Retail and Service Sector Markets

2007

Prof Francois Viruly

University of the Witwatersrand

School of Construction Economics and Management

INTER LINKING THE SECTORS INTER LINKING THE SECTORS

CapitalMarkets

TheUser

DevelopmentMarket

LandMarket

SOCIAL DIMENSION

Economic/Market

Dimension

DIMENSIONS OF LAND USE

Maybe We Need To Start Thinking Maybe We Need To Start Thinking DifferentlyDifferently

Town Planning

Servicing

Building

Occupation

The Research Methodology The Research Methodology

Mega Trends in the Property MarketStep I

Economic Activity & ProfileStep II

Step IIISupply AnalysisExisting InventoryForecast Supply

Demand AnalysisExisting DemandForecast Demand

Equilibrium / Gap AnalysisRentalsVacanciesType of Market

Step IV

Step V

Marketability of the Site / DevelopmentCharacteristics of site / developmentFit of the development in the marketPotential market sharePotential take-upSize of the development

SA ScenariosSA Scenarios

“CUBA” “VIVA”

INCLUSIVE

“India ”

EXCLUSIVE

WEAK ECONOMY STRONG ECONOMY

“The Way we were”

Asgi SA / JIPSA/BBBEE

Inclusionary Housing

Economic growthEconomic growthGross Domestic Product (GDP)Gross Domestic Product (GDP)

0

1

2

3

4

5

6

7

8

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Y.o.

Y. %

cha

nge

BER FORECAST

Number of people on social grantsNumber of people on social grants““ThatThat’’s Worth R62,2 Billions Worth R62,2 Billion””

0

2000000

4000000

6000000

8000000

10000000

12000000

2003 2004 2005 2006 2007

The Commercial Ladder The Commercial Ladder

Consumption growthConsumption growthHousehold Consumption Expenditure (HCE)Household Consumption Expenditure (HCE)

0

1

2

3

4

5

6

7

8

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Y.o.

Y. %

cha

nge

BER FORECAST

““12 000 families/month moving out of 12 000 families/month moving out of the Townshipsthe Townships””

Black middle class approximately 2.6m, increased by 30% in past two years. Earning more than R 4’000 per monthBlack middle class living in suburbs increased from 23% in 2005, to 47% in 2007. % living in Townships decreased from 77% too 53%. Or 12’000 families a month moving out. Black middle class responsible for 30% of consumption expenditure.Between 2004 -2006 there was a 91% increase (84’000 new entrants ), in the number of black adults with personal incomes of R12 000 or more a month.The buying power in the townships dropped by 15% in the past twoyears (UCT/Unilever)

Starting up the Property Market Starting up the Property Market –– The The Secondary market is CriticalSecondary market is Critical

The Changing Township Built The Changing Township Built EnvironmentEnvironment

Township Annual Inflation

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07

Township

National

Source: Lighstone

The Distribution of Shopping Malls (10,000m2 +)

SANDTON CITY

EASTGATE

MIDRAND CITY

BRYANSTON NORTHGATE

CRESTA

ROSEBANK MALL

CARLTON CENTRE

SOUTHGATE

DOBSONVILLE

WESTGATE

1991 - 2002

PRIOR TO 1991

Township Shopping Centre DevelopmentsTownship Shopping Centre DevelopmentsCentre Node Size (sqm)

Altridgeville Mall Altridgeville 20,000 Pan Africa Alexandra 12,000Jabulani Mall Soweto 43,000Maponya Mall Soweto 58,500Orlando Power Station Soweto 24, 000Diepkloof Plaza Soweto 15,000Sontonga Mall Katlehong 16,000 Tembisa Village Tembisa 12,000Philani Valley Shopping Centre Umlazi 10,900Umlazi Mega Mall Umlazi 28,000Mdantsane Mall Mdantsane 35,000Tsakane Mall Tsakane 32,000

The Changing face of TownshipsThe Changing face of Townships

Soweto is not homogeneous

15% in LSM 8/9

Precarious relationship between new entrants, older residents and those that moved out to previously forbidden suburbs

1.5 Million People

4.3 Bn Rand of annual retailing potential – 25% in Soweto

Social Grants

Mofolo North Meadowlands Zone 4

Meadowlands Zone 5

Meadowlands Zone 6

Meadowlands Zone 2Meadowlands Zone 3

Meadowlands Zone 9 Meadowlands Zone 7

Meadowlands Zone 8

Diepkloof Zone 6

Diepkloof Zone 1

Diepkloof Zone 3

Diepkloof Zone 4

Power Park

Pimville Zone 7

Pimville Zone 1

Pimville Zone 6

Klipspruit

Klipspruit Ext

Jabavu

Mofolo Central

Pimville Zone 3Dlamini Pimville Zone 4

Pimville Zone 2

Pimville

Moletsane

Phiri

Protea North

Tladi

JabulaniDobsonville Gardens

Thulani

Protea Glen

Dobsonville

NONE Meadowlands Zone 10 Meadowlands Zone 1

Doornkop AH Orlando East

Orlando West

Protea Glen Ext

Protea South

Klipriviersoog

ChiaweloProtea Gardens

Mapetla

Kliptown

Doornkop

Naledi Ext 2

Naledi

Emdeni

Zola

Bambayi

Molapo

Moroka

Mofolo South

Dube

Senaone

Zondi

Sou

Goldev

DevlandFreedom Park

Motsoaledi

Diepkloof Zone 2

NONE

Diepkloof Zone 5

Diepkloof Ext

Prison

Monthly Income by Suburb

7,100 to 14,600 (5)4,001 to 6,999 (13)3,001 to 4,000 (22)2,001 to 3,000 (19)

0 to 2,000 (9)

Mofolo North Meadowlands Zone 4

Meadowlands Zone 5

Meadowlands Zone 6

Meadowlands Zone 2Meadowlands Zone 3

Meadowlands Zone 9 Meadowlands Zone 7

Meadowlands Zone 8

Diepkloof Zone 6

Diepkloof Zone 1

Diepkloof Zone 3

Diepkloof Zone 4

Power Park

Pimville Zone 7

Pimville Zone 1

Pimville Zone 6

Klipspruit

Klipspruit Ext

Jabavu

Mofolo Central

Pimville Zone 3Dlamini Pimville Zone 4

Pimville Zone 2

Pimville

Moletsane

Phiri

Protea North

Tladi

JabulaniDobsonville Gardens

Thulani

Protea Glen

Dobsonville

NONE Meadowlands Zone 10 Meadowlands Zone 1

Doornkop AH Orlando East

Orlando West

Protea Glen Ext

Protea South

Klipriviersoog

ChiaweloProtea Gardens

Mapetla

Kliptown

Doornkop

Naledi Ext 2

Naledi

Emdeni

Zola

Bambayi

Molapo

Moroka

Mofolo South

Dube

Senaone

Zondi

Sou

Goldev

DevlandFreedom Park

Motsoaledi

Diepkloof Zone 2

NONE

Diepkloof Zone 5

Diepkloof Ext

Prison

Monthly Income by Suburb

7,100 to 14,600 (5)4,001 to 6,999 (13)3,001 to 4,000 (22)2,001 to 3,000 (19)

0 to 2,000 (9)

Monthly Income by Suburb

7,100 to 14,600 (5)4,001 to 6,999 (13)3,001 to 4,000 (22)2,001 to 3,000 (19)

0 to 2,000 (9)

New CentresNew Centres

Housing AffordabilityHousing Affordability

• There is a move towards trading down of properties

• CBD Properties grow in importance, but at the lower end of

the market

• Trading off transport costs, commuting time and Property

Values

• The Rental Market becomes more important in all sectors

““ Cities support 50% of the population , Cities support 50% of the population , but they consume in excess of 75% of but they consume in excess of 75% of

EnergyEnergy””

Improve indoor quality of life: Save water: Conserve Energy

Control of light Motion sensing

Build Green Pick a sustainable site “ Brownfieldsreceive greater attention”

The Social DriversThe Social DriversHOME

PLAYWORK

EDUCATION

Looking AheadLooking Ahead

The state plays a more important role, through non core businesses.Mixed use developments grow in importance The listed sectorconsolidates. Funds start looking offshoreA listed residential fund.Funds start increasing exposure to propertymarket – say to 10% (PIC R70 Bn )

Market Structures Market Structures Direct Property PortfoliosDirect Property Portfolios

0% 20% 40% 60% 80% 100%

South AfricaUK

PortugalSpain

CanadaIreland

NorwayNetherlands

FranceGermanyDenmarkSweden

Residential Office Retail Industrial OtherSource: SAPIX/IPD

Total ReturnTotal Return

Total Return 97 98 99 00 01 02 03 04 05 06

26.116.724.427.523.4

32.625.633.024.730.1

27.424.531.122.026.7

17.48.517.525.415.1

RetailOfficeIndustrialOtherProperty

23.012.816.818.117.5

9.11.62.15.15.1

17.99.58.324.913.7

10.412.77.116.611.2

13.47.87.510.010.6

11.05.18.820.59.5

Source: SAPIX/IPD

Vacancies per sector Vacancies per sector (IPD) (IPD)

0

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

%

Retail Office Industrial

Decentralized (A & B) Decentralized (A & B) -- VacanciesVacancies

Source: SAPOA

0%2%4%6%8%

10%12%14%16%18%

Q1/90

Q4/90

Q3/91

Q2/92

Q1/93

Q4/93

Q3/94

Q2/95

Q1/96

Q4/96

Q3/97

Q2/98

Q3/99

Q2/00

Q1/01

Q4/01

Q3/02

Q2/03

Q1/04

Q4/04

Q3/05

Q2/06

Q1/07

Johannesburg Decentralised Durban DecentralisedCape Town Decentralised Pretoria Decentralised

CBD Offices CBD Offices -- Vacancy RateVacancy Rate

0

5

10

15

20

25

30

Feb-90

Feb-91

Feb-92

Feb-93

Feb-94

Feb-95

Feb-96

Feb-97

Feb-98

Feb-99

Feb-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

%

JHB CBD DBN CBD CPT CBD PTA CBD

Source: SAPOA

Some Concepts Some Concepts

Vacancy Rate Amount of space in the market that is not occupied

o Total Stock o Amount of space that is vacant. o Space under lease but vacant should be consideredo This is the equilibrium indicator o Some vacancy will exist in the market

The Natural vacancy rate o “ When vacancy rate is below the natural rate,

rents will tend to be driven up (and new developments tend to occur ). When vacancy is above the natural rate rents will tend to be driven down”

Absorption Absorption

Gross Absorption;“ measures the total amount of space

for which leases were signed during the year, regardless where they came from”

Net Absorption;“ The net change in the amount

occupied space in the market

Sandton take Up Sandton take Up

Dec 2003 Dec 2004Rentable 1’012’128 1’043’901Available 149’309 120’711Occupied 862’819 923’190Take up 60’371Monthly 26 mnth10% Vac 20 mnth‘02/’03 65 mnth

The The ““A & PA & P”” Grade Rental GradientGrade Rental GradientR/sqm Q4 2006 R/sqm Q4 2006

0

20

40

60

80

100

120

140

Sandton

Century C

ity

Cpt C

BD

Illovo

Rondebosch

lunww

od

Westville

Constantia

Rosebank

Rivonia

Dbn C

BD

Jhb CBD

1st Q 1996 1st Q 2001 1st Q 2006

A Grade 1’216’300 1’325’232 713’200

B Grade 514’000 398’574 632’345

C Grade 288’367

Total 1’730’300 1’723’806 1’633’912

A CHANGING CBD OFFICE ENVIRONMENT

Inner CBD Housing Inner CBD Housing

Social FacilitiesHigh Rise LivingCloser to TransportAffordabilityContested Commercial vs Residential UDZ Incentives

Value ComponentsValue Components

The Project

The Market Costs

PhysicalLegalSociety

• Rentals• Cap rates / discount rates\• Vacancies

• Building costs• Land prices• Escalations• Interest rates

Building MaterialsBuilding MaterialsY/Y % ChangeY/Y % Change

0

2

4

6

8

10

12

Jan-05

Apr Jul Oct Jan Apr July Oct Jan2006 2007

Total Building Plans PassedTotal Building Plans Passed

0

50,000

100,000

150,000

200,000

250,000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

m2

Industrial Office Shopping

Source: STATS SA

GDFI By Building SectorGDFI By Building SectorSource: BER

0

5000

10000

15000

20000

25000

1990

1992

1994

1996

1998

2000

2002

2004

2006

Year

R -

mill

ion

Non-residential Buildings Residential Buildings

Decentralised New Office Developments Decentralised New Office Developments ((JhbJhb))

050,000

100,000150,000200,000250,000300,000350,000400,000

Q1/02

Q3/02

Q1/03

Q3/03

Q1/04

Q3/04

Q1/05

Q3/05

Q1/06

Q3/06

Q1/07

m2

LET AVAILABLE

Source: SAPOA

The Real Estate ClockThe Real Estate Clock

6

9 3

12

BOOM MARKET

Saturated Market

Increasing Construction

Funding Available

Increasing Rents

Stabilizing Rents

Increasing AbsorptionMinimal Construction

Overbuilding

Rent Concession

Excess Funding

Tightened Funding

Less Construction

Reduced Funding

RECESSION

RECOVERY

Counting BuildingsCounting Buildings

Orange Grove : Sales 2003 Orange Grove : Sales 2003 < R150,000

R350 –R399,000

R400,000

R150 – R199,000

R200 – R249,000

R250 – R299,000

R300 – R349,000

The Legislative Environment The Legislative Environment

The Property Charter:Economic TransformationUnlock obstacles to ownershipPromote investment in under-resourced areasChange the composition of ownership, control and management Skills development

o 30% black people in senior management o 15% black women in Senior Management

Procurement o 70% from BBBEE.o 40% from level 1-4.

Policies and Bills ..Policies and Bills ..

Rental Housing Amendment Bill, 2006Rental Tribunals, decide on evictions.

Draft Social Housing Bill, 2006Create a sustainable Social Housing Environment.Social Housing Regulatory Authority (SHRA)

Housing Consumers’ Protection Measures Amendment Bill ( HCPMAB)Who is and who is not a builderRegulate individuals or companies that build homes.Conveyancer needs to make sure that the builder is registered with NHBR, before registration of a mortgage.

Immovable Asset Management Bill, 2007Government Asset Management Bill, 2007 Will influence how government uses its assets.

Municipal Property Rates ActRating on land and Improvements Rating every four years

National Credit ActFull credit history Expenses Move to Rental Market

Policies & BillsPolicies & Bills

National Environment Waste Bill

The disposal of wasteLittering

Inclusionary HousingMixing high and low cost housing

o Infrastructure Finding a voluntary solution

Foreign Land OwnershipIs this a town planning or ownership issue?The purpose remains unclear

Amendments to the Provision of Land assistance Act of 1993

Land First offered to the public sector

Policies and Bills ..Policies and Bills ..

Rental Housing Amendment Bill, 2006Rental Tribunals, decide on evictions.

Draft Social Housing Bill, 2006Create a sustainable Social Housing Environment.Social Housing Regulatory Authority (SHRA)

Housing Consumers’ Protection Measures Amendment Bill ( HCPMAB)Who is and who is not a builderRegulate individuals or companies that build homes.Conveyancer needs to make sure that the builder is registered with NHBR, before registration of a mortgage.

Immovable Asset Management Bill, 2007Government Asset Management Bill, 2007 Will influence how government uses its assets.

Municipal Property Rates ActRating on land and Improvements Rating every four years

National Credit ActFull credit history Expenses Move to Rental Market

Policies & BillsPolicies & Bills

National Environment Waste Bill

The disposal of wasteLittering

Inclusionary HousingMixing high and low cost housing

o Infrastructure Finding a voluntary solution

Foreign Land OwnershipIs this a town planning or ownership issue?The purpose remains unclear

Amendments to the Provision of Land assistance Act of 1993

Land First offered to the public sector

This presentation was made with contributions from: Stats SAIPD SASAPOA Rode Report SARB City Network ProjectMy friends

For Further information:

www.viruly.co.zaTel: 011 728-0751

Francois.viruly@wits.ac.za

Viruly Consulting offers a regular Property Information subscription Service