Trophy rents slow down retailers' European expansion: King Sturge

New retailers entering the market continue to have an unhealthy preoccupation with expensive 'trophy' locations even though the economic downturn has forced retailers across Europe to reappraise what constitutes an affordable rent, King Sturge has warned in a new report entitled 'European Retail Property 2011 - bumpy landings'.

The report's author Stephen Springham said: 'Trophy locations can be a distraction in retailer cross-border expansion programmes. New and would-be market entrants tend to focus primarily on these locations for their initial stores and then base their wider roll-out programme on their performance. But the huge rent paid can undermine the profitability of these locations, curtailing future expansion. Internationalisation would be so much better, easier and more profitable if retailers could see beyond the narrow parameters of prime markets and trophy rents.'

He added: 'Our message to retailers is: would you rather make a statement in a prestige location or money in the right location? Surely there is more value in developing a network of 100 stores across a country than paying a very high rent to open a flagship store in the most expensive location in the capital? Such trophy rents send out a misleading message to other overseas retailers and could create a barrier to entry.'

The report states that European retail property markets as a whole have rallied over the last year but a bumpy rather than smooth landing is on the cards. Individual markets are at very different stages of the recovery cycle, but there are some common denominators. Rising inflation is set to be one of the most influential factors in both the short and medium term with occupier markets facing a double whammy of increased cost/margin pressures on retailers and indexed rents/occupancy costs becoming increasingly unaffordable.

In those European countries where rents are indexed to inflation, the Consumer Price Index is forecast to be highest this year in Romania (+6.3%), Hungary (+4.9%) and Greece (+4.3%), with the latter likely to be worst affected given that retail rents tend to be reviewed annually and indexed to the local CPI plus one point. In Hungary and Romania, as in many Central and Eastern European (CEE) countries, rents are more likely to be pegged to Euro CPI, mitigating slightly against higher inflation locally.