap rates of regional shopping centres – those with between 50,000 and 100,000 sqm of rentable space – went up from 8.9% in Q1 2023 to 9.4% in Q2 2023.

“This makes sense given the weaker performance of the retail market so far in 2023,” the report said.

“To illustrate, real retail sales on a national level fell by 1.1% year on year over the first four months of 2023, while mall vacancy rates rose to 5.4% in the first quarter of 2023 from 5% in the fourth quarter of 2022.”

In addition, most of the major cities surveyed by the report have higher cap rates in Q2 2023.

It said that the weighted regional-centre cap rates are far higher than the 2022 level and well above the 2019 average of 7.9%.

Furthermore, nationally, the cap rate for smaller community and neighbourhood centres totalled 9.9% and 10.4%, respectively – both higher than Q1 2023.

This is reflected in the decrease in retail confidence in South Africa.

The Retail Trade survey from the Bureau of Economic Research (BER) recorded a drop in retailer confidence from 34% in Q1 2023 to 20% in Q2 2023 – dropping further below the neutral score of 50%.

“When asked if they expect business conditions to be better/the same/poorer next quarter, the majority of retail respondents (net negative 56%) answered that they expect conditions to worsen in the near term,” the BER said.

The Rode’s Report said that this was not surprising given the expectations of weakened consumer spending due to higher inflation and interest rates. It added that this will continue to put further pressure on retail caps in 2023.

In the BER’s trade survey, the biggest drag on confidence was due to the increase in operational costs for retailers who had to invest in backup power systems or diesel for generators.

“Let us not forget that the power crisis is pushing up inflation as producers (think manufacturing and farmers) and mall owners and retailers install costly alternative power sources, like solar or generators,” the Rode’s report said.