Today the European consumer is faced with more opportunities to shop than at any time in the past. From the perspective of retail developers and landlords they now have to fight for every euro, pound or krone of a consumer’s wallet; and it is a battle faced every day of the week. How does the owner and developer ensure that they entice the shopper to spend with them rather than spend their money elsewhere or on other non-retail products and services such as holidays, education, health and leisure? How well shopping opportunities match the shopper’s requirements for goods and services or an experience will ultimately determine the successful performance of the retail property market across Europe.
High street shops
Despite the fact that edge and out-of-town shopping centers account for the bulk of leasing and investment activity in most European markets, high streets continue to play an important role in the retail hierarchy as far as consumers are concerned. As a result, major brands continue to seek representation on Europe’s main high streets, boosting demand for large flagship stores which are in relative short supply. Indeed, supplydemand imbalances have been the key driver of high street growth across most markets. Demand from domestic and, increasingly, international operators for the limited supply of ‘right size, [Photo]
The Champs-Elysées, Paris: high street shopping by definition. right configuration’ space has maintained and boosted prime rentals. Across Europe, shops recorded an uplift of nearly 4% over the year to September – more than 1% above shopping centers. However, while the economic mood has improved, increasingly cost-sensitive retailers are becoming more resistant to paying high rents and premiums in some markets, with the result that leasing transactions are taking longer to conclude. In the investment market, increased activity has been noted on the high street in some markets – along with corresponding yield falls. The average high street yield stood at 5.07% in September – down from 5.51% a year earlier.
Shopping centers
Shopping centers continue to be the main focus for developers and investors and also the main source of new space for expanding retailers. Demand and supply are in relative equilibrium in most markets, although most new schemes are fully pre-let well in advance of opening. Taking into account all cost elements, shopping centers still look good value for occupiers compared with the most expensive high street locations. Rental growth over the year to September amounted to 2.80%; a solid performance, albeit slower than 2005 and well down on the record [Photo]
Broadmead shopping center in Bristol, UK, is a co-development
by Hammerson and Land Securities. growth year in 2004. Meanwhile, shopping center yields continue to harden across the continent. Average prime shopping center yield
The average prime shopping center yield stood at 5.04% in September, with Central European yields (averaging 5.8%) converging still further with Western European levels. The main issue is clearly how much further yields can fall, notably in view of the ECB’s recent interest rate increase and the expectation of further hikes. In terms of ability to bid competitively, equity players are more likely to benefit at the expense of debt-financed investors, with demand from the latter expected to cool in some markets. However, at [Photo] current levels, yields look sustainable in most markets, particularly given the weight of capital already allocated to the sector. Indeed, one of the key issues for investors remains the difficulty in sourcing stock. As a result, forward commitments are playing an ever-increasing role in the development and investment process and secondary schemes and asset management opportunities are increasingly sought-after in the drive to acquire new product and add value. The pace of new development continues unabated meanwhile, with this year expected to be a record year for new shopping center floor space. Tight planning in the more mature markets such as the UK, France and Germany has shifted the focus back to intown development, while in the emerging markets of Central and Eastern Europe, development is moving increasingly away from the top tier cities. In most areas, the continuing strong pace [Photo]
SNS Property Finance and developer Foruminvest will develop Gran Sasso retail center in Teramo, Italy. of development has had little impact on high street or shopping center rents. There are a limited number of exceptions where rents have softened in the last six to 12 months, but values have now generally stabilized in these locations. There is a perception of impending localized over-supply in some areas in Central and Eastern Europe, although this relates more to large food stores than shopping centers. There is [Photo]
Kanyon shopping center in Istanbul, Turkey. still a relative under-supply of good quality comparison shopping in the capital cities, for example, and rental levels may yet rise further for the best schemes. [Photo] [Photo] Retail warehouses
Recent performance from the retail warehouse sector has relied heavily on yield compression, with rental growth rather lackluster in the last few years. However, while rental growth over the year to September amounted to under 3%, this represents an improvement on previous years. Moreover, positive signs have more recently emerged that rental growth may be accelerating in some markets, on the back of growing occupier demand. In several markets, notably France, Belgium and Spain, increased interest from traditional high street operators in taking space out-of-town has been noted. Indeed, the growth of the retail warehouse market will aid expansion, with domestic retailers in a number of countries increasingly seeking to take advantage of the lower costs and larger units now being offered and the fact that [Photo]
Harrod's department store, a famous London icon. better quality, integrated schemes are being built. The strong level of investor interest in retail warehousing is continuing meanwhile, with only a lack of stock holding back the number of transactions. New investment markets continue to emerge, with Greece, for example, recently seeing its first retail park transactions. The average prime European retail warehouse yield now stands at 5.85%, compared with 6.19% a year earlier. Planning, of course, continues to be a major driver of the out-oftown market, particularly for food stores, with recent (and proposed) changes both serving to restrict and liberalize their respective markets. For example, in Poland, a proposed ban may prevent Sunday trading for hypermarkets and new large food stores. In The Netherlands, the longawaited changes to planning have finally arrived which have removed the distinction between GDV and PDV consents (open and restricted consents). In theory this opens the door to more bigbox development out-of-town, but in practice local authorities are currently averse to granting consents for more development. [Photo] [Photo] Factory outlets
As in the US, factory outlet stores have existed across Europe for well over a century, but outlet centers emerged only relatively recently. A factory outlet center functions like a traditional shopping center, with a number of factory outlet shops trading side by side. Traditionally converted from factories or other disused buildings, more recent schemes tend to be purpose-built and of high [Photo]
MacArthurGlen outlet center, Roubaix, France. quality. Good parking and catering are key features, with leisure facilities also present in many centers. Merchandise is usually discounted, which can be a condition of the lease or planning permission. Turnover leases are also common and aggressive management can result in the removal of tenants who do not generate sufficient sales. Over 100 factory outlet
centers across Europe
The first centers were built in France and the UK in the midto late 1980s. Large numbers of outlet stores were present in both countries so consumers were relatively familiar with the concept when the new centers were developed. But it was not until 1995 that the market really started to take off with the UK leading the way in terms of new development. In fact the UK accounted for over half of all European outlet center [Photo]
Factory Outlet Vila do Gonde in Portugal. development in the late 1990s. Development across all of Europe peaked in 1999-2000. In 1999 some 193,500 m2 of outlet center space was built in 16 centers. But as many of these centers were relatively small, a similar amount of space (186,800 m2) was built in 2000 from fewer centers (12). The number of new centers fell in 2001 and 2002, but another record year was recorded in 2003 (with the opening of 12 additional centers). Since then the number of developments opening has been smaller. There are now over 100 factory outlet centers across Europe, with the UK still the largest FOC market in terms of schemes and activity. Other European countries such as France, Spain, Germany and Italy all now have a number of purpose-built factory outlet centers. Central Europe is now also familiar with the concept, with schemes in Hungary, Poland and the Czech Republic. The largest center is Freeport’s Alcohete scheme (93,000 m2) in Portugal. Some countries, for instance Denmark have still to see their first factory outlet centers, but there are schemes in the pipeline. NON-TRADITIONAL
SHOPPING VENUES
Airports
Air travel is in a period of sustained growth following the terrorist attacks in 2001, the second Gulf War and the 2003 SARS scare, and despite concerns about global warming and the contribution of air transportation. Airports have [Photo]
The shopping center of Amsterdam Airport Schiphol,
the Netherlands. come a long way in their retail offer since the days of just the duty-free bottle of spirits, a pack of cigarettes and some perfume. It is now an important element of the airport experience. Best airports not only target the traveling consumers, who expect to have the opportunity to shop for big brands and to eat and drink in comfort, but also the ‘meeters and greeters, weepers and wailers’ and the many thousands of airport employees; for instance Amsterdam Airport Schiphol and Frankfurt Airport employ some 58,000 and 70,000 people respectively. The perception of the airport is often influenced by the range and quality of shops, bars and restaurants available to them. With the additional time spent at airports as a consequence of heightened security, arguably there is more time to shop. Some airports such as London Heathrow, Schiphol, Copenhagen Kastrup and [Photo]
The shopping center of Kastrup Airport, Copenhagen, Denmark. others have become shopping centers offering global, national and local brands across a wide range of sectors. For many brands airports are largely immune to the peaks and troughs of the high street while enabling them to showcase their merchandise to an international audience. Airports are being used increasingly as springboards for expansion into new markets, for instance Hamleys, as it is easier to grow international recognition here than from stand-alone stores in an unknown location. Airport authorities have realized the revenue potential of retail in airports and greater efforts are being made to feature retail as new airports and terminals are developed and older ones redeveloped. London Heathrow’s Terminal 5 (T5) is being built around a retail concept, signaling the importance of the sector to its operator. The terminal is not due to open until March 2008, but already retailers are seeking space in one of the 140 shops to be housed in the 20,000-m2 retail area. Reportedly some of the most prime sites in Heathrow can achieve annual sales of GB £4,000 per square foot, compared to the high street where GB £1,000 per square foot would be considered good business. Railway stations
Railway stations are also increasingly about more than just the coming and going of passengers. Railway stations offer huge retail opportunities and in many respects they can replicate trends developed by airports. Travelers may want to purchase tickets, buy something to read, eat or drink on the journey, and if it is a longer trip then there is the opportunity for last minute purchases. The plethora of trading hours legislation across Europe has meant that other less [Photo]
The Central Station/Lehrter Bahnhof in Berlin, Germany. traditional retail venues such as railway stations for instance provide the only option for urban consumers to shop during non shop-opening hours and they have therefore become more popular. Grandi Stazioni redeveloped Rome’s main station and is in the process of applying a similar approach to Prague’s main station and two others in the Czech Republic. Shopping centers at railway stations have been a key driver in the revitalization of city centers, such as Lehter Bahnhof in Berlin and in Leipzig (30,000-m2 Promenaden Hauptbahnhof), which opened after 1997 and the awardwinning 18,500-m2 Estação Viana in Viana do Castelo, Portugal. The rise of the Internet
Multi-channel shopping is hardly a new phenomenon. There are already some 30 retail distribution channels including mail order, farmers markets, pick your own, party plans, street markets, kiosks, vending machines, direct from factory, in-transport sales, theme parks, restaurant shops, TV shopping, and the Internet, all of which can erode traditional property-based retail channels. The much trumpeted demise of the retail property world in Europe as a result of the take-off of online shopping has not happened, but what is certain is that how, when and where people shop for certain types of goods and [Photo]
Fun and entertainment should be part of the shopping experience. services has already changed and will continue to evolve. It can no longer be ignored by those involved in the retail property sector, as the Internet is not only a source for purchasing goods and services, but it is also increasingly influential in how consumers decide where and how to spend their money off-line, in stores, and so forth. To the consumer with access to the Internet, there is no longer a clear distinction between on and off-line as they can do both at different times of the day and week. Where retailers and the developers or owners of shopping places can always score over the Internet is by making shopping a more satisfying human experience or exchange rather than a purely commercial transaction. The ‘experience’ of shopping is a much-discussed topic. This is generally taken to mean that consumers want to be entertained and have ‘fun’, but while this may be possible in the larger shopping places geared towards the ‘day-out’, it is not always feasible in more functional shopping places. However if a more literal meaning of the word ‘experience’ is applied then it becomes rather more all encompassing and goes back to the basic and fundamental principles of retailing. For both retailers and property owners in particular, those who embrace technology within their retail spaces will be winners.by Dr. Yvonne Court,
Partner at Cushman & Wakefield Healey & Baker
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