The most resilient retail sector during the pandemic

Retail park footfall and sales experienced a less dramatic decline compared to shopping centres and main high streets, and recovered faster with the reopening of stores after the lockdown. Consumers have showed preference to open air, large-scale shopping formats, easily accessible by car, where social distancing and hygiene protocols have been easier to follow.

According to the British Retail Consortium, in the UK total retail footfall in October was 13.7% below pre-pandemic levels, with high streets at -18.3%, shopping centres at -33.6% and retail parks at just -0.4%. Spain’s retail footfall was down 10.2%, Germany down by 26.2%, and Italy and France declining 34.6% and 34.9%, respectively.

Latest Google mobility data, which show movement trends across different categories of places, indicate that overall footfall in Retail & Recreation places (restaurants, cafés, shopping centres, cinemas etc.) is close to 2020 levels at -3%, while Grocery & Pharmacy locations, which represent convenience retailing are 17% above Q1 2020 levels.

According to Eurostat, the total volume of retail trade picked up in May and June, but has been slowing down ever since. September retail trade volume was down -0.2% on a monthly basis, but still 3.2% up compared to last year. Food (0.8%) and Fuel (1.0%) were the only segments where trade volumes increased slightly vs the previous month.

During periods of crisis, consumer spending typically shifts towards essential goods and value shopping, which are the key product categories for retail parks. This was exacerbated during the pandemic, as shops selling essential goods, such as supermarkets and pharmacies, were the only ones allowed to remain open. The data demonstrate that focus on convenience and essential goods continued after restrictions were lifted.

Value operators drive demand for retail park units

Since the start of the pandemic, people have developed new habits and routines. While spending all their time at home during lockdown, they picked up new hobbies, did more DIY and gardening, set-up home gyms, acquired new pets and cooked more at home. These trends have underpinned sales in certain product categories such as food stores, furniture and homeware, sports equipment, gardening, sportswear, pet shops, toy shops etc., which are typical retail park occupiers.

Value oriented operators such as Lidl, Aldi, and Kaufland in the food segment have been driving acquisition activity. Furniture (IKEA, JYSK, Pepco), electrical (Media Markt), and DIY (Leroy Merlin) operators are also expanding in well performing or newly developed schemes across Europe.

With the challenges that the retail sector has faced over the last decade, including the growth of e-commerce and more recently the COVID crisis, retailers have been increasingly keen to seek more affordable rent agreements. The large and comparatively lowrented units combined with high car parking provision and good accessibility, means the sector has proven to be ideally suited for servicing click-and-collect orders, customer returns and home deliveries.

In addition to food retailers, mass market fashion retailers (Deichmann, Next, Clarks) and sportswear chains (Sports Direct, JDSports) have also embraced the concept. The extended and more diverse tenant mix of the new generation retail parks, is often complemented with leisure and Food & Beverage (F&B) offer. Domestic and international F&B brands are exploring expansion opportunities in this market segment.

Rents remain stable

Although rental discounts in shopping centres have increased as a result of the health crisis, these discounts have not become a trend in the best retail parks due to their resilient performance and high occupancy. Average prime achievable rents are at €17.5/sq m per month. Prime rents have increased in Helsinki (3.4% yoy), while they remained stable in other markets.

The highest achievable rents can be found in Dublin, more than double the European average (€38/ sq m), followed by Helsinki and Copenhagen, while the lowest rents are achievable in Lisbon (€10/sq m) and Warsaw (€12/sq m).

Rent Collection

Rent payments on existing leases shines more light on how well the retail warehouse sector is performing versus other asset classes in response to the pandemic. Many retailers have of course struggled to make payments due to prolonged trade inactivity throughout the lockdowns.

However, with much more of the retail warehouse sector considered to be ‘essential’ during these periods the sectors’ resilience has been further reflected in the proportion of rent and service charge payments that have been made over the last 18 months. The most recent statistics highlight tenants on Savills UK managed retail parks paid 61% of the rent and 47% of service charge due in Q3 2021.

Shopping centres however, remain lower at 57% for rent and 35% for service charge collection.

Capital market trends

Retail parks and retail warehouses accounted for over 33% of the total retail investment activity this year, up from a five year average of 18%. Investors looking to meet higher return thresholds while managing income risk have discerned that retail parks and grocery stores are often located close to population centres, and are generally less exposed to changes in discretionary spending due to downturns or public health restrictions. In the first three quarters of the year, more than €5.1bn were invested in retail parks and retail warehouses, across nine European markets. This is 29% up yoy and 20% above the five year average. Q3 alone was 46% up yoy. Activity was driven by the UK, German and French markets, which captured 46%, 37% and 12% of the total respectively.

Retail parks yields first time below shopping centre yields

The defensive characteristics of the convenience sector have been driving investor confidence. This is also reflected in the narrowing of the yield gap between shopping centres and retail warehouses over the past quarters. In Q3 21 and for the first time in our historic series, the prime average retail warehousing (RW) yield (5.43%) fully converged with the average prime shopping centre yield. Since the end of 2019, the average prime RW yield has been gradually moving out. Q3 2021 is the first quarter since Q4 2017 that it was lower compared to a quarter ago, by 5bps. On an annual basis, prime RW yields have softened in Amsterdam (25 bps), Madrid (25 bps), Germany (20 ps) and Milan (10 bps).

The strongest quarterly yield compression was noted in Spain (-25 bps) and in the UK (-25 bps). Pricing in these markets is effectively reverting to their pre-pandemic levels. In the rest of the markets prime yields remained stable on a quarterly basis.