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Keypoints
- Retail sales grew 18 quarters in a row, inflation remains high
- Demand for prime high street picks up as vacancy rates fall
- Increased uncertainty slows down the investment market
- Higher energy costs accelerate sustainability efforts
Retail sales grew, but are driven by the higher prices
Inflation rose to 14.5 per cent in September (CBS). Rising costs are now being felt across the market and are causing great uncertainty. Consumer confidence was already historically low and fell further during the last quarter. So far, producer confidence remained fairly stable, but declined in the third quarter. Producers are particularly worried about the decreasing number of orders and the expected production. The sentiment deteriorated especially in the textile, clothing and leather sector, an important driver for the retail sector. The number of bankruptcies rose in September, but is still low from a historical perspective. The number of bankruptcies increased relatively strongly in the hospitality sector. This sector is suffering severely from higher prices and is also struggling to attract sufficient staff. The deteriorating sentiment is not yet directly reflected in the development of retail sales, which have been growing for 18 quarters in a row. While the non-food sector rebounded in the summer, the increase in August was mainly driven by the food sector. The gap between the value of sales and volume is widening. Where possible, selling prices are being increased to cover higher operating expenses. Online sales in the non-food sector fell in August. It seems that consumers are more cautious in general and have found a balance between the physical and online sales channels.
THE VALUE OF RETAIL SALES VERSUS THE VOLUME
Source: CBS (2022)
Demand for prime high street in the larger cities picks up
In the first three quarters, vacancy fell by 0.6 per cent to a level of 6.2 per cent. This decrease was caused not only by retail spaces being transformed, but also by new lettings. It is notable that vacancy rates at prime locations in city centres fell the most. In Amsterdam, for example, a decrease of 2.9 per cent was measured in the prime shopping area. Retailers are selective though, focusing mainly on the slightly larger spaces which have limited availability. In terms of causes of new vacancy, the top 10 sectors include hairdressers, hospitality businesses and food specialty shops. In general, these businesses are less likely to locate at A-locations in city centres. At A locations, the fashion & luxury segment almost always dominates. The associated brands are expanding and decreasing the number of stores. Examples of brands that opened new stores in recent quarters include Shoeby, Cotton Club, My Jewellery, Goodz and KiK.
Moreover, My Jewellery is a strong example of a retailer that started online and is now opening physical shops. Examples of declining brands include ONLY, Scamm, Wam Denim, Vero Moda and C&A. The demand for retail space is targeted at the slightly larger spaces. This is strongly reflected in the decrease in vacancy expressed as a percentage of retail space, which fell to a historically low level of 5.7 per cent, and in the increased average shop floor area.
VACANCY AS A PERCENTAGE OF THE NUMBER OF STORES AND RETAIL SPACE
Source: Locatus (2022)
Prime rents remain stable, average market rent increases
The top rent levels remained stable overall, while average market rent levels rose slightly in the last quarter. Still, there is more uncertainty in the market than a quarter earlier. In particular, it remains to be seen how the energy support packages will affect consumers and whether purchasing power will hold up. As a result, retailers have become slightly more cautious, but the market rent level has not been much affected. There are, however, retailers that are heavily affected by the higher energy prices, such as hospitality businesses or those with a lot of electrical equipment, such as a kitchen and refrigeration. The government is working on the details of the support packages for affected retailers. It looks like there will be some compensation, but it remains to be seen to what extent retailers will be able to make use of it and whether the help will come fast enough. Retailers are particularly affected when they are unable to charge on the higher costs in their prices. This has increased the risk that incentives will be needed to accommodate retailers during this difficult period.
PRIME RENT LEVELS (INDEX, 2010 = 100)
Source: C&W (2022)
The investment volume slows down
Based on preliminary figures from Real Capital Analytics (RCA), the transaction volume in the third amounts to 256 million euros, 39.8 per cent lower than the same quarter in 2021. This suggests that demand for retail real estate as an investment is low. However, the current uncertainty in the market is causing investors to become more cautious across all sectors, retail being no exception. In addition, the higher interest rates is making it more expensive to finance deals and is creating an upward pressure on yields. On 1 January 2023, the transfer tax will increase. Therefore, investors may bring forward planned transactions in order to come under the current rate. For now, it is mainly the general uncertainty in the market and higher financing costs that are slowing down investment activity. No strong price correction was measured in the third quarter as initial prime yields remained stable in almost all markets.
INVESTMENT VOLUME PER QUARTER
Source: RCA (2022)
PRIME YIELDS (Q1 2010 - Q3 2022)
Source: C&W (2022), edited by Syntrus Achmea Real Estate & Finance
Outlook: Investors are expected to be careful while examining market developments
High inflation due to soaring energy prices and higher interest rates are creating a lot of uncertainty in the market. The government is trying to stimulate the economy where necessary, focusing mainly on protecting consumers and affected businesses. It seems that a way has been found to limit the impact on purchasing power by maximising energy prices for households at least a threshold based on average consumption. The details of a similar measure are being worked out for the business sector, but it remains to be seen whether enough retailers will qualify. For instance, one possible condition is that energy costs must account for a minimum of 12.5 per cent of a business's turnover, while on average the actual percentage is around 8 per cent. In addition, it remains to be seen whether the help will come on time as it will not be implemented before the first of April 2023.
The support will be implemented retroactively, but many retailers expect short-term problems. Long-term structural solutions, such as making properties more sustainable, are being sought. On average, households have accumulated a lot of savings, which will help to limit the impact on purchasing power. Moreover, homeowners have built up a lot of surplus value in recent years and financing conditions for sustainability efforts are often attractive. The sustainability challenge is not only for households, but also for retailers and property owners. Property owners can help, but this is not always easy in historic buildings in city centres, for instance. Yet here, too, they are increasingly looking at how properties can be made more sustainable. By simply using a building more efficiently, a retailer can lower energy consumption and increase margins. A win for both retailer and property owner.