RETAIL
Keypoints
- Retail sales grow 21 months in a row, strong inflation eases
- Vacancy rate drops to 6 percent
- Investment market slows due to increased uncertainty
Consumer confidence bottoms out, high inflation eases
The value of retail sales rose by 5.5 per cent year-on-year in November (CBS, 2023). Retail sales have shown positive growth figures for 21 months in a row, but the growth was mainly driven by rising prices. In December, inflation reached around 10 per cent on an annual basis. Meanwhile, consumers were more willing to spend and generally less negative about the economic climate. In November and December, energy bills were compensated by the government by 190 euros per month. Households used this not only to get through the month but also to boost their savings. It was also criticised as it also reached households that did not need it directly. Moreover, households had already been able to anticipate the price cap, which was introduced on 1 January. In any case, it helped to keep retail sales flowing and allowed consumers to get used to the higher prices. These higher prices are necessary as retailers' margins are being squeezed by rising operating and input costs. For the time being, it seems to be helping, as the number of bankruptcies - although on the rise - is still low by historical standards.
THE VALUE OF RETAIL SALES VERSUS THE VOLUME (INDEX 2015 = 100)

Source: CBS (2023)
Vacancy rate falls to 6 per cent
The vacancy rate fell by 80 basis points to 6 per cent last year. This was not only because retailers signed new leases, but also because investors removed retail space or converted it to other functions, thereby reducing the retail stock. The decline in space was mainly in unattributed retail stock and smaller shopping centres. Although demand for prime retail space picked up and the overall stock declined, the pressure was not strong enough to generate rental growth. Prime rents remained stable in almost all primary core shopping areas during the last quarter. The existing stock was sufficient to absorb the increased demand, but there were early signs of rental growth in places where the supply of good retail space is scarce. Such space is of strategic importance to a tenant and therefore remains in demand from both tenants and investors.
VACANCY AS A PERCENTAGE OF THE NUMBER OF STORES AND RETAIL SPACE

Source: Locatus (2023), edited by Syntrus Achmea Real Estate & Finance
PRIME RENT LEVELS (INDEX, 2010 = 100)

Source: C&W (2023), edited by Syntrus Achmea Real Estate & Finance
Investment activity slows down, spread in returns is high
In the fourth quarter of 2022, the investment volume was 318.8 million euros, 70 per cent less than in the same quarter of 2021 (Real Capital Analytics, 2023). The decline was mainly driven by economic uncertainty and developments in the capital market, where financial assets were repriced against the backdrop of the ECB's monetary policy. The ECB is committed to reducing inflation and raising key rates rapidly. The decline therefore does not reflect a deterioration in sentiment towards retail property. On the contrary, investors have started to look at retail again. They are looking for a good entry point in the retail currency investment cycle and the stable direct yield that the asset class traditionally offers. Investors remain cautious, however, as the spread in returns indicates a wide gap between strong and weak performing retail assets. For example, the top quartile returned 15 per cent a year in the third quarter, while the bottom quartile returned just over 0 per cent a year in the same period. The impact of higher interest rates on yields has been limited compared with other commercial property sectors. Top initial yields for high streets rose by a modest 5 to 15 basis points in the last quarter, except in Eindhoven, where they remained stable. Top initial yields for prime shopping centres and neighbourhood and community centres also remained stable.
INVESTMENT VOLUME (PER QUARTER, € BILLION)

Source: Real Capital Analytics (2023)
SPREAD IN TOTAL RETURN (Q1 2008 - Q3 2022)

Source: MSCI (2023)
Investors are cautious amid uncertainty in the capital markets
In a (mild) recession, property investors are usually comfortable with an allocation to retail. The low correlation with other property classes and relatively stable yields have always helped retail to come out of a recession relatively strong. The coronacrisis was different in this respect, as the operating model of retailers was challenged and the growth of e-commerce seemed to be accelerating. The market fell sharply during this period, but the robust part of the market has now proven itself. Better high street locations, dominant malls and neighbourhood shopping centres are expected to continue to perform well. Tourism is slowly picking up, which could boost retail markets in major cities in the period ahead. In addition, average wages are rising and there is a price cap on energy prices, which is putting less pressure on purchasing power than six months ago. As the retail market has already corrected, yields are higher on average than before. As a result, there is more room to absorb the higher interest rates. As a result, the expected price correction for retail property will be smaller than for other asset classes, which are currently priced at historically low yields. However, transaction activity is expected to remain limited in the short term. Investors are expected to hold on to good-performing retail properties in their portfolios, and liquidity in the market is limited.