Why Europe’s retail investors need to get more flexible
Flexibility isn’t just a buzzword for today’s retail investors – it’s essential for them to thrive in a rapidly changing omnichannel world if they’re to maximise returns.
As Europe’s retail sector adapts to the disruptive force of e-commerce, physical stores remain key but old ways of managing, leasing and valuing property are in for a shake-up.
Changing consumer habits and ongoing urbanisation means some stores are no longer in the right format in the right location.
As a result, the number of empty shops in the UK is at its highest level for five years. On a smaller scale, Germany has already experienced disruption, with fashion retailers AWG, Gerry Weber, Esprit, René Lezard and Voswinkel all closing stores.
“Europe’s retail industry faces a period of adjustment and uncertainty which requires more dialogue between retailers and their landlords than ever before,” says Emma Tattersall, retail capital markets director at JLL. “Investors also need to remain open-minded and realistic and consider how they need to change their strategies to maximise returns in a fast-evolving, increasingly omni-channel world.”
Landlords are increasingly looking at how they can repurpose underperforming or empty assets to generate better returns.
“It’s about asking how it fits into the needs of the immediate catchment area,” says Tattersall. With housing in high demand, residential redevelopment is one option. Intu, for example, is mulling replacing a former House of Fraser store and parking space with up to six residential blocks at its Lakeside complex.
In central London, a former BHS store has been converted into the UK’s largest food hall, complete with events spaces and rooftop garden. Last mile logistics facilities and leisure activities such as trampoline parks are also in-demand.
Investors are equally considering re-engineering how space is used within buildings.
German investor DWS and ECE recently revamped the fourth floor of the My Zeil shopping centre in Frankfurt, adding more food outlets, as well as a cinema to feed into increased consumer spending on experiences including leisure and eating out.
In the UK, Hammerson worked with regeneration specialists Urban Edge to revamp space following the closure of a four-floor House of Fraser department store at Leicester’s Highcross centre in 2017. The store was replaced by a mix of new smaller retail, leisure and food and beverage units, alongside space for the mall’s major tenants, Zara and JD Sports.
Across Europe, pop-up stores from new and existing brands are growing sources of demand for space, says Dirk Wichner, head of retail leasing, JLL Germany.
He believes the template of the concept mall, with rotating tenants, could become more mainstream: “The constant rotation of tenants keeps concept malls fresh and adds value by giving shoppers a new reason to visit. However, that requires a much higher, more intense level of management.”
Germany’s first concept mall, Bikini Berlin, opened in 2014 and works as an incubator for new fashion labels alongside more established brands and exhibition space, a food hall and coworking space. And as e-commerce continues to grow in the coming years, in-store mini-distribution spaces for click-and-collect and returns could also be more in-demand.
New models will require a rethink of traditional leasing terms. It’s early days, but Germany is starting to see less rigid leasing structures, Wichner says.
“Locking down 10-year leases is illogical when you are dealing with fashion brands who can’t predict beyond their winter collection,” he adds.
In the UK, a swath of company voluntary arrangements (CVAs) in the last two years is prompting discussions between retailers and their landlords and the rise of more flexible leasing terms.
Yet retail leases are still less flexible than say, offices. Figures from index provider MSCI show around 30 percent of retail leases had break clauses in 2018, down on the average of 38.7 percent for other types of commercial real estate. Leases also tended to be longer: 9.4 years for retail compared to 8.4 years for offices in 2018, although both have dropped significantly on 2002 figures.
Value on many levels
What’s more, retail investors will need to change their approach to valuation. A wider range of metrics, from footfall to sales volumes and performance, will need to be factored in when setting and agreeing rent levels.
“It’s raising significant questions,” says Tattersall. “How do you put a value, for example, on something less quantifiable, such as customer experience?”
If retailers don’t adapt, it could open up a niche area for specialised operators in a similar way to what’s happened in the workplace with coworking providers, she adds.
And while the UK is directly facing the biggest challenge now, other European countries are set to follow suit amid growing e-commerce levels and changing shopping habits.
Both retailers and retail investors on the continent will need to think more creatively if they are to avoid UK-style disruption, says Wichner.
“Investors and retailers are looking to the UK and asking themselves if they will be next,” he says. “For both tenants and landlords, the ability to adapt and think differently will be essential.”