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European retail market analysis by BNP Paribas Real Estate

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Eurozone: a weak economic recovery

Though not unfavourable for European growth, the world economic environment is suffering some uncertainties. Nevertheless, the global situation is expected to pick up in 2017 (3.3% vs. 3%). GDP growth in the Eurozone is forecast to reach 1.5% in 2016, with the greater impact of ‘Brexit’ felt in 2017, and particularly in the United Kingdom.

All in all, in 2017, GDP growth is expected to be close to 1% for the Eurozone (vs. 1.3% expected before the UK referendum) and around 0.7% in the UK (vs. 2.1% previously forecasted). The latter should be slightly revised upward due to the resilience UK showed during Q3. Steady domestic demand remains driven by oil prices and low inflation. GDP is still improving in most European countries, particularly in Spain, Germany and France.

Dynamic trends in European retail

According to our last forecast, retail sales should remain robust and will rise by +1.3% in the Eurozone in 2017 following growth of +1.8% in 2016. The three major European markets should therefore record satisfying trading activity. On a rolling year basis, most sectors have followed an increasing of growth.

Investment: Germany, UK and France represent half of European retail investment

Press release - Mapic retail european - BNP Paribas Real EstateOver the last 12 months, retail investment in Europe, which represents more than 25% of total real estate investment, amounted to nearly € 60 bn. The top three European markets are Germany, United Kingdom and France, which contribute half of European retail investment. After a record year at € 70 bn in 2015, retail property investment has been slowing down, reaching € 39bn, over the first nine months of 2016; 23% down on last year’s figure but an amount consistent with the trend of the past five years.
However, thanks to some particularly large deals, retail investment has multiplied threefold in Ireland (Blanchardstown Shopping Center) and doubled in Poland (Echo Portfolio).

Retail prime yields under pressure

The low-yield level in Europe’s main market areas is continuing to drive investors to seek higher yields. Retail prime yields in Europe’s core markets remain under pressure. In the United Kingdom, yields have compressed to below 2.0% since 2014 and have remained at a low level. After several years at a high level, Spanish yields have decreased sharply since 2014.

Prime rents: large discrepancies across Europe

Two cities are real outliers in terms of rent levels. Thanks to their luxury offering, London’s New Bond Street and Paris’s Avenue des Champs Elysées have recorded the highest rent levels. Others important cities like Zurich and Berlin offer cheaper alternative for retailers. Over the 10 past years, prime rents have multiplied fourfold in London and doubled in Paris.

The expert view

According to Fiona Hamilton, Global Head of Retail for International Brands at BNP Paribas Real Estate, « Retailers are rethinking their online strategy and embracing physical shops as their biggest assets. Bricks and mortar stores are back and are the next step for online retailing. Birch Box, the ‘test and try’ makeup group, recently opened in Soho, is a good example. Warby Parker, originally online, now has 31 stores across the US and a business valued at $1.2billion after physical expansion. Other operators going down this route include Nasty Gal, Ever Lane, Amazon and Bonobos. Many more are following. This is the market we are focusing on. Successful retailers are now merging their online and high street presence to provide a seamless customer experience across the web and in-store, which purely online business cannot match. They need to tell their story. A pure play ecommerce approach is dead, and this is good news for the real estate industry ».

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