RETAIL
Keypoints
- Higher prices make consumers cautious, but higher wages mitigate lower purchasing power
- Retailers not only see sales rise, but also costs
- Transaction volume is historically low, spread between yields an interest rates normalizes
- Does retail offer better value than other property sectors?
Higher prices make consumers cautious, but higher wages mitigate lower purchasing power
Retail sales rose by 8.5% in February. This growth was mainly due to higher prices, as volumes fell by 2.9 percent. The increase was weaker than in the previous month, but was positive in all subsectors except DIY, kitchens and flooring. Household final consumption expenditure rose by almost 3 percent in February. This spending was mainly on services and less on durable goods. Consumers see product prices rising while energy prices are falling again. This makes them cautious, but on average wages are rising strongly. Cao wages have not grown this fast in 40 years, reports the CBS. Consumer research by Wunder (2023), shows that Dutch consumers like quality but are also sensitive to price discounts. Most consumers say they are buying the same or less online, so online spending seems to have peaked for now. Consumers will therefore mainly have to adjust to higher prices and should have sufficient purchasing power.
This adjustment may take some time and will not be a major threat to the retail sector unless there is a general economic recession with rising unemployment.
RETAIL SALES; VALUE VS VOLUME (2015 = 100)
Source: CBS (2023)
CONSUMER PRICES
Source: CBS (2023)
Retailers not only see sales rise, but also costs
The vacancy rate remained stable at a level of six per cent in the first quarter of 2023. The number of bankruptcies increased, but did not lead to a massive drop in demand. However, with a few exceptions, there was less demand from international retailers. Retailers saw operating costs rise due to high inflation and wage increases. The sharp rise in interest rates also increased the cost of financing. This created problems for retailers with high levels of debt on their balance sheets. One notable casualty was Scotch and Soda, which immediately went into bankruptcy, only to restart almost immediately with new capital. Higher costs depressed prime rents in almost all markets. However, most leases are being renewed at market rates and further falls are unlikely.
VACANCY: % UNITS AND SPACE
Source: Locatus (2023), edited by Syntrus Achmea
PRIME RENTS (Q1 2023 VS Q1 2022)
Source: C&W (2023), edited by Syntrus Achmea
Transaction volume is historically low, spread between yields an interest rates normalizes
The preliminary transaction volume was € 87.6 milion (Real Capital Analytics, 2023). This is by far the lowest first quarter volume since the start of the measurement in 2007. The investment market is very quiet due to the high level of uncertainty in the capital markets. Interest rates have risen sharply in recent quarters but now appear to be stabilising. Nevertheless, bid and ask prices are still far apart, resulting in a lack of transactions. It is particularly striking that the number of purchases by institutional investors in 2023 has been minimal so far, while the share of purchases by private individuals has been the highest. Lower demand and higher interest rates are pushing initial yields higher. As most initial yields have already fallen significantly, the shock is now milder. Retail stands out relatively well compared with other property classes such as residential and logistics.
RETAIL INVESTMENT VOLUME BY QUARTER (X € BLN.)
Source: MSCI/Real Capital Analytics (2023)
TOTAL RETURN (Q1 2008 - Q4 2022)
Source: MSCI (2023), edited by Syntrus Achmea
Does retail offer better value than other property sectors?
As interest rates have risen more sharply than at any time in recent history, the spread between yields and interest rates has narrowed at the same pace. In the fourth quarter, the spread even fell to a level of 2.2 per cent relative to its previous average. On average, the yields in the retail sector seem to have enough room to absorb the higher interest rates. Moreover, portfolios are less leveraged than in the past. After all, financiers were already cautious as sentiment was not always strong. Meanwhile, much of the market has proven itself and demand from retailers for physical stores is holding up. The outlook for rental growth is moderately positive, so the likelihood of value growth is also positive. This makes it a good entry point for investors who do not depend on debt financing.
The spread for retail compared to the spreads of other sectors implies that retail offers better value than other sectors. Demand for real estate assets depends, among other things, on price levels relative to other property classes. Spreads, or the difference between the initial yield and long-term government bond rates, provide an indication of relative valuation. In the retail sector, this spread rose sharply to over five percent after the global crisis in 2008. This was mainly because interest rates fell for a long time and the initial yield did not fall as much as interest rates. As a result, retail was attractively priced in the face of an abundance of cheap capital. With some outliers in 2015 and 2017, the investment volume was between two and three billion euros per year. The spread was very high compared to the pre-2008 period, when it was typically between two and three percent. With spreads normalising and the institutional part of the retail market performing well, retail offers a strong relative value and the sector is likely to outperform in the period ahead.
SPREAD BETWEEN NET INITIAL YIELD AND INTEREST RATE
Source: Oxford Economics (2023), MSCI (2023), edited by Syntrus Achmea
SPREAD BETWEEN NET INITIAL YIELD AND INTEREST RATE PER SECTOR
