By Patrick Delcol
While negative statements are made in the press concerning the retail sector in general, we cannot ignore that this has, indeed, led to negative sentiment concerning the retail real estate market as a whole. As a consequence, nearly all listed retail real estate players are currently trading below their Net Asset Value (NAV).
This phenomenon started a couple of months ago, driven by an oversaturated shopping center market (six times more square meters per capita than in Europe), coupled with a sharp decline in the department store industry, and being itself, in many cases, an important anchor of shopping malls. The fact that the retail online segment was displaying double-digit-figure growth added to that fear, and a hasty conclusion led some to assume that retail – and the retail property sector – would soon fall by the wayside.
While European markets cannot be kept isolated from what the US has been experiencing, it should be emphasized that our shopping centers have been structured differently. Most European city authorities, after allowing for out-of-town shopping developments in the 60s and the 70s, thereby negatively impacting their historical downtown economies, have spent most of the last 30 years reversing that trend and redeveloping or rejuvenating their city center environments, using retail as an engine for that purpose. Many European retail property developers preferred large department stores rather than large food operators (supermarket, hypermarket, delicatessen), a wider Food & Beverage offering, and more fast retailing brands, such as Inditex and H&M.
Lately, however, retailers’ strategies have been much more focused on increasing their space productivity than store expansion, which may lead to the closure of some stores, the expansion of others, the integration and expansion of online offers into their brick-and-mortar environments, and, possibly, the renegotiation of lease terms, which would result in disruptions and headaches for their landlords.
Accordingly, a series of value-add and opportunistic investors are on the lookout, observing the increase in vacancy rates as well as the anxiety of some shopping center owners. In Europe, the move has recently been more visible in the UK, amplified by the Brexit and currency uncertainties and a series of retailers’ receiverships. However, vendor expectations and buyer return requirements – taking leasing and rental risk into account – are still too far apart to qualify this as a wide-scale trend.
Meanwhile, core and core+ investors have shifted their interest towards other retail segments, such as retail parks, retail outlets, retail warehousing, and, above all, the high street segment, which has likely experienced the historically lowest yields ever. Investors have saved some room to focus on the booming logistics sector, but not too much as we do not expect European retail investments in 2018 to lose their second preferred asset class ranking (23% of commercial real estate investments).
While there is a current decrease in interest in retail shopping centers in certain segments, such as shopping centers predominantly driven by fashion in secondary cities – not experiencing any visible growth – or those that are not considered as dominant in major cities, impact on other segments does not exist. The latest European data regarding the retail trade in 2018 (+1.7%) and its estimates in 2019 (+2.1%) provide evidence of sustainable consumer demand.
Many retail brands have adapted their traditional responses to new client habits in order to include online channeling in-house. The retail sector is historically used to transforming its offer in order to adjust to new customer needs. The ones that cannot adapt are the ones that end up suffering, but that has always been the case. While, nowadays, some retailers might blame online retail for their closure, the fact of the matter is that the online dimension has either been a boost to their businesses or a cause for change that, possibly, was not implemented early enough. This argument should not be used as a scapegoat today.
While the retail sector finds itself, once again, in a cyclical transformation, motivated, as usual, by a change in customer habits and the impact of new technologies, the retail property sector will remain its major and most efficient channel of distribution, even if a period of repricing and space adjustment is required for some.