Integrated analysis of retail trade areas: (1) techniques

Abstract

Keywords Market analysis, retail trade areas, central place theory, market saturation, retail demand potential. Abstract Traditional techniques for the analysis of trade areas (per capita approach, residual approach and analogue or share approach) oversimplify the relationship between population and expenditure, while pertinent variables that influence demand and potential are left unaccounted for. Inappropriate model specification, incomplete portrayal of market realities and faulty market analysis give rise to poor investment decision making. An integrated analysis of retail trade areas is proposed in this, the first of two papers. The analysis incorporates four proposed techniques, namely the Multi-Criteria Saturation Index (MCSI), Retail Diversification Index (RDI), Demand Density Analysis (DDA) and Growth Matrix (GM). Improvements to the analogue method are also proposed, including economic indicators to account for the time value of money. In Part 2 of this paper a test for validity is developed, based on a comparison of actual versus forecast shopping centre sales data for twelve shopping centres in South Africa. The negligible difference observed between actual and forecast sales validates the proposed integrated approach. Introduction Market analysis is a key component of a sound real estate investment analysis process. Traditional market analysis techniques do not reflect complex trade area attributes and socioeconomic realities, such as retail market structure, degree of diversity within the retail market structure, supply-demand saturation levels, the spatial distribution of demand and the composite effect of trade area growth variables on future asset performance. Pyhrr et al. (1989, 409) argues that faulty market analysis was a major contributor to the financial failure of real estate projects in the United States between 1980 and 1989. Traditional techniques designed for the analysis of trade areas oversimplify the relationship between population and expenditure, while pertinent variables that influence demand and potential are left unaccounted for. Inappropriate model specification, incomplete portrayal of market realities and faulty market analysis give rise to poor investment decision making. The development of the proposed new methodology requires cognisance of the relationship between economic role players as portrayed in the Keynesian economic equilibrium equation Dernburg (1985, 9 & 39-41); Lombard, Du Pisani and Steyn (1986, 15-17); Lombard, Stadler and Haasbroek (1989, 181-215); and Gnos and Rochon (2008, 10), but also of the complexities that characterise real estate and asset market interaction. This paper proposes an improved methodology for the analysis of retail trade areas. The techniques that form part of the improved methodology include the Multi-Criteria Saturation Index (MCSI), the Retail Diversification Index (RDI), Demand Density Analysis (DDA) and Growth Matrix (GM). Selected improvements to the analogue model is also identified to account for the time value of money. In Part II of this paper the validity of the proposed techniques is tested by comparing actual versus forecast shopping centre sales data for twelve shopping centres in South Africa.