4 Minute Read
Continued focus on prime locations amid stable sales growth
Risks are mildly skewed to the downside. Consumer confidence remains subdued, while real incomes are growing, but the rate of growth is moderating. Despite rate cuts over the past two years, household savings rates continue their upward trend. This suggests some degree of cautiousness among consumers, who may opt to hold back on discretionary spending.
Retailers will continue their expansion strategies, focusing on prime sites, and express willingness to compromise on unit size, but not on location. In the high street segment, strong competition for the best locations, combined with sub-5% vacancy rates on most prime streets, suggest rents for the best units will continue to be bid above quoted levels. Rome, Paris, and London are forecast to see the strongest high street rent growth this year.
Shopping centre rents will also trend stronger, moving away from last year’s convention where their growth was largely index-linked. Landlords will not hesitate to use their increased bargaining power to rotate weaker-performing retailers out of schemes, in order to attract stronger players willing to pay higher rents. Demand for secondary space will be subdued across both the high street and shopping centre segments.
Discounters will expand their area of focus from secondary locations to better quality shopping centres, taking space in “cold areas” of shopping centres that have typically seen lower footfall.
Retail parks continue to see strong occupier demand and virtually no vacancy. We see another year of rent growth outperformance in this segment, though certain markets may see flat rents due to a large amount of supply coming on stream.
Our base case forecast is for rents to grow by 2.1% at a European level (high street and shopping centre weighted average), with 2.7% growth under our upside scenario, and a 0.2% drop under our downside scenario, as explored in the Economy section.
Figure 7: European retail prime rent index (Q1 2018 = 100) and annual change (%)
Trends to watch
-
Key money
Key money, payments made by prospective tenants to either landlords or outgoing tenants to secure a lease, will continue to make a return across Europe. Key money is used by retailers as a means of unlocking the very best prime high street units, amid fierce competition. Lease terms will also continue to shift in favour of landlords, with increased terms and longer periods to break becoming more common.
-
Experiential retail
Experiential retail will expand beyond Western Europe. At present, flagship stores in London and Paris typically feature an experiential element. Examples include events spaces, competitive socialising, and in-store fitness classes in the case of sports and athleisure brands. We expect to see this spreading to other parts of the continent. Food & Beverage (F&B) elements will continue to be incorporated into flagship stores.
-
Broadening the offer
Shopping centre owners will continue to work hard to widen their centre’s offer and make their schemes more compelling to clients. This will primarily be achieved through an increased focus on F&B and leisure. These tenant types increase footfall, dwell time, and widen retail schemes’ catchment areas.
-
DTC strategies
Brands will focus on a Direct-to-Consumer (DTC) approach, as opposed to selling stock through wholesale channels. Stores increasingly serve as a strategic expression of brand identity and experience. Selling directly, especially in flagship stores, allows brands to connect with their customers and showcase their values, increasingly the likelihood of acquiring a lifetime customer.
-
Enhanced analytics
Brands will increasingly look to close the analytics gap between their physical stores and online channels. Using technologies such as radio frequency identifiers, sensors, and AI-enabled computer vision, retailers can better track consumer behaviour in their stores, monitoring dwell times, flow patterns, and the movement of stock around the store. Combined with insights from the online channel, retailers will be able to fully optimise the customer experience and better understand demand and buying patterns.