PL

Riding out the e-commerce storm

Investment
Retail investors might be feeling wary but in Central Europe and Poland the sector is still performing well. However, as Jeff Alson, head of CEE capital markets at Cushman & Wakefield, explains, the market is still undergoing deep structural changes.

Alex Hayes, Eurobuild CEE: What is happening with retail yields across the region?

Jeff Alson, head of CEE capital markets, Cushman & Wakefield: They’re not compressing, is the short answer. They’re probably best described as inconsistent in the sense that they are polarising between the very best dominant schemes in the region and the less dominant weaker or secondary schemes. Sentiment towards the retail sector is in a malaise and there is a period of uncertainty. That is being reflected in investors’ appetites for the sector and we are seeing this across Europe generally. Probably the CEE region is the part of Europe that is faring best because the underlying performance of the centres tends to outshine elsewhere in Europe. The capital base focused on Central Europe includes more local capital than perhaps the rest of Europe, which still has some appetite for retail, and thus helping to support the market. And this is keeping a degree of competition in the market among investors.

Does e-commerce have the potential to wipe out the retail sector as we know it?

I think that is an exaggeration. I think it is impacting the market, I think it’s shifting the style of retailing, it’s shaping retailersʼ decisions in where they take space up and how; but if you are implying that it will completely change the face of the high street or the shopping centre, then my personal view is no. Online retailing is having an impact everywhere on the market. It’s probably not having as much impact in Central Europe because historically the density and the amount of square metres of retail shopping centres per capita has been and may still be less.

How do you see the immediate future here in the CEE region?

I think we’ll see a continued polarisation or concentration of tenant demand to the very best centres that are dominant in the big conurbations, which is a trend thatʼs already happening and that I think will continue. I don’t think thereʼs going to be a huge dramatic shift in the amount of money thatʼs spent in stores. It will be encroached upon further by online, I suspect, but I don’t see a complete change. I think we’ll see the local market – very local retail and small local stores – continue to do well. Itʼs the segment in-between thatʼs at risk of suffering.

Could you be more specific about what ‘the segment in-between’ is?

I think the segment in-between could generally be described as any shopping centre that isn’t dominant in its catchment area, almost regardless of its scale. The second or third shopping centres in towns with populations of 50,000–250,000 will need to get creative in order to compete.

Are we seeing any differences in the way the market is developing for different retail formats?

We think that good retail parks in good locations serving a local market will continue to perform, and part of the reason for that is they are coming off a low base rent and they serve that niche between retailing that is out of warehouses and the retailing in shopping centres. Because the tenants are paying lower rents per sqm this format has the opportunity to be more robust.

What about outlet centres?

If outlet centres are operated purely as a niche that is focused on discount and value, I think they will keep their place because they are destination centres. People go there for a very clear purpose. And again this might be a format that has the opportunity to be more successful.

For many years there has been talk of high street retail growing in importance. What is happening with this segment now?

In Central Europe the biggest market, Poland, has a limited amount of high street space; it doesn’t have natural high streets and so it’s not part of the conversation. In Prague high street retail is very strong and continues to perform. There is constant demand for the right units in the right position on prime high streets. Again, this is a format that remains robust, particularly in capital cities. Pockets of high streets that exist in smaller towns have never been over-performers, but will probably maintain their status and position. They’ve never been in big demand, either by tenants or investors. Hungary is similar to the Czech Republic. Its prime high street will always remain the main retail segment of the country. It has a degree of protection that malls don’t have.

How does all this compare with Western European markets, like France, Germany and the UK?

In the main western markets – the UK, France and Germany – there is strong demand for prime high street, notably from pension funds and institutional investors for the main streets in London, Paris and Berlin. In terms of stock, several deals have been transacted over the last 18 months in both London and Paris. Berlin is seeing less supply, but with strong demand given the lower level of rents/taxes when compared to the two other capital cities. However, with the general caution in the retail sector at the current time being driven by a softening of rents, and with many retailers – particularly in the UK – now struggling to even survive the structural changes, the demand on non-prime high streets has slowed dramatically, creating a polarisation between prime and secondary assets.

Do you see any big changes on the horizon?

I see the very big retail owners becoming more creative as to what their shopping centres deliver, in terms of experiences. I think that this is a change that is already being considered. As they come under increasing pressure from their customers, they have to do other things to attract people. Itʼs a change that we are beginning to see and will continue to see.

How is technology changing the market?

I think technological change needs to be looked at together with people shopping online and the impact of social media. The access and interface with the customer is now multi platform – it’s not just a shop window. So I think although technology does have an impact, it would however be difficult for me to identify where and how it impacts the point of sale. But the important thing for physical real estate is how many people are seeing things, touching things, trying things on, regardless of where they are actually choosing to part with their money.

Recently we’ve been hearing about a lack of space for building shopping centres. Is that the only thing that is blocking their development?

Where shopping centres have the ability to extend their centres they are certainly thinking about it. There is more risk than there was in the past. By extending a shopping centre you risk simply spreading the same revenue over a wider area. So unless there is a clear business plan, a clear story that you need to extend to dominate, the business case is much weaker. The only place where there is a lack of space and the pressure for space remains on the very prime high streets. And that can be down to the right space at the right end of the high street or where a particular kind of footfall is. Retail is a difficult sector, but because of that thereʼs the likelihood that the market sentiment will drag all investment pricing down and that provides a considerable opportunity for those who understand assets and are bold enough to calculate where these assets might be in the future. I think the sector represents an opportunity for some for sure.

Europe seems to be preparing for an economic slowdown right now...

I think to some degree the negative sentiment or potential impact of an economic downturn has already been priced in. I would also expect that Central Europe and in particular Poland are going to be less impacted by any slowdown compared with other European counties.

Categories