Rental models in the retail sector are becoming more complex due to the blurred lines between online and offline sales, according to Andrew Vaughan, CEO of from retail real estate specialist Redevco.

Rental models in the retail sector are becoming more complex due to the blurred lines between online and offline sales, according to Andrew Vaughan, CEO of from retail real estate specialist Redevco.

‘A few years ago, the talk was all about a move towards turnover-based rents, now we’re seeing the opposite,' Vaughan said in an interview with PropertyEU. 'The question is how do you capture online and offline sales. Smart retailers see their business as a full offer across the spectrum for selling, browsing or showcasing and so how do you deal with goods bought online and collected in store and what about returns from online but returned to the store?'

The distinctions between online and offline are becoming more blurred, he added. 'In the end retailers will decide what rent they can justify to be in a particular location to showcase their brand and that’s not all about turnover.’

On aggregate, Vaughan believes there is significant oversupply in the European retail market. Indeed, he reckons that 25-40% of retail space may become obsolete. ‘It will happen over time but that is why we are repositioning our portfolio to be future proof as far as we can.’

At the same time, there is also an acute shortage of space that fits our strategy, Vaughan noted, especially in some of the larger cities that are expanding due to increasing urbanization, growth in tourism, and demographic shifts, for example the increasing number of single people moving into the big cities.

‘We have set for ourselves a buffer of 35%-40% which is why we want to have assets in the top quartile. That has been a big driver for the selling that we’ve done. The internet revolution will have a really dramatic impact over time together with structurally lower economic growth of 1-1.5% in the long term.’

High street stores in the big cities will do well
Vaughan firmly believes that high street stores in the big cities will continue to do well. ‘Retailers are reviewing their footprint, some of them are opting for fewer stores, and complementing their existing locations with an online offer. They have to offer their formulas anywhere anytime. Either they are quick and easy, or they offer more of an experience. Big shopping centres also have to offer an experience.’

That does not mean there is no place for smaller regional centres. Locally based convenience shopping centres in individual towns with their own catchment will survive as will retail parks that offer click and collect facilities, Vaughan predicted. ‘Consumers don’t care what these destinations look like but they do need to be very convenient. They can be a great format if they have all the ingredients: variety, easy to access, quick to go into and to park and cost effective.’

But landlords need to monitor their assets on a continuous basis, Vaughan warned. ‘The speed of change has just gotten faster, we are really going through a transformation and it’s really happening fast. The whole retail space is changing dramatically.’

Macro-economic effects
In the past seven years, the financial crisis has also had a major impact on consumer spending but although the economy is improving, it is still fragile, Vaughan said. ‘Studies of previous financial crises show they typically last between seven and 10 years and this crisis feels like it will be more like 10 years. We’re just at the beginning of a recovery period. In fact, I believe we are in a structurally low-growth era and will be for awhile.’

Vaughan also sees several big macro risks but on the whole is optimistic. ‘What has been extraordinary these past few years is that the shocks that could’ve had a big impact like the Russia-Ukraine conflict haven’t really had such a big impact at all. Deleveraging continues in many places, households and countries although not so much in companies anymore. The ECB will do what needs to be done in terms of quantitative easing so I am not so worried about the short term.’

Nevertheless, there is plenty to worry about, he conceded. ‘A major upheaval is possible, but I don’t see it on the horizon. It is not out of the question that the euro crisis will blow up again. The Russia-Ukraine situation is worrying, as are terrorist attacks, but they are unfortunately a fact of life these days and in most cases economies are more robust to shocks than most people think.’

The upcoming UK elections are difficult to call, he added. ‘The advantage of the UK is that it is growing fast. London is driving the growth but we are starting to see it move out to the provinces. The UK is a debt-driven economy, but it has taken tough measures and undergone some big structural changes. It is slightly better positioned for sustained growth.’