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Expert view: the current European real estate investment market

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There has been a recent bout of scepticism prevailing among the international real estate investment community, regarding in particular the retail real estate segment. Here, Head of Pan-European Retail at BNP Paribas Real Estate, Patrick Delcol helps identify the underlying reasons for this scepticism.

The Retail sector: a negative sentiment

While negative statements have recently been made in the press concerning the retail sector in general, we cannot ignore that this is causing a negative sentiment towards the retail real estate market as a whole. As a consequence, almost all listed Retail Real Estate players nowadays are trading below their Net Assets Value (NaV).

This phenomenon started a couple of months ago, driven by an oversaturated shopping centre market (6 times more sqm per capita than in Europe), coupled with a sharp decline of the department store industry, which in many cases is an important anchor within shopping centres. Adding to the fear that the Retail online segment was displaying double digit figure growth, a hasty conclusion led some to assume that Retail (and the Retail property sector) would soon flounder.

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Many retail brands have adapted their traditional response to new client habits in order to include online channelling in-house. The retail sector has been historically used to transforming its offer in order to adjust to new customer needs.

Patrick Delcol
Head of Pan-European Retail
Europe

Shopping centres and department stores: the European Approach

While the European markets cannot be kept isolated from what the US has been experiencing, it should be pointed out that European shopping centres have been structured differently. Most of the European city authorities, after allowing for out-of-town shopping developments in the 60s and 70s, have spent most of the last 30 years reversing that trend by redeveloping or rejuvenating their city centres environment, using retail as an engine for that purpose.

However, recently retailers have been focusing their strategy on the increase of their space productivity rather than the shop’s expansion, which may mean closing some shops, extending some others, integrating and expanding the online proposition into their brick-and-mortar environment, and possibly using the opportunity to renegotiate their lease terms. All of this is unsurprisingly causing disruptions and concerns with their Landlords.

Opportunistic investors: redeveloping the retail sector

A series of value added and opportunistic investors are therefore on the lookout, having observed the vacancy rates going north and some owners of shopping centres becoming nervous. In Europe, the move has been more visible in the UK, amplified by the Brexit and currency uncertainties and a series of retailers’ receiverships. However, vendors’ expectations and buyers return requirements (taking in to account leasing and rental risk) are still a bit 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 experienced the lowest yields ever historically. Investors have also saved some space to focus on the booming logistics sector. But not so much since we do not expect the European retail investments in 2018 to lose their second preferred asset class ranking (23% of commercial real estate investments).

Online shopping: a retailer’s ally or enemy?

While there is a current decrease in interest for retail shopping centres in certain segments, such as shopping centres predominantly driven by fashion in secondary cities (having not experienced any visible growth) or not considered the dominant ones in major cities, it does therefore not impact other segments. The latest European data regarding the retail trade in 2018 (+1.7%) and its estimates (+2.1%) in 2019 attest, if needed, to the sustainable consumers’ demand.

Many retail brands have adapted their traditional response to new client habits in order to include online channelling in-house. The retail sector has been historically used to transforming its offer in order to adjust to new customer needs. The ones that cannot adapt are the ones who end up suffering, but that has always been true. While nowadays some retailers might blame online retail for their closure, the fact is that the online dimension has been either a boost to their business or a cause for change that they did not potentially adjust early enough. They should no longer use this argument as a scapegoat.

While the retail sector is again in a cyclical transformation, motivated as usual by a change of customers’ habits and the boosting impact of new technology, the retail property sector shall remain its major and most efficient channel of distribution, even if requiring for a period of repricing and space adjustments.

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