By John Loos, Property Sector Strategist at FNB Commercial Property Finance
June Retail sales recorded the 7th consecutive real (inflation-adjusted) year-on-year decline, to the tune of -0.9%, following on a revised -1.6% decline in May 2023. Hopefully, this slower rate of real decline points to a levelling out in real retail sales.
The pressure remains widespread across most of the major retailer categories, with the exception of Clothing and Footwear Retail (+5.8% real year-on-year growth), although this growth rate is also slowing).
Even the less cyclical “General Dealers” saw a decline of -2.7%, a slowing economy and significantly higher food and grocery prices (after last year’s inflation surge) exerting pressure on real consumer disposable income.
There is also pressure in Home-related retail, “Household furniture, appliances and equipment” retail declining by -1%, and “Hardware, paint and glass” retail sales by an even larger -4.4% year-on-year. Declines in these two latter categories makes sense, given that many home-related purchases and maintenance items are postpone-able in tough financial times. Pharmaceutical and Health Care Retailers saw a -1.4% year-on-year real decline, and the large “Other Retailers” category saw a -1.6% decline, so the decline was broad-based across the major retail categories.
This most recent data thus sustains the pressure on retail shopping centre tenants, and thus on the centres themselves, likely having caused further slowdown in growth in retail centre trading densities during the 2nd quarter of 2023, following a slowing in MSCI 1st quarter trading density numbers.
All 5 main shopping centre categories (Super Regional, Regional, Small Regional, Community and Neighbourhood) showed slowing trading density growth as at the 1st quarter of 2023, following on the post-lockdown recovery through 2021/22, and 3 of the 5 centre categories already saw real (inflation-adjusted) year-on year declines in trading densities in the 1st quarter.
Declining real retail sales comes at a time when shopping centre owners and tenants alike face significant operating cost pressures too, including often above-inflation municipal tax and utilities tariff hikes, while also required to find costly electricity alternatives due to unreliable power supply.
As things stood in the 1st quarter, according to MSCI data, both base rentals and gross rentals were in decline in real (inflation-adjusted) terms in all 5 main centre categories (Super Regional, Regional, Small Regional, Community and Neighbourhood), reflecting a weak level of “pricing power” for landlords in the rental market with tenants under pressure. This most recent retail sales data is expected to contribute to further near term real (inflation-adjusted) rental decline.
In short, the declining June 2023 real retail sales numbers point to a likely continuation of the recent weakening in the retail property market on a national basis.
