Trophy rents slow down reatilers’ European expansion

Although the economic downturn has forced retailers across Europe to reappraise what constitutes an affordable rent, new market entrants continue to have an unhealthy preoccupation with expensive ‘trophy’ locations. This is slowing down the pace of internationalisation, says a new report ‘European Retail Property 2011 – bumpy landings’ published by King Sturge.

The report’s author Stephen Springham says: “Trophy locations can be a distraction in retailer cross-border expansion programmes. New and would-be market entrants tend to focus primarily on these locations for their initial stores and then base their wider roll-out programme on their performance. But the huge rent paid can undermine the profitability of these locations, curtailing future expansion. Internationalisation would be so much better, easier and more profitable if retailers could see beyond the narrow parameters of prime markets and trophy rents.”

He adds: “Our message to retailers is: would you rather make a statement in a prestige location or money in the right location? Surely there is more value in developing a network of 100 stores across a country than paying a very high rent to open a flagship store in the most expensive location in the capital? Such trophy rents send out a misleading message to other overseas retailers and could create a barrier to entry.”  

The report states that European retail property markets as a whole have rallied over the last year but a bumpy rather than smooth landing is on the cards. Individual markets are at very different stages of the recovery cycle, but there are some common denominators. Rising inflation is set to be one of the most influential factors in both the short and medium term with occupier markets facing a double whammy of increased cost/margin pressures on retailers and indexed rents/occupancy costs becoming increasingly unaffordable.

In those European countries where rents are indexed to inflation, the Consumer Price Index is forecast to be highest this year in Romania ( 6.3%), Hungary ( 4.9%) and Greece ( 4.3%), with the latter likely to be worst affected given that retail rents tend to be reviewed annually and indexed to the local CPI plus one point. In Hungary and Romania, as in many Central and Eastern European (CEE) countries, rents are more likely to be pegged to Euro CPI, mitigating slightly against higher inflation locally.

The report makes the distinction between countries and retail markets that are consumer driven and those that are not, with the former achieving a greater catalyst for innovation and change and therefore proving more resilient to any downturn in the wider economy. Key examples of consumer-driven markets include the UK, France, the Nordics (especially Sweden and Norway) and increasingly Poland.

Poland in fact was the only European country to escape recession, recording GDP growth of 1.9% in 2009 and forecast growth of 3% in 2010, with its retail economy similarly performing well and offering a strong supply of property stock. Paradoxically, its investment market was one of the worst performing in Europe in 2009, with retail property capital values falling 8.7%. This serves as a reminder that property markets are not wholly wedded to macro-economics.

Several European countries have defied macro-economics and avoided ‘retail recession’, with annual retail sales growth remaining positive over the last two to three years in Belgium, France, Norway, Poland, Sweden, Switzerland and the UK. The outlook is even more positive in the longer term with CEE countries set to resume the high growth trajectories they enjoyed prior to the onset of global recession.

Less mature markets such as Romania, Bulgaria and the Baltic States are forecast to see retail sales grow by more than 60% over the next decade, with larger markets such as Poland, Czech Republic and Hungary all poised for growth of more than 40%. Over this period, traditional ‘East versus West’ orders will also start to be challenged with King Sturge forecasting that retail sales per capita in the Czech Republic will surpass those in Spain and Portugal by 2020.

In the European investment sector, a sustained recovery in volumes over the last year has been driven by the major Western European markets, notably the UK, Germany and France which, in the first half of 2010, collectively accounted for around 70% of all retail investment activity. This improvement in retail property investment volumes compares favourably with other property segments and has proved more consistent. It has also filtered down to investment performance.

Total retail returns across Europe increased by 5.3% in 2009, a sharp turnaround on the 17.9% decline recorded in 2008 – although growth was driven primarily by income return ( 6.3%) rather than capital growth (-0.9%).

Stephen Springham concludes: “As the end of 2010 approaches, there is growing evidence that the retail property investment market is pausing for breath. Yield stabilisation rather than further compression is more likely in the short term across most markets, as fears of a ‘double dip’ in the economy abound.”

Notes to Editors:

King Sturge is one of the largest international property consultancies in Europe. In the UK, King Sturge owns 22 offices and in Continental Europe it operates 20 offices in 13 countries. Together they form part of a worldwide network of over 215 wholly owned and associate offices in 47 countries. Over 3,800 staff throughout these offices cover all property sectors and specialisms including plant and machinery and residential.

In Europe, King Sturge operates in the major UK commercial centres and principal mainland European cities. In Asia Pacific, the firm has associations in Australia, Indonesia, Malaysia and New Zealand. In the Americas, King Sturge has business partners in North, Central and South America through King Sturge CORFAC International and ChainLinks Retail Advisors.

Through a joint venture with a wealth manager, King Sturge now has a presence in the Middle East. The office will initially be based in Dubai, concentrating on states in the Gulf Corporation Council: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

King Sturge provides a comprehensive range of services for  high streets, shopping centres, retail warehouses and leisure property. It has a dedicated retail research team and also provides planning, valuation and development consultancy services. Overseas, King Sturge is especially active in Central and Eastern Europe with retail specialists located across these regions, while its tie-up with ChainLinks Retail Advisors provides access to over 600 retail brokers in North America.