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November 29, 2017

Driven by the rise in e-commerce, rapidly advancing technology and shifting consumer patterns, the EMEA retail market is undergoing serious structural change.

The shift has prompted retailers and investors alike to rethink their business strategies – and they are responding.

E-tailing has grown, but at a pace less than previous expectations. JLL’s Jenny Tuleby, says the organisation predicted in 2012 that UK online sales would hit 25 percent by the year 2020 and while there has been strong growth, online sales currently sit between 12 percent and 15 percent.

“We may have over-estimated the overall proportion migrating online by this time, but we believe pure-play online retailers moving into the physical space, and the success and adoption of click and collect, will help further drive online growth,” Tuleby says. “Figures for continental Europe are lower, and while that could imply further disruption, it certainly will not be the same for all countries.”

It is important to note increased e-tail sales will not necessarily cannibalise on traditional retail spend in its entirety, she says. History has proven that an increase in online spend has an accumulative effect in spend overall, and savvy landlords and retailers are taking advantage of it through solutions such as click-and-collect, techy showrooms and destination-based retail.

To understand the impact of e-commerce it is key to understand the drivers behind it; for a growing group of consumers, there is little differentiation in the way they spend – rather, it is a matter of which channels better service their needs. The main threat to first-generation retail is not e-commerce itself, says Tuleby, but rather the changing demographics of a generation that doesn’t really acknowledge the split the industry continues to make between e-tail and retail.

In response to this structural shift, European retailers are increasingly exploring options to manage their lease liabilities, such as the introduction of smaller store formats or the negotiation of more break options.

Although counter-intuitive to owners that rightly value income predictability, shorter leases also give them the ability to react more swiftly to changing market dynamics.

“The key is relevance – to be able to provide a balanced mix of retail and leisure, in the right location, well suited for the micro-location and the asset’s specifics,” Tuleby says.

“Experience-based retail has become a mantra and we see little signs of this abating. Landlords need to create a place where customers want to visit now that, in theory, they no longer have to. This means an increasing focus on goods that you can’t put in a shopping cart.”

One of the most palpable indications of this is the increasing share of the food & beverage sector (F&B). Having historically been viewed as a service provision in the shadow of fashion, rarely refined and lacking in quality, a well-executed F&B offer now often serves as an anchor in its own right.

European retail investors can breathe a little more easily than their U.S. counterparts, for whom the structural shift in the retail market has been unforgiving. According to JLL, the U.S. has simply too much traditional shopping centre space: 1274 square-meters of gross leasable area (GLA) per 1000 people compared to 216 square-meters in Europe. Furthermore, 46 percent of gross lettable area in larger U.S. centres is devoted to department stores – which are relatively unproductive in terms of densities – compared to Europe, where they only account for 27 percent.

Supporting the view of a resilient European retail real estate market is research from JLL showing prime retail rents remained stable in most continental markets during Q3 2017 across all asset classes, with notable quarterly prime rental growth registered for shopping centres in Greece (+12.5 percent quarter-on-quarter), Sweden (+7.1%) and the Czech Republic (+4.3%), and for high street retail in Barcelona (+3.7%).

While in the U.S. out-of-town shopping centres make up a large proportion of total retail, Europe sees a much more focused supply around high street locations and historical centres. The subsequent natural foot fall and easy access to retail, leisure and F&B units, minimises the risk of becoming obsolete, assuming, of course, that it continues to cater to the continuous changing and high demands of its catchment.

So what is the best way to avoid retail obsolescence? According to Tuleby, it’s all about research, flexibility and partnerships.

“Retail owners should seek knowledge about the catchment and the customers within, as well as advice on how to best cater to that catchment,” she says. “There is no one magic formula; it is a matter of keeping relevant to your micro-location and understanding that retail is dynamic, not static.”

“Flexibility has become somewhat key, because demand is changing so rapidly that a strategy becomes outdated before it is implemented. Many landlords now try and work around this through shorter leases and flexible space in an attempt to stay current and be able to respond speedily to consumers’ changing habits.”

Furthermore, investors and tenants need to partner together. Tuleby points out that there needs to be an agreement between landlords and retailers that they are part of a rather complicated supply chain and that all benefit if all contribute. The continuously and rapidly changing demand from consumers needs to be channelled via investors to landlords, as well as landlords being prepared to quickly and willingly act in light of these demands.

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Jenny Tuleby

JLL EMEA Capital Markets - Retail

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