Whisper it, but following a battering during the pandemic and after years of market share erosion by e-commerce, investors are quietly placing European retail real estate back in their shopping baskets. Pent-up savings released after Covid and consumers’ renewed desire for social experience have been the main drivers behind the rebound in retail spending and investment, as they have in the travel and hospitality industries.
Union Investment’s Global Retail Attractiveness Index showed a positive trend for six of the 15 EU markets tracked during the first quarter of 2023 compared with Q1 2022. In the second quarter of 2023, the Index continued its cautious recovery, with gains in 12 of the 15 countries. “In addition to the positive trends in the labour market and retail sales that have been apparent for some time, rising consumer sentiment in most European countries now suggests a broader recovery and the prospect of markets returning to pre-pandemic attractiveness levels,” Roman Müller, Head of Retail Investment at Union Investment, says.
The rise in consumer sentiment across most markets indicates a broad-based recovery and a likely return to pre-pandemic levels.
Total European real estate investment transactions have waned since the final quarter of last year, however, as rising financing rates and economic uncertainty began to drag on activity. Full-year 2022 European deal volume was around the same level as 2021, or about €40 billion, JLL research shows. Retail has, however, recovered some market share in the overall European investment hierarchy.
Retail parks are currently highly favoured by investors
At the end of 2022, 16 percent of the total value of investment transactions was in the retail sector, versus 14 percent in 2021, according to BNP Paribas research. Offices declined to 36 percent from 39 percent and logistics to 22 percent from 24 percent over the same year-on-year period. Sandra Ludwig, Head of Retail Investment EMEA at JLL, said in an interview with IPE Real Assets that she believes retail will be the best-performing real estate class over the next five years and that retail warehouse parks are currently a stand-out investor favourite.
Retail parks were the strongest investment retail segment during the pandemic and also offer possibly the greatest future renewable energy and societal “impact potential”, because their usually large sites and urban periphery locations are well-suited to the installation of solar power plants and the creation of new sustainable residential community hubs.
There are not only local platforms, such as GPEP and Habona in Germany or TREI in Poland, which focus on grocery and retail park strategies at national level. Pan-European platforms such as Savills IM and Union Investment that offer a combination of a strong local network, a long-term track record and a sophisticated institutional approach are likewise growing their stakes in the Essential Retail segment.
European deal volume was €40 billion in 2022, around the same level as 2021.
Creating thriving new neighbourhoods around retail hubs
Amsterdam-headquartered Redevco also announced the creation of one of the largest retail warehouse park asset management platforms in Europe earlier this year, with AUM of around €4.5 billion distributed across Germany (60 percent of GLA), Belgium (38 percent) and France (2 percent). “We have the opportunity to create the core of thriving neighbourhoods in and around our parks, which are usually located in the peripheries of urban areas,” Herman Jan Faber, Head of Business Development at Redevco, says.
“Retail-anchored mixed-use developments could, where local planning permits, incorporate affordable and sustainable residential properties to address Europe’s housing supply crisis, as well as building on other functions such as last-mile logistics.” Discount fashion outlet centres are another retail segment to have emerged full throttle from the pandemic. Strong growth in brand sales has continued since, boosted by the revival in European tourism and outlet centres’ attractiveness to consumers versus full-price High Street retail at a time of high inflation and squeezed household incomes for shoppers still determined to maximise their “day-out” experiences.
Outlet centres are popular destinations for high-spending tourists
Otto Ambagtsheer, CEO of VIA Outlets, which has 11 centres across Europe, says 2023 has been noticeable for the continued resurgence in brand sales the operator experienced through last year. Tourism is an important contributor to VIA Outlets’ performance, with tourists spending on average six times more than local visitors at its centres.
“It’s clear the rapid recovery has been supported by the competitive prices our guests can find in our outlets, particularly during periods of economic downturn. But also due to the continuing intensive investment we have made in our 3R-Strategy of remerchandising, remodelling and remarketing,” Ambagtsheer adds. Southern European and CEE markets generally outperform their north-west European counterparts, with the shopping centre segment particularly strong in these regions compared with High Street properties. Retail real estate investment in southern Europe reached €5.7 billion in 2022, a year-on-year rise of 120 percent and a level not achieved since 2018, compared to overall investment growth in Europe of 14 percent over the same period, according to Savills.
Retail real estate investment in southern Europe reached €5.7 billion in 2022, a year-on-year rise of 120 percent.
“The twin shocks of the global supply chain disruptions initiated by the Covid pandemic and the energy crisis triggered by Russia’s war on Ukraine – which have pushed consumer price rises to levels not seen for 40 years – are dissipating,” Rafal Benecki, Chief Economist for ING Bank in Poland, told a gathering of major retailers in the region at the NEPI Rockcastle Retailers Day forum in Warsaw earlier this year. “The inflation shock caused consumption to decline across Europe, but consumers in Poland cut their spending less than in Western Europe, and sentiment also deteriorated less and recovered earlier, due to the rapid rise in disposable income.” “We came out of Covid like a rising star,” Rüdiger Dany, NEPI Rockcastle’s CEO, told the forum. “Consumers have a strong preference for visiting shopping centres in CEE, which generally play a much more important role in local economies and communities than in Western Europe, where High Street retail is more present.”
Shopping centres are major engines of consumption in CEE
“This also tends to mean inflation has less of an impact on spending in our CEE shopping centres than in malls in other European regions. The distinct market positioning of shopping centres in the CEE region, where they serve as significant economic and community hubs, means the presence of these centres translates into higher consumer spending, as they offer a range of services beyond traditional retail.”
By Samuel Rhydderch