One size doesn’t fit all: why we shouldn’t make conclusions about the retail sector just yet

In terms of real estate, we have seen discussions in the media relating to which asset classes have suffered and which have proven to be more “resilient”. This has led many to conclude that the state of retail is fragile, a debate that has been going back and forth in recent times, as the strength of the high street and certain brands have been questioned. In my opinion, whilst big claims have been made, it is important that we take these with a pinch of salt, and consider the recent events in a more general context.

With the health crisis still being a very new event, it is still too early to make conclusions of its exact impact on the retail sector. What’s more, being able to analysis this on a pan-European level will take some time. 
 

According to research from BNP Paribas Real Estate, after a sustained growth in 2019 (+2.7%), the impact of lockdown will mean that European retail sales growth will turn negative (-6% in 2020). Yet, a symmetric recovery might occur in 2021 (+6%) for Europe as a whole. Recovery at country level will be variable though: Germany will lead European growth while Italy and Spain may struggle to reach 2019’s levels of consumption.

Indeed, how different parts of the retail sector have fared during the pandemic has a lot to do with individual countries, the lockdown imposed and the sanctions put in place. Whilst countries such as Spain, Italy and France saw a complete shutdown, Germany and the Netherlands were amongst the countries that continued to stay “open”. This meant that retail players had to adopt different strategies depending on the country, forced to close all stores in some countries whilst being able to operate “business as usual” in others. The group Kingfisher for example noted that their stores in France were severely impacted by having to be closed and their Polish stores experienced much lower footfall and sales during the third week of March. As lockdown has ended, the group has seen performance and sales improve. How then can we make generalised conclusions about the state of each retail class? Sales and footfall have varied so much and been subject to unforeseeable events that it is impossible to draw conclusions about the future just yet. 
 

Across Europe, most retail stores are once again open, there is however certainly not a “one size fits all” approach. We are currently seeing that the major European cities are experiencing demand that is much less significant than their smaller counterparts. With reduced numbers of tourists and people vetoing public transport, small cities, which are easily accessed by car, are proving to be more popular. However only time will tell if consumers are going to continue shopping in this way. 

What we do know is that the health crisis is going to accelerate trends that were present long before the pandemic hit. Retailers that were already struggling will find it much harder to come out of this, and we are likely to see that a number of brands will no longer be present on our high street. For many brands, it was almost an easy option to close, thanks to furlough schemes and rent reductions. Reopening and adopting potentially new strategies is more complicated. This will undoubtedly clear the retail landscape and in turn bring a review of rental values such as how good and bad locations are viewed and how asset values are assessed. Where and how Flagship stores are positioned will also be an interesting question. 
 

With having to maintain social distancing, retailers that have worked hard on their digital channels have performed generally better than those who haven’t. This has been a vital change that they have needed to make in order to mitigate their losses. Whilst many online players have claimed to perform exceptionally well, we must consider what their benchmark is. Is this better than the same period last year or better than other retailers who have not been able to adapt their strategies? Certainly, e-commerce has been heralded as the resilient hero of retail but is this trend here to stay? Much has been said about those over 50 now turning to e-commerce and a rise in online orders, across all categories of retail. This has meant logistics has been viewed very favourably, which is undeniably the case. What I would add though is that logistics is intrinsically linked to retail. Without the retail players who invest in online solutions, e-commerce and logistics are unable to function. It is after all the brick and mortar stores that generate the income that allows such digital channels to be rolled out and backed. Whilst I believe we will see more investment into these channels, I do not believe they will become as present as we might be led to believe. 

When European cities opened up their stores for the first tile, queues were witnessed outside many of them, showing that people still have a real desire to interact with a physical store and its products. Yes, the health crisis has impacted retail and will certainly accelerate many trends already in place, but how sustainable such changes are remains to be seen. 
 

• In Q2 2020, the European retail investment volume amounted to €6.4 bn (–37% y-o-y). With a level just over half the 10-year average, this is unsurprisingly the lowest volume recorded since 2009.
• A few adjustments in rental prices have already been recorded during the first half-year, especially in some high streets in London, Prague, Madrid and Barcelona. A greater downward pressure is expected in the coming months, while vacancies will increase. 
• However, retailers and landlords are showing greater collaboration and becoming more proactive in terms of flexible arrangements. Overall, prime rents in core locations are the ones least likely to see major changes in the immediate future. In these prime locations, real estate supply is limited leading to considerable competition for space.
• London’s New Bond Street (€2,023/sqm/month, -10% vs H1 19) and Paris’s Avenue des Champs-Elysées (€1,833/sqm/month) are still the two most expensive store locations for retailers in Europe.