Polarised consumer demand across European countries and retail sectors.
The positive outlook for an efficient COVID-19 vaccine is likely to act as a turning point for the European retail market. However with challenges for retail stretching far beyond the pandemic, a lot still needs to be done and retailers will need to continue navigating unprecedented and challenging market conditions.
Considering the full year of 2020, consumer demand for retail goods overall has held up remarkably well, backed by strong government support in a large number of markets.
Retail sales for the EU27 are expected to end 2.6% lower in 2020 compared to 2019 levels, mostly caused by the sharp decline in sales observed in March and April when national lockdown measures were introduced in most European countries. Second lock downs are expected to have a further impact on sales during 2021. Oxford Economics expects retail sales to bounce back in 2021 with the EU27 and Eurozone forecast to see 4.4% and 3.8% year-on-year growth respectively.
Retail Sales Growth Forecast EU27
The impact of the pandemic on individual European retail markets remains mixed. Retail sales in Germany and the Netherlands for 2020 are anticipated to be up 3.3% and 3.6% on 2019-levels. The Scandinavian countries of Norway, Finland, Denmark and Sweden are forecast to see an increase in retail sales of 7.1%, 2.7%, 2.6% and 2.4% respectively.
These countries are among the best performing retail markets globally in 2020, however with retail sales growth expected to soften in 2021. Conversely, countries such as Spain, Italy and France are faring less well with an anticipated decline in retail sales of over 5.0% in 2020, with all three markets however expected to see a strong recovery in 2021.
Despite challenging climate market conditions, various major retailers have been able to adjust their operations and return to profit during the summer months. One example is the fashion sector that have seen demand fall due to less need for leisure and formal wear as an effect of elevated levels of home working. Fast-fashion sales on the other hand have recovered more strongly than expected. Tighter cost control, a reduction in sales of discounted clothing and a focus on e-commerce are factors enabling a number of international fashion operators to return to profitability. With less people going on holidays or visiting leisure venues, consumers have instead spent more on big-ticket items such as furniture, DIY-products, electronic goods, luxury items, outdoor goods and bicycles.
The online sales channel has seen retail spend rise significantly during the pandemic, notably in March and April. Easing of lock-down measures did however mitigate this growth, albeit a part of the shift in retail spending towards online is likely to be permanent as the channel has welcomed new customers. This trend was also evident within the grocery sector.
For 2021, the Centre for Retail Research forecast online sales in Europe's major economies to fall in revenue and as a proportion of total retail spending, on 2020’s elevated levels.
Retail Sales Growth Forecast 2020
Accelerated right-sizing of store portfolios, cautious recovery in leasing activity in 2021
Various retailers have accelerated their real estate strategies in 2020. As retailers in the most developed countries are expected to occupy less physical retail space on a net-net basis, retail markets will gain clarity more quickly on relevant and productive retail destinations. The real estate requirements will evolve differently by country, retailer type and the level of structural change that is playing out.
Overall, long-term demand for space is pivoting towards large cities and major shopping destinations on the one hand and accessible local retail places on the other hand.
Many grocers have seen solid sales growth during the pandemic and remain focussed on expansion opportunities, including large floor plates that may become available due to potential failures of other retail and leisure operators. Due to margin pressures, more grocers are expected to explore sale and lease back options for releasing capital in the short and medium term.
Various electronic retailers, furniture specialists and DIY-stores as well as outdoor specialists and bicycle shops, have benefited from stronger than expected domestic spending.
Requirements for new stores have not changed significantly. Well-capitalised operators and some manufacturers of consumer goods are looking to benefit from the current market conditions and aim to increase their exposure in inner-city areas.
The “right-sizing” strategies among various fashion retailers have accelerated, including the rationalisation of larger stores, coupled with major upgrades of the remaining stores, and closing of underperforming stores.
A large number of retailers, among them discount grocers, are introducing an extended click-and-collect service as part of their omni-channel strategy, to mitigate short-term risks related to the pandemic and provide customer reasons to keep visiting their stores. The current trading conditions are also driving increased retailer demand for flexible lease structures, rents and space. For many pure-play operators, flexible leases may allow them to diversify operations, while managing risks.
Considering Europe’s key retail markets, overall expectations are that 2021 will see a cautious recovery in leasing activity and a further pick-up in 2022. The Covid 19 vaccine may act as a tipping point as early as H2 2021. With prime high streets and major shopping centre locations benefitting from a return of customers, pent-up demand and a desire to socialise again. Leasing activity could accelerate more quickly in the major cities, depending on the recovery of tourism flows. It should be noted that the outlook on recovery of the retail leasing market will vary significantly by market, retailer type and the level of structural change that is playing out.
Retail Trade Volume Growth EU27 by category
February – September 2020
European retail investment volumes rise in Q3, HOWEVER remain polarised
2020 has been a turbulent year for the European retail investment market. The year started well with Q1 volumes up 12.7% year-on-year to €8.3bn, supported by the 50% stake sale of four shopping centres in Portugal by Sonae Sierra to Allianz for €850m, the €475m joint venture sale of Intu Puerto Venecia by CPPIB and former Intu to Generali Real Estate and Union Investment Real Estate, and the €400m domestic trade of Farsta Centrum in Sweden with Stadsrum buying from Atrium Ljungberg.
The pandemic outbreak towards the end of Q1 led to a significant slow-down in activity. Q2 volumes fell 39% yoy to €4.9bn. The uncertainty around operational income raised questions around pricing and various planned transactions were put on hold. The market became polarised between large transactions, consisting of core shopping centres and defensive income producing retail portfolios, and small transactions by local buyers.
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The polarised trend continued in Q3, however as investors gained more clarity on the impact of the pandemic and other challenging factors, investment activity started to pick-up and volumes rose to €6.4bn. Glattzentrum shopping centre in Zurich sold for €940m, while ECE transferred three shopping centres, worth €500m, into a new investment fund.
Share of Grocery Real Estate Investments as a Proportion of Total.
Residual value and asset management potential
With the prospects of consumers being able to return to ”a new normal”, investor interest is likely to strengthen in 2021, albeit a mismatch in pricing expectations between sellers and buyers could constrain transactional activity, notably on the prime and near prime end of the European retail investment market.
The structural change of the retail market is likely to lead to a re-appreciation of grocery real estate as a defensive income producing asset by pension funds, institutional capital and dedicated long-income funds.
The share of grocery real estate investment as part of Europe’s total retail investment grew from 6% in 2017 to 13% in 2019. With the pandemic impacting the wider investment market, grocery real estate attracted 20% of the capital flows targeting retail during the first three quarters of 2020. As more grocers are expected to explore sale and lease back options in the short and medium-term, investors have a unique window of opportunity to gain access to prime product.
Redevelopment potential is increasingly becoming a key driver for investments. Alternative uses have grown in recent years for both stand-alone grocery sites as well as retail parks as they are more likely to able to be underwritten by high residual values.
Retail parks, ideally grocery-anchored and with low rent levels, will also appeal to investors looking for defensive income. Specialists operators will increasingly target these sites in and around the major urban areas to develop alternative uses, such as affordable housing and urban logistics.
The recovery in the shopping centre market will depend on the return in institutional demand. France and the Nordics are currently the only regions seeing institutional activity. Countries such as the UK, Germany and Poland currently see little institutional demand and the recovery may take longer to materialise, depending on pricing of core product. Strategic disposals and distressed sales are likely to move yield levels out in 2021. Once the economy improves and there has been at least six months of stability in operational income of shopping centres, yields are likely to compress again.
The secondary and tertiary shopping centre markets are seeing more activity with a wide range of buyers, including developers, PE-investors and UHNW-investors. Notable is that most of these acquisitions involve asset management and repositioning plans, targeting higher returns.
The COVID-19 pandemic has left deep scars on the European retail market, however the promise of a vaccine will likely allow people to return to a new normal and allow retail spend to potentially return to patterns seen before the pandemic.
The structural change that has been playing out throughout the retail supply chain over the past decade has received a boost as a large number of retailers have accelerated their real estate strategies, ranging from opportunistic store expansions to closing down of underperforming stores.
While less retail space is expected to be occupied in the near term on a net-net basis, the accelerated change is providing retailers and investors clarity on what space will remain relevant and productive.However, as pricing expectations adjust for weaker assets, a rising number of investors will be able to build a business case for asset management initiatives and repurposing some of the retail space, a development that will allow the European retail investment market to return to growth and become an attractive destination again for the wider investment community.
Words by Tjard Martinus
Head of Retail Research EMEA
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