News that global restaurant chain Vapiano has filed for insolvency after being forced to close its 230 restaurants around the world, three of them in Prague, is a stark illustration of the effects of the coronavirus pandemic on the retail real estate sector. However, the pain will not be felt equally across the industry and the long-term effects of this crisis will throw up some interesting strategic questions for landlords and developers to consider over the medium to long term.

It is undoubtedly a difficult operating environment currently for retailers of all stripes, though certain sectors that have been permitted to remain open during the government-imposed lockdown in the Czech Republic, such as grocery, pharmacy, drug stores and purveyors of other essential goods, are seeing a significant short-term uptick in sales.

There is also growing evidence that employment in some areas of retail being particularly hard hit by the crisis, like restaurants and non-essential sectors (e.g. clothing, footwear, sportswear etc.), is shifting to segments that are benefitting from it, like grocery and e-commerce. Grocery stores in the Czech Republic are on rapid hiring sprees, including delivery drivers for Tesco to fulfil a backlog of online shopping orders. The upshot is that we are unlikely to see mass unemployment in the retail sector, as jobs are not being lost (and not replaced) across the board; rather, they are being directly transferred to sectors experiencing above-normal activity.

For landlords, the imposed restrictions are likely to impact cash flow in the short term, mainly due to the reduced opportunity to collect full rental and charges income. With many tenants suffering immediate and potentially sustained stoppage to their revenues, cashflow shortages are going to quickly become a significant problem for landlords, further compounded if fixed costs continue to be paid. As there is no precedent for the international quarantine situations in place, each landlord and tenant is going to need to remain in dialogue and work with each other to minimise losses. As the crisis continues, we expect to see corporate-level positions from the main landlords on how they propose to approach the crisis. We have so far seen the international landlord Ikea, for instance, take the bold, proactive step of waiving the rent and charges for tenants across its retail centres in Europe until the end of emergency measures. This is a huge undertaking and one that is likely to have ramifications for other major landlords.

CHINESE LESSONS 

Looking further ahead, it is instructive to examine the experience of Asia. Savills is fortunate in that it has an extensive network of offices in Asia and China – including in Wuhan – from which we can learn valuable lessons of their experiences over the last couple of months.

The latest update is that our Chinese business, which encompasses 18 offices located in major cities across the country, is now approaching full operations again with the state approving the re-opening of our office in Hubei province from next week and our Savills colleagues in Wuhan also going back to work.

As business restarts and life begins slowly returning to pre-Covid-19 normality, there has been a staggered recovery across different sectors. Retail has seen shopper numbers remain far below previous levels, with footfall in malls generally at least 50% of what it was in the same period a year ago. However, we see this as an inevitable response to an unprecedented period of mass quarantine, with a more rapid uptick in retail activity in the coming weeks and months as the economy continues to uncurl and business confidence grows.

WHAT TO EXPECT IN CZECH REPUBLIC

If the restrictions do start to be lifted here within the same kind of timeframe as we have seen in China, we might expect to see some kind of retail recovery start to kick in by the summer. The big question, then, is to what extent the crisis will permanently change consumer habits and what effect this will have on the real estate market?

Shopping centres, retail parks and the high street will, I believe, remain relevant post-pandemic. But if the crisis period provides an immediate boost to online shopping, then it will be important to see how quickly consumers change back to their old habits – or whether they change back at all. For example, the crisis has encouraged many people to do their grocery shopping online for the first time. Realising how easy/convenient this is, will they continue to shop for groceries online after the restrictions have been lifted? 

An important determinant will also be whether there are some restrictions left in place over the medium term on public places and social gatherings after the pandemic is brought under control. A big trend in retail over the last few years has been for shopping centres to reposition themselves as leisure gathering places, to bring some ‘experiential’ aspect to shopping. Would any overhanging restrictions on gatherings – in terms of how many, where and for how long – put that strategy in doubt?

These are questions that will continue to be asked as the full effects of this pandemic start to be understood. Needless to say, whatever the future holds, retail will need to keep reinventing itself.