Oct 11, 2022

European Retail House View

Economic Outlook

The speed at which Russia’s conflict in Ukraine has intensified has contributed to a slower growth outlook and heightened uncertainty projections for 2022 and 2023.
Oxford Economics expects The EU (27 countries) to see a rise of 2.9% in economic output for 2022, with the Eurozone forecast at 2.7% for the year. GDP is forecast to grow by 1.2% and 1.1% for the EU (27 countries) and Eurozone respectively in 2023.
The consumer confidence for the EU (27 countries) reached the lowest level on record in July 2022. Fewer consumers indicate to have intentions for making major purchases over the next twelve months.
Gas and food price rises are key contributors to inflation, which directly impact consumers’ ability to spend. As interest rate rises have a limited impact on moderating inflation, the outlook for Q4 2022 and 2023 remains uncertain. Oxford Economics expects 2023 to be a major turning point, with inflation to fall back below the target rate of 2.0% during the second half of 2023.
The retail sales growth outlook across Europe for the remainder of 2022 and early 2023 is mixed as consumers in each country face a different proportion of drivers and barriers for consumption and retail sales. Despite the softening growth outlook for most countries, total retail sales are expected to remain above pre-pandemic levels in all the key markets.
Eurozone retail sales are forecast to grow 0.6% in 2022 and 0.2% in 2023 before accelerating to 2.0% in 2024. Consumption is forecast to soften from 3.4% growth in 2022 to 2.0% in 2023. The outlook for 2024 is more positive with consumption forecast to grow by 2.9% in 2024.

Key economic challenges by region

Global DPD growth to ease from 3.0% in 2022 to just 2.4% in 2023

Consumption | Retail Sales Growth Forecast

Mixed retail sales performance expected, volumes to remain above pre-pandemic levels…

Retail Reopening

Pent-up demand, removal of COVID-19 measures and the summer period has allowed footfall to reach near peak levels observed since the start of the pandemic. Various markets are also benefitting from a recovery in tourism.
The recovery in footfall across many major European cities is lagging the national average in most countries as a result of a larger structural adoption of home working and the recovery in tourism.
The effects of high inflation is starting to filter through the retail market. While retail sales values have continued to grow in Q2 2022, some consumers have started to rein in their retail spending. Total retail sales volumes from Q2 and June 2022 remain well-above pre-pandemic levels.
The return of customers in physical stores is impacting online sales in Europe. Online sales volumes for the EU-27 have fallen 12% in June 2022 on 2021’s peak. Compared with pre-pandemic volumes, online sales in June 2022 is still up by 27%.
The fall in online sales is observed in nearly all European markets. The current performance in total retail sales is more mixed. Some markets, including the UK, Germany and the Czech Republic have seen Q2 2022 sales volumes fall on a year-on-year and quarter-on-quarter basis. Poland, Portugal and Romania have reported growth over the same periods.
The European retail market is currently benefitting from the removal of COVID-19 measurements. Various consumers are expected to rein in their retail spending during the winter period. Consumers are likely to reduce expenses for going out, eating out and major purchases.
A critical review of the existing tenant mix may be required as some retail sectors are more prone to the shift in retail spending towards online. For some assets, optimising the tenant-mix will be sufficient. Weaker assets may benefit from transforming a proportion of (obsolete) retail space.

Europe Re-opening | Retail and Recreation Mobility Index

Footfall has returned to or above pre-pandemic levels in most markets…

Source: Google COVID-19 Community Mobility Report (Updated on 5 August 2022). Note: Index based on a 7-day rolling average of the 20 largest retail markets. © 2022 Jones Lang LaSalle IP, Inc. All rights reserved.

Retailer Conditions

A ‘better-than-expected’ recovery in footfall and in-store sales has resulted in a broad range of international retailers posting strong financial results during the first half of 2022. However, this has not been equally felt across the broader sector as rising costs and the removal of COVID-19 restrictions is putting pressure on profit margins for other.
Leasing activity remains robust in many larger and more mature retail markets across Europe. Retailers who are targeting domestic consumers, in particular, continue to push ahead with new store openings. However, as retailers assess the current situation, some have “paused” store acquisition processes or are optimising their physical store footprint in a city.
Pure play online retailers are bracing themselves for challenging times as consumers return to the stores and rein-in their discretionary spending. In addition, rising costs is affecting their operating margins, while traditional retailers are becoming more successful operating in the online domain.
A select number of European markets have seen prime rental growth return during Q2, supported by a lack of quality retail space and solid demand. Notable growth in prime shopping centre rents has been observed in Greece (+9.1% quarter-on-quarter), the UK (+8.4%), Hungary (+5.6%) and the Netherlands (+2.9%). Hungary (+20.0%) and the Netherlands (+5.0%) have also seen prime retail warehouse rents rise in Q2.
More markets are expected to see prime rental growth filter through in the short term. However, rising energy costs, service charge costs and slowing sales are likely to dampen a strong recovery in rents until the second half of 2023. The Netherlands, Poland, Turkey, Spain and Hungary are forecast to see the strongest growth in prime shopping centre rents until 2026.

Retailer Conditions | Notable News

Various international retailers reporting a rebound in sales and growth post COVID-19…

Inditex profit jumps as sales surpass pre-pandemic levels (Retail Gazette). Zara owner Inditex recorded revenue growth of 36% to €6.7 billion in the quarter to April 30, supported by a sharp recovery in footfall. Net income increased by 80% year-on-year to €760 million. Online sales fell by 6% year-on-year.

Primark raises prices as it is unable to offset rising inflation

(Retail Gazette). Sales grew by 59% to £3.5 billion for the 24 weeks to 5th March. Primark will raise prices during the second half of the year. It expects its full-year profit margin to come in at 10%, down from 11.7%for the first half-year.

Metro AG raises full-year outlook following a ‘better than

expected’ third quarter (Retail Detail, ESM). The wholesale and cash and carry group said that sales in its third-quarter were driven by rising inflation and strong momentum in the hospitality industry. It expects sales to grow by 17% to 22% for the full financial year 2021-2022.

Kingfisher Owner of B&Q ‘managing inflation’ as DIY demand is expected to continue (The Guardian). Like-for-like sales in the three months to April 30th were 16% above the same period in 2019 at £3.2bn, although they fell by 5.8% on 2021-levels. Kingfisher expects sales to be resilient in the coming months, despite ongoing inflation.

H&M beats profit expectations in the second quarter of the year after cutting back on discounts (FT). It reported better than expected results as it raised prices and benefitted from a strong recovery in footfall. Sales for Q2 rose by 17% to SEK54.5 billion (€5.1 billion), while its margin rose by 1.3 percentage points to 52.2%.

Cecomomy reports a 40% year-on-year decline in online sales for its second quarter (Retail Detail). The holding company behind MediaMarkt and Saturn saw its combined revenue rise by 19% year-on-year in Q2 to €5 billion. The growth is driven by physical shops and services, as online sales fell by 40% over the same period.

Adidas cuts guidance as China lockdowns bite (Company Report). The sport retailer is anticipating a hit to its full-year profit as it struggles with disrupted supply chains, closed shops in China and rising costs. Operating profit fell by 38% year-on-year to €437 million in its first quarter.

Nike reports smaller than expected declines in revenue and profit for the fiscal fourth quarter (Investor’s Business Daily). Earnings in Q4 fell by 3% year-on-year while revenue was down

by 1% to $12.2 billion. Revenue from the Chinese market fell by 19%. The losses were partially offset by 20% gains in Europe middle East and Africa divisions.

Retail Leasing Market | Announced Store Openings

Opportunity for growth and strengthening resilience…

Retail Leasing Market | Market Activity

Healthy retailer demand for quality space in prime shopping destination remain…

Retail Leasing Market | Prime High Street Rents

Greater emphasis on lease flexibility and contributions from landlords…

Retail Leasing Market | Prime Shopping Centre Rents

Rents expected to stabilise in most markets in 2022 and return to growth in 2023 onwards…

ESG Key Retail Trends in Europe

Retail is one of the sectors facing the major challenges on carbon emissions as activity density linked to asset performance is high. Reduction efforts have been high and results in the sector are beginning to become visible. Retail has some of the greatest risks and opportunities, with estimates showing carbon emissions need to be reduced by 95% from current levels.
In terms of social responsibility, retail investors have published the benefits of their schemes for many years, rightfully claiming that the curated public spaces, employment opportunities and community facilities provided by retail schemes improve the local area. With an increasing focus on issues such as mental health and closing inequality gaps, there is now a greater focus on the impact of property investment beyond its impact on physical space.
Green premiums on retail rents are difficult to assess. However, it cannot be avoided that there will be an impact on valuations in the long term. Amongst others, climate change will challenge resilience of assets and future extra costs to comply with regulations and to meet other environmental targets. In addition, as it may be difficult to achieve net zero or carbon neutral operations at a retail scheme, the possible benefit of reduced future capital expenditure relating to less frequent maintenance of a sustainable space could be offset by the necessity to purchase carbon offsetting credits.
Innovative sustainable solutions that help manage cash flow and improve profitability for retailers as well as preserving the long-term asset value is key. This can be emphasized in the short-term by investors and occupiers focusing on tackling high energy costs through operational efficiencies and shifting the cultural mindset of a business to encompass a focus on the ‘S’ in ESG.
Considering the broader structural change within the retail sector, there is a significant role to be played by owners and occupiers of retail space.

Planned actions to address environmental impact

Opportunities for physical retail real estate

ESG | Key trend: the rise of ESG in Europe

Case studies of openings and clauses following an ESG pathway

Malinas Retail Warehouse Park, Belgium

Has been declared the most sustainable retail warehouse park, consisting of carbon neutral design and achieve BREEAM Excellence. Also features 1.2 hectare reed field, 200 planted native trees, 7 metre eco-green façade, a green roof and solar panels that will generate a cost saving of more than 1,000 tonnes of CO2.

Carbon Neutral Lidl Store, Sweden

This is Sweden’s first net zero carbon building. This scheme has been used as a pilot for developing the Sweden Green Building Council certification system. This scheme has also focused on developing a net zero project during a building’s life cycle.

Burwood Brickwork, Australia

Has been declared the most sustainable shopping centre after receiving the ‘Living Construction Challenge’ award. It is the only retail centre to attempt the award which focuses on Place, Materials, Health & Happiness, Beauty, Water, Energy and Equity. Enabling the development retail spaces that reduce environmental harm.

Aatmay Clause

Aatmay’s clause enables landlords and tenants to reduced unnecessary waste and embodied carbon by prompting the use of a circular economy when considering entry of new tenants to prioritise using reclaimed, re-used and recycled goods for fitout. This clause is currently used in the UK and focuses on the pathway to net zero and reducing embodied carbon.

M&S Green lease clause

In its UK leases M&S include green clauses which state both landlord and tenant will share information about gas, water and energy usage for each shared space and encourages tenants and landlords to promote use of advanced green technologies such as biomass boilers, rainwater harvesting and LED lighting.

Unibail-Rodamco-Westfield

Has set a company pathway that focuses on an ambitious CSR strategy by developing the ‘best’ practices, social fairness and transparent governance. As a group its portfolio has achieved an unrivalled certification level, with 51 of their European shopping centres being certified ‘outstanding’ BREEAM in-use.

Retail Investment Market

European retail investment volumes are expected to rise in 2022 on volumes reported in 2020 and 2021, supported by a more diverse offering of investment products.
European retail Investment volumes for the second quarter rose by 51% year-on-year to €10.4 billion. The European retail investment volumes for H1 2022 totalled €19.9 billion, which was an increase of 70.2% year-on-year. This volume also brings activity close to levels seen in the years before the pandemic.
Germany and the UK remained Europe’s largest retail investment markets in H1 2022. Due to increasing market liquidity in other markets and slowing activity in Germany and the UK, the combined share of these two countries has fallen to 38% of the total retail investment volumes for H1 2022. This has fallen from levels, at or around 50%, seen over the past two years.
All major retail asset classes have seen investment volumes rise across Europe in Q2 2022 on a year-on-year basis. High street retail investment volumes in Q2 2022 grew by 75.4% year-on-year to €3.1 billion. Investors traded €2.9 billion worth of retail warehouse stock, a 33% year-on-year increase. Grocery real estate investment volumes rose by 57.0% to €1.5 billion, compared with Q2 2021, while shopping centre investment volumes grew by 35.8% to €2.7 billion.
Prime retail yields remained stable in most European markets during the second quarter of 2022. Strong investor demand for quality retail warehouse product resulted in prime yield compression in Spain, Italy, Sweden and Slovakia. Prime grocery and shopping centre yields moved out in Sweden, reflecting recent interest rate rises. Denmark and Finland have also reported outward yield movement for prime shopping centre product.
Looking forward, effects of inflation and energy price increases have potential to limit retailer performance over the next 12 to 18 months. Prime retail yields in West European markets are likely to be affected by base rate increases.

Retail Investment Market | Breakdown by Country

Germany and the UK attract 38% of the capital flows targeting European retail real estate…

Retail Investment Volumes by Country H1 2022

Share by Country

Source: JLL (Q2 2022); Note: This review considers all investment sales of shopping centres, retail warehouses, factory outlet centres, supermarkets and high streets, but excludes any investment deal less than €5 million in value.

Prime Retail Yields Q2 2022

Retail Investment Market | Outlook

Food anchored real estate remains in high demand…

Potential Trends for H2 2022

Shopping Centres –Prime / Outlook: positive trending to neutral

Shopping Centres –Inner city & redevelopment / Outlook: neutral

Good demand but at opportunistic prices.
Asset needs to have demonstrable redevelopment potential to offices/residential on upper floors at least. Cost inflation an issue.
Lack of stock an issue.

Shopping Centres –Secondary / Outlook: negative but improving

Weaker secondary/tertiary shopping centre markets seeing more activity –predominantly from PE investors.
UK secondary market in particular has been very active.
Lack of debt availability affects most markets.

Grocery –supermarkets etc / Outlook: positive

High demand from a wide range of investors –especially specialist investors.
Restriction in supply of stock is limiting deal volumes.
Prime yields in W. Europe markets likely to be affected by base rate increases.

Retail Warehouse (Parks) / Outlook: positive if grocery / DIY anchored

High demand for grocery anchored RWP and recent improving demand for DIY anchored.
Prime yields in W. Europe markets likely to be affected by base rate increases.
Last mile logistics use gives inner city RWPs increased attractiveness.

High Street Retail / Outlook: neutral / core positive

Focussed demand for a select number of prime high street retail assets.
Demand to favour assets with stable rental income or rebased rents.
Good demand for very best core assets in European capital/key cities.

Outlook

Economic growth slows due to subdued confidence, weakening demand and inflation. The forecast for 2022 remains positive as the services sector benefits from the removal of COVID-19 restrictions.
Various retailers report a ‘better-than-expected’ recovery in footfall and in-store sales for H1 2022. The retail sales growth outlook across Europe for H2 2022 and early 2023 is mixed as consumers in individual countries face a different proportion of drivers and barriers for consumption and retail sales. Despite the softening growth outlook, total retail sales are expected to remain above pre-pandemic levels in all the key markets. Eurozone retail sales are forecast to grow 0.6% in 2022 and 0.2% in 2023 before accelerating to 2.0% in 2024.
Major leasing markets remain active, although signs of caution emerge as some retailers hit the pause button. The prime rental growth forecast for 2022 across Europe has weakened, most notably for shopping centres, as rising energy prices and service charge costs is affecting retailers’ ability and willingness to pay higher rents. Given the uncertain outlook for the winter period and potential economic fall-out, retailer demand is expected to strengthen notably in 2024.
Retail investment activity across Europe during H2 2022 has risen closely to levels seen in the years before the COVID-19 pandemic. The total European retail investment volumes for the year 2022 are still on track to end above 2021 volumes. The outlook for 2023 has become more uncertain as institutional investors have paused activity and prospect buyers are asking for a discount.
Retail real estate, supported by affordable defensive income, linked to inflation, will likely continue to benefit from solid investor demand. For retail assets, with a larger proportion of income coming from retailers with a discretionary product offer, investor demand is expected to vary by country.