Izak Joubert, Director of Property & Operations, Pick n Pay

It would be silly to argue that the global financial crisis has had no impact on South African retailers. The reality, however, is that our own economic factors have had a far more profound impact on us than the near collapse of the developed world's banking system. Ironically our own economic factors have been affected mostly by international factors.

The biggest impact on South Africa and consequently also the current prognosis for retailers is inflation and the consequences thereof, most specifically the tool used to counter it, i.e. increases in interest rates. South Africa entered a period of exuberant spending that was borne out of the cheapest cost of credit in recent memory and high levels of business and consumer confidence. This notwithstanding, most of the inflationary pressures were in fact not as a result of this consumer spending spree but rather as a result of global factors. World food inflation and the price of oil are the most significant of these factors.

With interest rates increasing, the cost of servicing a home loan has increased by 50% over the last year and a half. Add to this the high price of petrol - and this is where the crisis does come in - inflationary pressures aided by a depreciating Rand. The depreciation of the Rand is linked to the crisis as markets retreat from emerging markets and flee to the Dollar.

The first items to be reduced or cut from household budgets would be a household's discretionary spend, for example, furniture, clothing, dining out and even, I have heard, gambling. The last items to be cut would be non-discretionary spend such as food.

Clearly the result is that all retailers are affected to an extent. In an environment such as this I would imagine that the first to struggle would be the small independent retailers and this would have the most direct impact on centre owners. Whilst these are really tough times for many national retailers, especially retailers in durable goods and discretionary categories, the reality is that most, if not all, will survive through this cycle. I said earlier that all retailers are affected but without a doubt the least affected would be supermarkets.

It is the independent and by this not necessarily just "one store only" tenants that may fail and threaten income for centre owners. This is where the vacancies and loss of rental will come from. Nationals do not have the leverage to deal with stores on a store by store basis. If the company as a whole is sound the leases and income on a lease by lease basis will be safe for centre owners.

As with national retailers, the institutional owners that can ride the cycles will be best geared to see this one through. The listed funds, with shareholders to answer to and a share price to defend, will be less resilient and may come under pressure to dispose of assets that dilute their earnings. Consortia, syndications and individuals will be hardest hit, especially the ones which are highly geared. High gearing and increasing vacancies can and will lead to a crossover where the profit disappears and cash bleeds. If an owner can hold its position through this they should be fine, if they cannot they will have to sell.

We can also expect a slow-down in new property developments as the high cost of finance coupled with building cost escalations beyond the inflation rate starts to bite. Perhaps this could be considered a "development correction" since the appetite for development has lately started exceeded demand for space in many instances.

So in conclusion, in this market, if I were to be a retailer, it would be a supermarket and if I were a property investor I would be one that had a pile of cash to invest - and these are quite likely to be the institutions.

Brett Exner, Property Executive, Massdiscounters

After writing in the Madison Property Innovation July 2008 about retailers cutting back or expanding and the impact the current market criteria at that stage were having on taking premises, the world has since seen economic change unrivalled since the 1930's. It is almost surreal to think that just over a year ago retailers were sharing in an unprecedented consumer boom in this country whilst the economic storm that has now broken was brewing in the US.

Low interest rates in the US since 2001 caused house prices to increase with access to credit being freely accessible. Investors getting low interest returns forced interest rates to decline even further with sub-prime lending taking place in the US. All of this was driven by the unspoken assumption that US house prices would continue to rise and they did not. The US housing bubble was pricked by rising interest rates and lower house prices and before long the banking model, which relies on trust and confidence and accepts short-term deposits and lends for the long-term, came under fire. Cash deposits were withdrawn and banks were left with too much debt and were forced to de-leverage by selling assets. This caused asset prices to decline even further with more over-gearing taking place as a result.

Panic ensued. To restore confidence governments have had to guarantee or pump cash into banks. The world banking crisis seems somewhat averted for now and liquidity is slowly returning, but there will be much less credit to finance industry growth in the short- to medium-term, which will have an impact on developing economies like South Africa.

Exchange controls have meant that South African banks are relatively unaffected by the credit crisis, although the availability of local credit has tightened significantly. The June 2007 National Credit Act had the desired effect of beginning to de-gear individual consumers and therefore things are unlikely to get much worse. In terms of few job losses, property valuations, equity valuations, and economic growth (not recession), SA is a relatively good place to be in right now.
 
The low-cost model of value driven discount retailers will be ideal for the tougher trading environment being experienced at present and it is expected that the value side of retail will gain market share. The flat and slightly negative growths most retailers are showing at present will result in a correction of base rental levels with expected downward pressure on lease renewal rates per m². Escalation percentages that are currently under pressure to increase will move with inflation and the interest rate which, it is expected, will start declining by mid 2009.
 
The effect of the current market conditions will be hardest felt by the smaller retail stores, restaurants/food outlets and 'moms and pops' stores. These effects can already be seen in recently completed new shopping centre developments where national food brands are battling to find franchisees and where large amounts of vacancies are being seen on the small operator side.
 
All of this translates into a rather dark and gloomy picture for retail property owners who are seeking growth on investments and increases in revenue. If one however takes a slightly longer view things need not be that glum as it will be the retail property owners that invest in the right sustainable new developments and improve existing assets with sufficient potential that will reap the benefit of the inevitable upswing in economic and retail trading conditions. This could start as early as mid 2009.
 
Now, more than ever, it is fast becoming evident that relationships between retail property owner and retailer will be the key in sustaining good tenant mixes and offerings within shopping centres, thereby ensuring the durability of these destinations throughout the trying circumstances retailers and consumers are currently experiencing.

Pieter Prinsloo, CEO, Hyprop Investments Limited

The most dramatic impact of the global economic crisis will be the restriction on availability of credit. Historically, consumers used home mortgages to fund their lifestyle. As a result of liquidity constraints that option is rapidly being obviated. With less credit available to consumers, consumer spend will inevitably decline.

We have seen that retailers who rely on credit sales and sales of big-ticket items are the worst affected by declining consumer spend, while cash sales are still faring reasonably well.

The benefit in the scenario is that affordability of goods and products will improve as demand drops and retailer profit margins come under pressure. Already car prices are falling sharply with similar effect in certain sectors of the residential market. Similarly building costs will decline as the demand for building materials slows, making it more affordable to acquire homes, especially for the first-time homeowner.

Notwithstanding a tough trading environment in the 12 months ahead, the anticipated reduction in interest rates and reducing fuel costs should have a positive impact on consumer spend from the second half of 2009 going forward.

To date the decline in consumer spend has been gradual with no significant retail failures reported. Certain retailers have already changed their pricing models and are focusing on providing more value for money and better service as a counter measure.

Shopping centre owners should now concentrate on tenant retention - focusing on key tenants and providing superior service in order to attract increased spend to shopping centres.