According to current trends, it seems online shopping will one day dominate traditional retail as the world’s preferred method of shopping. But is this really the case? Or is retail merely experiencing a short-term downturn?
To help us answer these questions, we consulted Patrick Delcol, Head of Pan-European Retail and Anita Simaza, Head of Logistics and Industrial at BNP Paribas Real Estate.
E-commerce is driving demand for both retail and logistics
The e-commerce sector has, over the last 5–10 years, experienced staggering growth of around 20%. And, according to Anita Simaza, Head of Logistics and Industrial, the future is even brighter for e-commerce. “I genuinely cannot see a plateau,” she says. “If you look at growth projections for the next 3–5 years, all the forecasts are for online sales to go up.”
Patrick Delcol, Head of Pan-European Retail at BNP Paribas Real Estate, agrees – although he points out that the rate of growth in e-commerce has recently slowed to around 15%, suggesting that retail may be taking back a share of the market.
But while e-commerce is more invested in the logistics industry, since it relies on last-mile deliveries as part of its chain, the growth of e-commerce is ultimately good news for both retail and logistics companies.
While many brands suffered a drop in value during the recession, they were able to continue trading in high volumes online without paying rent on physical shops. Logistics companies have capitalised on this trend by opening warehouses closer to city centres, in order to speed up deliveries.
As consumer demand increased, online retailers started to compete for the fastest delivery times, and many retailers even started to offer same-day delivery. This created competition between online retailers to see who could offer the fastest deliveries, notes Anita Simaza, leading some companies to look at the city centre itself as a place to open new warehouses.
But now that retail is beginning to recover, it too is benefitting from these improved supply lines. With faster access to warehouses, city-centre shops can benefit from faster and more frequent deliveries.
As Patrick Delcol points out, retail is a diverse asset class. Of the five types of retail real estate (shopping centres, high streets, retail parks, outlets and ‘big boxes’ – huge, standalone units such as hypermarkets), improved city centre logistics are having the biggest effect on shopping centres and the high street. These were two categories that experienced a decline after the recession, when the total retail share fell from 24% of all European real estate investment to just 19% in 2018.
We are at an all-time high in terms of investment demand for logistics. If we look at investment volumes, 2017 was the highest year, and if we account for platform transactions, investment in 2018 was higher still. This year, we have a very good sentiment once again
Investment is starting to return to the retail sector
That’s according to Patrick Delcol. “Concerning the high street, it has not seen a decline but on the contrary it is experiencing an increasing demand with a compression comparable to government bonds over the last five years. In France and Germany, the investors are really looking for prime assets on rue Saint-Honoré or Montaigne in Paris, or Maximilien Strasse in Munich for example.
“The retail parks keep attracting many investors. Their development is strong in Western Europe at the expense of the shopping centres. The reason? Lower rents and lower effort ratios in general (i.e. the ratio between the rent and the turnover performed by the retail unit). The outlets, like retail parks, are accessible at high rates of return. This brings margin and a welcome portfolio revaluation to the investors’ portfolio” he says.
Should the logistics sector be worried that retail is going to steal some of its investment? Not at all, according to Anita Simaza. “Right now, there is a higher certainty that you will lease a logistics space than a retail space, which still makes it the more attractive option,” she says.
“We are at an all-time high in terms of investment demand for logistics. If we look at investment volumes, 2017 was the highest year, and if we account for platform transactions, investment in 2018 was higher still. This year, we have a very good sentiment once again.”
The retail sector is looking more towards shopping centres
Shopping centres are the dominant source of growth within the retail sector, according to Patrick Delcol. He believes that the time is right for investors to start looking once more at retail, and this particular category could be the one-to-watch.
Europeans, particularly Millennials, still like visiting physical stores, according to a report by L’Observatoire Cetelem. A trip to the shopping centre is enjoyed by 83% of Spaniards, 87% of Romanians, 84% of Portuguese and 74% of Millennials. The report also shows that people like visiting large specialist stores and local shops.
Patrick Delcol advises investors to begin by looking at smaller, local projects, instead of focusing on larger, inner-city developments.
“Many investors tend to follow the trend to focus on large centres with a footfall of 5-10 million, that offer 200 or more shops (including leisure, cinemas, etc.) because these can attract all types of people and are therefore resilient,” he says.
“But on the other hand, there are centres that are smaller, perhaps around 25,000m², in smaller cities such as Tours in France or Siena in Italy.
“These places do not have high footfall compared to shopping centres in big cities, but the residents in the surrounding conurbation are much more dependent on them. These centres are forgotten so investors are reluctant, but they represent a great opportunity for new investors entering the market.”
Patrick Delcol does advise, however, that shopping centres bring with them certain unique challenges. One such challenge is that it is difficult to secure inter-continental contracts for shopping centres because every continent has its own trends and specifications that shape the take-up of units in shopping centres. Shops that are popular in the United States may not be popular in Europe, for instance. This makes it hard to secure global investment in retail.
Logistics by comparison does not have this problem, as the logistics market is more homogenous. Investors therefore feel more confident investing in logistics rather than retail.
We anticipate a period of stabilisation and consolidation in online and offline shopping behaviour, with the integration of digital in stores and less impetus on online sales. This heralds a return to focus on physical stores that will benefit the planet, consumers and investors
Now that logistics infrastructure has grown, online retailers are looking at brick and mortar stores
In the last ten years, large online retailers have invested heavily in warehouses and logistics. Not only has this helped them to cut delivery times down by moving items into city centres faster, it has also opened up the opportunity for them to move into traditional, brick and mortar-based retail.
Patrick Delcol goes so far as to say that the future of some of the largest online retailers is based in physical retail, not e-commerce.
“The largest online retailer in the world has stated in their business plan that they want to become a retailer,” Patrick Delcol says. “They are now buying brick and mortar locations and attempting to start their own retail portfolio.
“Why are they doing this? Because despite having such a large share of the e-commerce market, they and many other online retailers are unable to make a profit on deliveries. This is why they are ultimately aiming to become a retailer and set up more physical stores.”
With so many products already stored in warehouses close to city centres, large online retailers looking to move into physical retail are finding half the work already done. With the supply lines already established, all that’s left to do is set up the stores.
Having more physical presence has a complementary impact on retailers’ online business too, says Patrick Delcol, boosting brand awareness and working hand-to-hand to drive sales.
Click-and-collect will drive both logistics and retail asset classes
Patrick Delcol believes that unprofitable last mile deliveries will drive retailers to look towards click-and-collect as a compromise.
“Currently, the last mile does not make money, except in mega-cities like London, Paris and Moscow where a large population is densely packed,” he says.
Patrick Delcol goes on to say that the demand for click-and-collect will be driven by millennials, who are becoming increasingly conscious of environmental issues and are starting to question luxuries such as same-day delivery. “We need a return to reasonableness, because right now deliveries are not sustainable for the environment or for businesses,” he says.
“There will be a stabilisation of the situation online and offline, with the integration of digital in the store and less onus on deliveries.”
Anita Simaza agrees, noting that even couriers are starting to invest in retail space.
“In Amsterdam, DHL has taken a few retail shops,” she says. “If you’re not at home for a delivery, rather than taking the product back to a warehouse, DHL will take your parcel to their local shop and you can pick it up within 7 days.
“These physical locations can also function as returns facilities. So, it’s like a last-mile storage centre which operates a lot like a retail unit.”
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