Online retailing has developed to such an extent that it now represents a substantial threat to physical store profitability and is likely to have significant implications on landlords’ ability to grow, and in some cases maintain, rental income.
That is one of the key findings of AXA Real Estate Investment Managers’ new Market Edge research paper, “Retail will never be the same again”, which examines the UK, French, German, Swedish, Polish, Spanish and Italian markets.
AXA Real Estate also warns investors they need to take action, and sets out some guidelines for future-proofing their retail real estate portfolios.
According to trey AXA Real Estate report: investors are erroneously pricing in a recovery in physical sales that is unlikely to occur because, according to AXA Real Estate’s forecasts, 90 per cent of future growth in retail sales in the UK, France and Germany from 2012-2016, or EUR91.5bn of the EUR101.2bn total, will be captured by online spend and that investors have so far been unable to differentiate between the weakening of physical sales due to the shift online from those resulting from the current recessionary environment
The economic crisis is accelerating the growth in online sales as the price comparison capabilities of e-commerce are increasingly attractive to consumers with reduced disposable income; a trend which AXA Real Estate’s analysis concludes will not reverse once the economic situation improves since it anticipates that consumers will have grown used to, and not want to discard, the convenience and price comparison benefits, particularly as mobile-commerce becomes more mainstream
The current predictions that 25 per cent of total UK retail sales may be captured online by 2020 are understated with AXA Real Estate believing that the figure will be at least 30 per cent (equating to a projected c EUR165bn of sales)
The dilutive impact of e-commerce on physical sales by 2016 is likely to be further exacerbated by the growth of retail floor space based on current development pipelines with the report concluding:
France will be the most adversely affected of Europe’s three largest economies, showing a 5.5 per cent loss of overall sales per unit area (SPUA) due to an actual decline in sales of 1.5 per cent coupled with a 4.3 per cent projected increase in sales area from development. Spain is the worst affected with a loss of 5.7 per cent SPUA
The UK will see just a 1.5 per cent dilution in SPUA despite the fact it has the largest predicted jump in online sales from EUR67.7bn in 2012 to EUR104.6bn by 2016, while Germany will see a 3.5 per cent dilution
Sweden is forecast to buck this trend with a predicted 1.2 per cent net increase in SPUA due to stronger overall retail sales growth and a smaller development pipeline, while Poland is expected to remain broadly flat at 0.6 per cent as strong retail sales growth is largely offset by the development pipeline and due to its less developed ecommerce market. From 2016, it is anticipated that online sales in Poland will start to make more of an impact on physical retail as the market matures
Falls in SPUA are expected to directly impact retailers’ ability to meet current occupancy costs, with AXA Real Estate predicting a required reduction of 18 per cent in Spain, 17 per cent in France, 10 per cent in Germany, five per cent in the UK and just two per cent in Poland (with Sweden predicted to grow occupancy costs by 4 per cent) in order for physical retailers to maintain current levels of profitability (as they increasingly become price takers from online sales and are therefore less able to compensate by increasing prices). These are average figures for the whole market and AXA Real Estate believes that for some locations rents will be maintained, whilst for others, affordable rents may drop to close to zero.
Based on the predictions above AXA Real Estate suggests that investors:
Favour large formats, such as shopping centres, where they are better able to control external factors and where there is flexibility to provide complementary leisure and entertainment elements. These formats also allow comparison shopping and are better able to integrate multi-channel retailing
Be cautious in their allocation to retail in France as the worst affected of Europe’s big three economies, due to the shift in online sales being compounded by a significant development pipeline, as well as Southern Europe, where online sales continue to grow despite consumer spending falls
Favour physical stores occupied by luxury/branded goods retailers and discounters, where online retailers are less able to compete on price and service
Focus on locations that are of strategic importance for retailers, and invest in category-specific locations, those preferred as national or regional stores, or shop units in more affluent areas or those targeted by wealthy tourists which are expected to be more immune to the shift online
Alan Patterson, global head of research and strategy at AXA Real Estate, says: “Retail is undergoing an indelible structural change, and an inflection point has now been reached where investors need to start to protect the capital held in retail real estate investments. The conclusions from this research do not mean that retail as a sector is a poor investment, but investors need to consider very carefully whether the medium–to-long term risks associated from expanding online retail sales are appropriately priced into the assets that they are buying. AXA Real Estate aims to be at the forefront of research to ensure that our clients’ investments are future-proofed from economic and consumer trends.”