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Edcon may no longer be South Africa’s largest non-food retailer, but if the group’s business rescue process fails, this will still have adverse ramifications for JSE-listed and independent retail property landlords.
This is because the owner of Edgars and Jet stores, which announced it is filing for business rescue on Wednesday, still holds around a million square metres (sqm) of retail space, largely in the country’s major malls. Its largest store is the three-level Edgars flagship outlet in Sandton City, covering around 12 000m².
Many of its current 730 stores nationwide are located in prime, “deep box” anchor tenant positions that won’t be easy to fill, according to property analysts speaking to Moneyweb. The economic fallout from the Covid-19 lockdown, which is affecting most retailers and restaurant chains, will likely add to landlord woes with reduced demand for space and many tenants threatening not to pay rent.
Over the past two years Edcon has downsized its floor space by around a third and its store numbers by almost half as the part of its restructuring strategy but it still holds more retail space than The Foschini Group (TGF). Its better performing competitor has around 750 000m² of retail space in the country.
Following its downsizing, with store closures, space reduction and the sale of brands like Legit, Edgars Active and, more recently CNA, Edcon has been usurped as SA’s largest non-food retailer. Pepkor, which also includes the JD Group, now holds that title with around two million square metres of retail space countrywide.
Edcon cannot pay its suppliers, including rent to landlords due to the lockdown, which it says has cost it R2 billion in sales. Pepkor, TFG as well as other clothing giants such as Mr Price and Woolworths, will no doubt be facing even larger losses during the lockdown.
Craig Smith, head of research and property at Anchor Stockbroker, tells Moneyweb that while most listed real estate investment trusts (Reits) and private property companies have reduced exposure to Edcon, a collapse of the 90-year-old group will have negative ramifications on retail landlords and jobs.
“Although the news is unlikely to come as a surprise to many market participants, it is however most unfortunate and a real travesty as Edcon is a large employer in the South African economy. This is a clear sign of the stress that Covid-19 and the national lockdown is having on the real economy,” he says.
Craig Smith, head of research and property at Anchor Stockbroker. Image: Moneyweb
Despite Edcon’s downsizing, the retailer employs around 17 500 permanent staff, according to Edcon CEO, Grant Pattison. Edcon also employs up to 5 000 casual workers and supports many more jobs in the local clothing and textiles sector.
Considering the worsening economic environment due to Covid-19, Smith says that an Edcon failure “will have an impact” on retail landlords.
“It will be very difficult to try to re-tenant that [Edcon] space over the short to medium term,” he notes.
“Super-regional malls [over 100 000m² in size] however probably have less than 5% exposure to Edcon on average. Thus, while Edcon is a big user of space in aggregate, its exposure within super regionals is probably less than 5%,” he says.
“But the challenge is that it comes at a time when other tenant categories like restaurants and health and beauty [nail salons, hairdressers, barbers] will come under considerable pressure,” Smith adds.
According to research by Anchor Stockbrokers, Reits including Liberty Two Degrees (L2D), Hyprop and Resilient, have the highest exposure to Edcon at 3.5%, 3% and 2% of their portfolios, respectively.
Other diversified property counters, such as Redefine, Attacq, Vukile, Growthpoint, Emira, Fortress and Octodec, each have around 1% exposure to Edcon.
Many of these Reits were part of Edcon’s R2.7 billion funding restructure deal last year, which saw both listed and unlisted property companies either taking an equity stake in the struggling retail group or agreeing to a significant rent reduction. The Unemployment Insurance Fund (UIF) and banks were also part of the funding lifeline.
Some of the major SA Reits which have contributed to Edcon’s recapitalisation. Source: Anchor Stockbrokers
Group’s such as L2D, Hyprop and Redefine have had to writedown the value of stakes in Edcon since the deal. While Edcon’s Edgars store still occupies its three-level space within L2D’s trophy Sandton City property, the chain has given up a floor at Eastgate Shopping Centre.
Edcon has also closed its Edgars store at Hyprop’s Rosebank Mall and another in a high-street property owned by Fortress in the Durban CBD. The Edgars store at the Attacq-owned Mall of Africa was also reduced in size to a single level last year.
L2D released a voluntary Sens announcement on the JSE late on Wednesday, noting Edcon’s business rescue announcement.
“L2D management will review the business rescue plan once it is made available,” it said.
“Edcon occupies 33 674m² (3.5%) of L2D’s total portfolio GLA [gross lettable area] at March 31, 2020. As per previous communications, the investment in Edcon as part of the restructuring in March 2019 was carried at a fair value of R17.5 million at December 31, 2019,” it pointed out.
L2D is a much smaller Reit compared to the likes of Redefine and Hyprop, which have offshore exposure in Europe. Consequently, L2D has a higher exposure to Edcon. However, in actual retail space, both Redefine and Hyprop provide much more GLA to Edcon.
In a Sens statement related to the impact of Covid-19 and Edcon on April 1, Hyprop noted that Edcon currently occupies 50 199m² within its South African malls. The Reit said that this comprised 7.7% of Hyprop’s South African GLA, and 6.6% of its South African income, for the six months ended December 31, 2019.
Smith explains that while Edcon naturally represents a higher percentage of Hyprop’s South African portfolio, when its offshore property assets are taken into account, its overall exposure to Edcon comes down to around 3%.
Stanlib’s head of listed property funds, Keillen Ndlovu, says that with Edcon’s rationalisation, the local Reit sector’s total income exposure to the retailer has reduced from 2% before its restructuring, to around 1% today.
Keillen Ndlovu, Stanlib’s head of listed property funds. Image: Supplied
“Most property companies have either been quite conservative about income from Edcon or have excluded income from the group altogether. However, an Edcon demise will still have a major impact on listed and unlisted retail property counters, because Edcon still has a sizeable exposure to South Africa’s super regional and regional shopping centres,” he points out.
Besides Reits, property groups such as Pareto and Old Mutual also have exposure to the retailer. Pareto owns a small stake in Sandton City, but majority shareholdings in major malls such as Menlyn in Pretoria, Joburg’s Cresta Shopping Centre and The Pavilion in Durban. Old Mutual owns the expansive Gateway Theatre of Shopping in Umhlanga and Cavendish Square in Cape Town.
“Level 4 Covid-19 lockdown restrictions mean that malls will still not operate as usual or to full capacity. For instance, sit-down restaurants and entertainment venues like cinemas won’t being allowed to operate,” says Ndlovu.
“This will impact landlords, not only due to non-payment of rent, but in the event these tenants go out of businesses. Edcon’s troubles certainly add more uncertainty for landlords and who knows when the economy will be fully functioning again,” he adds.
Ndlovu says it will be tough for landlords to fill vacancies that may come up.
Wie is ons? Boere of Afrikaners? Antwoord van Dr Mike Du Toit
Ek het iemand gehad wat aan my geskryf het oor die onderwerp van Boere teenoor Afrikaners. Ek het besluit om Dr. Mike Du Toit te nader, wat die leier van die Boeremag was en ‘n professionele akademikus is wat baie goed ingelig is oor ons geskiedenis, om hierdie vraag te beantwoord. Dr. Du Toit weet nie net van ons geskiedenis in Suid-Afrika nie, maar ook van ons geskiedenis in Europa. Hier is sy antwoord.