Retail market
Resilience and risks in the retail sector
Executive Summary
In this section
Retail market heavily affected by major market developments
Over the past 10 to 15 years, we have seen steadily increasing growth in online shopping, the fallout from the GFC and, most recently, the impact of the sharp rise in interest rates and inflation rates, as a result of which we are now living in economically uncertain times. These trends have all had a direct impact on the retail real estate market. However, the experience segment (also: high streets, city centres) and the convenience segment (also: local shopping centres; daily shopping centres) have not responded in the same way.
There are substantial differences in the functioning of local shopping centres and city-centre shopping areas, both in terms of the user and the investor market. Because these differences have an impact on the current era and the forecasts for the future, we will first take a brief look back, focusing primarily on MSCI annual data for the period 2013-2022.
A tale of two subsectors
Experience retail (high streets)
The effects of the GFC, Covid-19, but especially the continued growth of online shopping hit the non-daily shopping sector harder, and this is a sector overrepresented in the main shopping streets. The average absolute retail turnover of the stores has therefore been under pressure for a long time and this gradually translated into a decline in market rents on the main shopping streets in
the period 2013-2019, with the exception of the largest cities, which were able to avoid this. The decline in rents is also partly a correction of the sharp increase in rents in the period 2005-2013. In the period 2020-2022, Covid-19 in particular had a huge impact on the experience sector and we saw a clear acceleration in the market rental decline, especially in the largest cities.
Capital decline in the past 10 years was strongest in second tier cities
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Roughly speaking, the same trend applies to capital value development. The decline in rents is reflected in a decline in values, something the largest cities were also able to largely avoid until the outbreak of Covid-19. The largest cities were subsequently hit harder during the Covid-19 period. In addition, the first effects of rising interest rates also became visible at the end of 2022 and these effects were also the most substantial in the largest cities, as that is where net initial yields were the sharpest.
“The retail market of the coming decade will centre around the optimisation of location strategies combined with far more focus on sustainability.”
This meant that during the period of recent interest rate rises, which started to affect the real estate sector from mid-2022, high streets were hit even harder: both a sharper drop in rents and a larger increase in net initial yields. The result is that the investment market has virtually ground to a standstill over the past four quarters and investors are only willing to bid when particularly attractive properties came onto the market.
Convenience retail (daily shopping centres)
Regarding the convenience sector, the larger the shopping centre, the greater the share of non-daily offerings is. This non-daily part is much more strongly influenced by the growth of online shopping than the daily offering. As a result, MSCI data shows that the smaller shopping centres have a much better average rental development than the larger centres. This market rental development was slightly negative right across this sector until the last two years of this period: in 2021 and 2022, we saw a significant market rent increase, especially in small and medium-sized centres.
Capital growth in the past 10 years was strongest in small convenience centres
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We see the same trend in the capital value development. A gradual decline in the period 2013-2016, after which small shopping centres began a cautious rise in value, followed by medium-sized and large centres. The value growth for these centres accelerated significantly during the Covid-19 period, in which this sector benefited from the decline in visits to city centres, the closure of the catering industry and the increase in working from home. At the same time, XL convenience centres are, as expected, lagging behind and recorded a slow decline in values throughout the period.
If we zoom in on the period of the recent interest rate increases, starting from mid-2022, we see that the rental growth in this segment has largely offset the recent yield shift, continuing to make this type of property much sought after by investors.
New constructions and vacancy
The Dutch retail market is very highly regulated. This has the disadvantage that it can hinder competition, but the advantages are that virtually everyone in the Netherlands lives within walking distance of a daily shopping centre and that city centres have not been sacrificed to generic out-of-town centres, as is the case in many other countries.
Adding new retail stock is only allowed within the strict limits of the zoning plans and happens almost exclusively in conjunction with the development of new residential areas. This has ensured that, even in better times, there was no major increase in new retail space.
Conversely, municipalities have been increasingly supportive in terms of changing the destination of retail units to non-shopping destinations. Municipalities are also actively thinking along with owners about merging retail plinths in order to create more attractive retail floor areas. By do this, municipalities are trying try to keep core shopping areas compact and attractive.
As a result of the above and despite the challenges that the retail market has faced and continues to face, the total vacancy rate in the Netherlands has remained relatively stable between 2015 and 2020 and subsequently even declined slightly, both in the number of stores and in floor space.
As a result of the above and despite the challenges that the retail market has faced and continues to face, the total vacancy rate in the Netherlands has remained relatively stable between 2015 and 2020 and subsequently even declined slightly, both in the number of stores and in floor space.
Like the rest of the real estate market, the retail sector is having to deal with high construction costs, along with strict sustainability requirements and the building limitations posed by the nitrogen crisis.
Additionally, many municipalities are struggling to connect building projects to the already congested power grid and this is proving an increasing hindrance to the completion of these new projects. These limitations are creating additional barriers to the potential construction of new retail stock.
All in all, this means that vacancy is relatively limited and there are hardly any new retail stock developments. Thus, the main challenge for the sector is to make the entire existing stock more sustainable.
Making retail stock more sustainable
Until recently, retailers focused their environmental attention mainly on improving the footprint of their product range. Supermarkets were the first to explicitly take the sustainability of their real estate into account. It is an energy-intensive sector that is explicitly looking for sustainable accommodation, in combination with the energy savings this produces.
However, the energy crisis has given a major impetus to other retailers to actively look at sustainability and energy consumption of the retail properties from which they operate (often as tenants). Bouwinvest is seeing more and more retailers submitting requests to improve the sustainability of their stores themselves.
In the context of sustainability (and also costs), we are also seeing an increasing number of retailers (including the likes of Wehkamp, H&M and Zara) charging money for returning items purchased online. The additional contributions currently range from €0.50-€2.00, but it is a start in an attempt to limit rampant ordering and returns.
Finally, investors are placing greater emphasis on the sustainability of properties in their strategies. Institutional investors are explicitly including the costs required to make properties Paris Proof in the acquisition process. This is driving an increasing yield spread between green and brown assets.
Optimisation
The effects of developments over the past 10-15 years have led to the ongoing optimisation of the retail market:
- Because part of store turnover has shifted online, retailers need larger catchment areas to generate sufficient turnover. The smaller cities then get the short end of the stick and some chains are disappearing from these locations.
- In the city centres, retailers and investors are aiming for the very best locations within the A1 shopping area, which is therefore becoming more compact (and sometimes shifting).
- New retailers are cautious about opening new stores and mainly start in the largest cities.
- Real estate that no longer fully meets the demand of retailers is disappearing from the market (often by merging with neighbouring properties, sometimes by giving it a completely different function). This is making inner cities more compact.
- Scaling up continues in the best locations in the largest cities: chains combine all their strength in large, attractive flagship stores.
- Over the past 10 years, the number of convenience centres has grown slightly, but continues to lag population growth. At the same time, the number of shops in those centres has declined and the total size has increased: here, too, we are seeing an incre- ase in scale.
At the same time, every retail store and every retail chain is faced with sharply increased costs due to increases in wages, energy costs, purchasing costs and rents. In the past period, retailers were able to pass the costs on to customers by raising prices, but
we are now seeing consumers starting to tighten their belts. And as a significant number of retailers still have repayment obligations for debts incurred during the Covid-19 pandemic, bankruptcies will likely increase further in the coming period. Also because the number of bankruptcies was exceptionally low in the recent period.