Real Estate

The future of European retail

Commentary this side of the Atlantic has mistakenly compared the US retail market with Europe
February 2018

Ian Kelley

Fund Director Europe & Head of France

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Risk Disclaimer

Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

 

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

 

As always investment values may fall as well as rise and capital is at risk.

 

The prevailing perception is that physical retail as a whole is in decline, with the media in the US, and elsewhere to be fair, exaggerating the effects of ecommerce giants such as Amazon. While ecommerce has had a transformational and irreversible impact on the retail industry, it is not the sole reason for certain retailers collapsing on the other side of the Atlantic Ocean.

The reality in the US is that department stores have failed to reinvent themselves, in the first instance with the arrival of Walmart and Target and, more recently, with the arrival of online retailers. Most of the retail failures in the US comprise brands that have neglected to renew themselves and no longer meet consumer expectations – think Sears, JC Penney, Payless Shoes, Forever 21 or Abercrombie & Fitch.

 

Commentary this side of the Atlantic has mistakenly compared the US retail market with Europe, and such comparisons are irrelevant. First, the US is oversupplied with over four times more retail space per capita than in Europe. Moreover, in any geography the retail sector is such a large, diverse and complex segment that to take a ‘one-size fits all’ view overlooks the realities and nuances of the structural changes taking place.

 

In Europe, the expansion of international retailers, specifically those brands that have reinvented and promoted new concepts, has continued unabated. Such retailers are focusing their presence on mature, stable locations with healthy fundamentals and this has been observed in the top tier and dominant regional cities across Europe. Another key driver of retail sales is tourism in Europe; over 600 million tourists1 visited in 2016, while 2014-2016 figures (inclusive) increased by an average of 5% per annum and an 8% increase is forecast for 2017.

 

The European retail sector, and in turn the real estate associated with it, has seen significant changes over the past years. The good old-fashioned shopping centre, once the recipe for success in almost any city or sub-market, has now fully matured, and only the largest and dominant schemes have resisted with their scale and high footfall. Other retail formats, including local shopping centres, convenience retail and retail parks have tempered and offer minimal, if any, rental growth, mainly due to their smaller and reducing catchments or their secondary locations.

 

Notwithstanding these evolutions, demand for physical stores remains very strong in prime locations and in top cities, which benefit from above average economic growth, strong tourism levels and affluent footfall. Retailers increasingly recognise the advantages of having an omni-channel sales approach, a seamless integration of all channels including online, mobile and the physical store. Whether the purpose is to support sales, wider wholesale, franchise or online businesses, or even to build brand awareness, physical stores are an integral part of any strong retail brand. But visibility and footfall remain the defining criteria for store locations and, as a result, prime high streets in top locations continue to offer sustainable and long-term rental growth for real estate investors.

 

Rental growth forecasts across all European cities are at 2.73% per annum2 on average up to 2021, with gateway cities even higher at 3.29% per annum3. Specific luxury locations such as Via Montenapoleone in Milan, Via Condotti in Rome and Rue Saint-Honoré in Paris, all exclusive destinations that shoppers will travel the world to visit, are seeing double-digit rental growth. This upward pressure on rents is set to continue due to a chronic shortage of supply in these prime locations, which meet the very precise demands of successful luxury brands.

 

In 2017, Europe accounted for 38%4 of all luxury openings, a much higher proportion than in Asia-Pac (28%) or North America (20%)5. Competition is very high in established luxury districts in close proximity to luxury hotels and anchors, for example Louis Vuitton, Gucci, Hermés and Chanel, in order to benefit from their halo effect. Alongside this, leading mass market retailers, such as Zara and H&M, are consolidating their physical presence through strategically located and image-led flagship stores.

 

Meanwhile the premium retail segment, with brands such as MAC, Michael Kors and Swarovski, occupy smaller stores but comprise the vast majority of retailer demand and leasing transactions. Finally, restaurants probably comprise the most dynamic retail segment. Demand from food and beverage retailers is increasing exponentially in city centres, mainly driven by experience-led customers and online delivery platforms such as Uber Eats and Deliveroo.

 

Retail is, and always has been, a competitive landscape. History has shown that every year, while older brands disappear, new brands and concepts are launched, successful brands look to expand in more locations and underperforming brands enjoy a renaissance with the arrival of a new designer or strategic shareholder. This lifecycle is the beauty of the retail sector and, for the foreseeable future, will underpin growth both for retailers and real estate investors alike.

 

Brioni on Via Gesu in Milan located next to the Four Seasons Hotel and Cartier, an example of prime high-street retail space benefiting from strong demand by luxury retailers.

All information is at February 2018 unless otherwise stated.

 

This marketing communication should not be regarded as investment research. The content has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination.

1The World Tourism Organisation (UNWTO)

2Independent forecasts

3Independent forecasts

4Savills’ Global Luxury Retail Report

5Savills’ Global Luxury Retail Report.

Risk Disclaimer

Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

 

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

 

As always investment values may fall as well as rise and capital is at risk.

 

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