Chapter 6
Retail
European Real Estate Market Outlook 2024
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Lower inflation and rising real wages should boost consumer fundamentals, with a positive effect on retail sales. E-commerce will grow further, but at a slower rate. Retailers will continue to explore flagship store formats in prime locations, which is expected to lead to steady prime rental growth.
Key Takeaways
- Retail sales growth should benefit from falling inflation rates and rising real incomes. Footfall and sales at key retail assets are expected to continue their upward trajectory. The lagged effect of earlier interest rate rises remains a downside risk.
- E-commerce growth is expected to continue, but at a more moderate rate than during the pandemic. Major European markets are expected to grow in line with their pre-pandemic trend, with no accelerated growth.
- Rental growth is expected to continue, with the rate exceeding inflation in the second half of 2024. Occupiers will likely continue their investment in physical stores, focusing more on prime locations.
Retail fundamentals expected to improve in 2024
Consumer fundamentals likely to improve due to rising real incomes
Real wage growth has been in negative territory across the UK and Euro area since the end of 2021, as high inflation has eroded purchasing power. However, it is anticipated to have returned to positive levels in late 2023, and to continue to improve in 2024 as inflation softens.
This in turn will likely have a positive impact on retail sales volumes, which have already proven to be resilient in the face of recent economic headwinds. While consumer confidence fell sharply following the outbreak of the war in Ukraine, retail sales across the Euro area held up and, despite their mild downward trend in 2023, remain above December 2019 levels in real terms. Retail sales are below end-2019 levels in the UK in real terms, though are forecast to improve in 2024.
The growth in purchasing power is expected to have a positive effect on retail fundamentals. Nevertheless, the lagged effect of interest rates rises remains a downside risk.
E-commerce growth to continue, but at a slower rate
The pandemic led to a surge in the share of retail sales occurring online as opposed to in-store. However, following the re-opening of physical retail, e-commerce penetration moderated.
CBRE’s recent analysis of post-pandemic e-commerce trends found that for key European markets, e-commerce penetration has broadly returned to its pre-pandemic growth trend. There has been little or no sustained acceleration of the growth rate as a result of the pandemic.
CBRE expects e-commerce to continue to grow in 2024, but broadly following this pre-pandemic trajectory. Occupiers are likely to continue to focus on creating a strong omnichannel experience, which seamlessly combines the online and brick-and-mortar experience and increases customer engagement.
Figure 15: Euro Area Retail Sales Volume Index (12/2019=100) and Consumer Confidence Balance
Source: Eurostat, Macrobond, CBRE Research
Figure 16: E-commerce Penetration Rates, Selected European Markets (%)
Source: CBRE Research, Euromonitor, Eurostat, Forrester, Istat, ONS, Statistics Netherlands (CBS)
Sales and footfall to continue to improve, generating growth in prime rents
Footfall and turnover levels are expected to continue improving
The improvement in consumer fundamentals is already having a positive effect on retail footfall, with footfall at CBRE’s managed portfolio of European retail assets now within 3% of pre-pandemic levels as of late 2023. We expect the upward trend to continue, and for footfall to return to, or exceed, pre-pandemic levels in 2024. Sales values are already above pre-pandemic levels and expected to continue their upward trend.
It is likely that convenience-focused retail assets will continue to perform strongly, with a similarly positive performance from dominant, experience-focused shopping centres that have a strong leisure and food and beverage offer.
Prime rental growth anticipated due to stronger fundamentals
An improvement in demand drivers for the retail sector is expected to have a positive impact on prime rents, which are expected to grow at around 3% in Europe in 2024, returning to positive growth in real terms in the second half of the year as inflation falls.
The polarisation between prime and secondary assets is likely to continue, with the most robust rental growth and occupier demand focused on those locations best suited to serving their catchment with the strongest proposition. Retailers are expected to continue investing in physical stores, focusing more on these prime locations.
Figure 17: Top European Retail Locations Prime Rental Growth and Forecast (% p.a.)
Source: CBRE forecast (weighted average of top European retail markets, 60/40 high street/shopping centre split)
Contacts
Alex Ozga
Associate Director, European Industrial & Logistics and Retail Research
Chris Gardener
Managing Director, Head of European Retail
