The growth of e-commerce over recent years has weighed heavily on retail real estate. The coronavirus pandemic and the unprecedented locking down of consumers have provided the strongest possible push factor towards adopting e-commerce. Many reticent consumers have breached a psychological barrier.
In the short term, social distancing is making it more complex and costly for retailers to run re-opened stores, and shopping less pleasurable for consumers. Shopping trips are more targeted, with larger transaction sizes and higher conversion rates. But the volume of goods returned is likely to be higher too.
Alongside the challenges of queuing for stores, the limitations on leisure, and food and beverage in many markets are constraining catchments. Meanwhile, retail locations that are more reliant on public transport for access — such as central areas of larger cities — have an even greater challenge. A lack of office workers is affecting many such locations, as social distancing requires the majority to work at home.
Alongside the challenges of queuing for stores, the limitations on leisure, and food and beverage in many markets are constraining catchments. Meanwhile, retail locations that are more reliant on public transport for access — such as central areas of larger cities — have an even greater challenge. A lack of office workers is affecting many such locations, as social distancing requires the majority to work at home.
Grocery retail has been highly resilient, both in terms of underlying consumer demand and investor appetite
Local convenience retail and locations designed for car-borne consumers are better-suited to the current situation. Grocery retail has been highly resilient, both in terms of underlying consumer demand and investor appetite. However, grocery has not been immune to the leap in online penetration — this "channel shift' adds to retailers’ costs without necessarily adding to revenue.
The implications of channel shift, which Covid-19 is likely to accelerate across the board, are a huge challenge for retailers. Physical retailers increasingly recognize the risk of not being omnichannel. But the cost of offering omnichannel shopping is a cost that consumers largely refuse to meet. The competition from "pure-play" online retailers that do not have the cost base of a store network ensures that physical retailers cannot pass on these costs to consumers. Regulatory interference that might level the playing field at the expense of pure-play retailers is a hope for physical retailers, rather than an expectation.
In the medium term, this puts the costs of operating store networks in the spotlight, and they are a clear target for savings. The balance of supply and demand is such that landlords have little power to prevent this. A move to more turnover-based rents is perhaps inevitable and, with it, a fundamental change in the tenant-landlord relationship. Flexibility of the cost base will be key to retailers’ viability and durability.
Technology also takes on far greater significance. Collecting and sharing data will be vital to understanding trading performance and rental sustainability. The fall-out from social distancing and lost trade leaves retailers financially challenged. Landlords will need to invest in technology that captures the data they need. This may include store-specific footfall counters and digital beacons. As already evidenced in outlet centers, there are situations where landlords can enhance income as a result. And rich data on footfall and trade can assist asset management.
The longer-term implications may not have changed dramatically as a result of Covid-19, lockdowns and social distancing. But they have brought the horizon closer – and the reckoning has arrived dramatically and quickly. Some markets, like the U.S. and the U.K., already had too much retail floorspace. And now the same reality is dawning much more quickly in other markets.
The solutions to this imbalance of supply and demand are complex and, in many circumstances, impractical or not financially viable to deliver. That means some dramatic falls in value in many instances. There are markets where pricing doesn’t reflect this. The precipitous fall in retail values shows where structural change has bitten hardest. Shopping center values are down more than 40% from their last peak in the U.K., with more losses to come. This serves as a warning as to how much impact rising risks and falling rents can have.
There is a further risk that the trend in western markets towards decentralization changes the relative value of locations. This is also being prompted by another Covid-19-driven structural change: the huge increase in remote working. There is still a great deal of uncertainty as to how permanent some behavioral changes will be. But a logical outcome from spending more working hours at home is more localized demand for retail, and food and beverage outlets. Previously dominant locations may diminish if consumer demand is more diffuse.
The gradual transitioning of the Chinese economy towards more domestic consumption may also be accelerating, with further implications for central, luxury pitches. Global travel, especially on the part of emerging Chinese wealth, has fueled spectacular value growth for luxury retail assets in the last 10 years. Those values no longer look sustainable as policy measures, trade tensions and shifting behavior redirect spending domestically. More luxury brands are also expanding their online presence.
Investing in retail real estate is likely to be increasingly operational in nature. In discretionary retail, it must be more collaborative between stakeholders, and data will need to be freely shared. The factory outlet center model of trading (short, turnover-based leases where the landlord takes a more active stake in the retailers’ trade) is evidence of how that can be successful. Locations that are more community-based and focused on everyday convenience and value, with low occupational costs, may also be better-defended. Localization could benefit independent retailers that tailor themselves to smaller catchments.
But the fundamental supply overhang means retail investment will be about income, and not growth. Pricing must reach a level where the income return compensates investors for their risk. For many assets across the world, that journey of price discovery is only just beginning.
US-300920-130303-1
Property investments may carry additional risk of loss due to the nature and volatility of the underlying investments and may not be available for investment by investors unless the investor meets certain regulatory requirements. In considering the prior performance information contained herein, potential investors should bear in mind that past performance is not necessarily indicative of future results, and there can be no assurance that such investments will achieve comparable results.
The implications of channel shift, which Covid-19 is likely to accelerate across the board, are a huge challenge for retailers. Physical retailers increasingly recognize the risk of not being omnichannel. But the cost of offering omnichannel shopping is a cost that consumers largely refuse to meet. The competition from "pure-play" online retailers that do not have the cost base of a store network ensures that physical retailers cannot pass on these costs to consumers. Regulatory interference that might level the playing field at the expense of pure-play retailers is a hope for physical retailers, rather than an expectation.
In the medium term, this puts the costs of operating store networks in the spotlight, and they are a clear target for savings. The balance of supply and demand is such that landlords have little power to prevent this. A move to more turnover-based rents is perhaps inevitable and, with it, a fundamental change in the tenant-landlord relationship. Flexibility of the cost base will be key to retailers’ viability and durability.
Technology also takes on far greater significance. Collecting and sharing data will be vital to understanding trading performance and rental sustainability. The fall-out from social distancing and lost trade leaves retailers financially challenged. Landlords will need to invest in technology that captures the data they need. This may include store-specific footfall counters and digital beacons. As already evidenced in outlet centers, there are situations where landlords can enhance income as a result. And rich data on footfall and trade can assist asset management.
The longer-term implications may not have changed dramatically as a result of Covid-19, lockdowns and social distancing. But they have brought the horizon closer – and the reckoning has arrived dramatically and quickly. Some markets, like the U.S. and the U.K., already had too much retail floorspace. And now the same reality is dawning much more quickly in other markets.
The solutions to this imbalance of supply and demand are complex and, in many circumstances, impractical or not financially viable to deliver. That means some dramatic falls in value in many instances. There are markets where pricing doesn’t reflect this. The precipitous fall in retail values shows where structural change has bitten hardest. Shopping center values are down more than 40% from their last peak in the U.K., with more losses to come. This serves as a warning as to how much impact rising risks and falling rents can have.
There is a further risk that the trend in western markets towards decentralization changes the relative value of locations. This is also being prompted by another Covid-19-driven structural change: the huge increase in remote working. There is still a great deal of uncertainty as to how permanent some behavioral changes will be. But a logical outcome from spending more working hours at home is more localized demand for retail, and food and beverage outlets. Previously dominant locations may diminish if consumer demand is more diffuse.
The gradual transitioning of the Chinese economy towards more domestic consumption may also be accelerating, with further implications for central, luxury pitches. Global travel, especially on the part of emerging Chinese wealth, has fueled spectacular value growth for luxury retail assets in the last 10 years. Those values no longer look sustainable as policy measures, trade tensions and shifting behavior redirect spending domestically. More luxury brands are also expanding their online presence.
Investing in retail real estate is likely to be increasingly operational in nature. In discretionary retail, it must be more collaborative between stakeholders, and data will need to be freely shared. The factory outlet center model of trading (short, turnover-based leases where the landlord takes a more active stake in the retailers’ trade) is evidence of how that can be successful. Locations that are more community-based and focused on everyday convenience and value, with low occupational costs, may also be better-defended. Localization could benefit independent retailers that tailor themselves to smaller catchments.
But the fundamental supply overhang means retail investment will be about income, and not growth. Pricing must reach a level where the income return compensates investors for their risk. For many assets across the world, that journey of price discovery is only just beginning.
US-300920-130303-1
IMPORTANT INFORMATION
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.Property investments may carry additional risk of loss due to the nature and volatility of the underlying investments and may not be available for investment by investors unless the investor meets certain regulatory requirements. In considering the prior performance information contained herein, potential investors should bear in mind that past performance is not necessarily indicative of future results, and there can be no assurance that such investments will achieve comparable results.