For the best part of a decade doomsters have been predicting the end of shopping as we know it. Someone forgot to tell shoppers, says Shayla Walmsley
The ‘Amazon effect', whereby consumers were meant to abandon shops in favour of delivery to the door, turns out to have been sector-specific. True, some retailers, such as French firm Fnac, have suffered from 10% of retail migrating online. But outside of books and music downloads, consumers seem unable to renounce look-and-feel.
So what does it all mean for retail real estate? The lesson, it seems, is: go high or go low. While fashionistas are unwilling to abandon the mall and head wholesale for Asos, discounters such as Primark and local convenience retailers are capturing market share in the real world.
According to Nick Gregory, CEO of the high street-focused Local Shopping REIT, dominant shopping centres and high streets are net gainers, as rents fall in ubiquitous out-of-town centres. "When you talk about the high street, you're talking about lots of different ones," he says. "Oxford Street is doing very nicely but some high streets are too small to survive the impact. If you look at how Oxford Street has succeeded, you can see that trading must be selective."
Andy Watson, head of southern European acquisitions at LaSalle Investment Management, questions Gregory's assumption that there is a flight to proximity, pointing out that the trend, which peaked with high petrol prices in 2008, has since reversed. Yet other factors suggest an in-town bias.
"You can't get your hair cut on the internet and you can't get your dry-cleaning done online either," says Gregory.
The growth of online shopping and negative consumer trends are more likely to have an impact on out-of-town shopping centres than they are local hair salons, of course, and those markets most exposed are those most over-supplied. SWIP head of international property and strategy, Robert Matthews, points to demographics favouring in-town retail. "People are moving back into city centres, attracted by better public transport and better infrastructure. What we're seeing is a return to the city. In-town retail is supply-constrained, in contrast to out-of-town retail. Generally speaking in densely populated areas is difficult to create more supply. That reduces the volume and maintains rent."
It makes the flurry of activity over UK out-of-town shopping centres last year appear ambiguous in its wisdom. Add to the ambiguity speculative developments such as the £11.7m (€13.3bn) redevelopment scheme in Wales agreed last July by the £3.3bn South Yorkshire pension scheme. Real estate makes up 8.56% of the scheme. Included among its assets are town centre retail assets distributed across the UK, retail warehouses similarly dispersed, and retail development projects in Edinburgh and Wales, valued at under £10m.
"We're looking to do deals involving existing assets or development, as long as they're attractively priced," says fund manager John Hattersley. "There are some concerns about significant increase in capital values and we hope to be ahead of the curve. Why development? Looking at the rental market, prices are justifiable. If we can't buy assets directly, we'll see what else there is."
He points out that banks pulling out of development projects had left developers with a finance gap to fill but also pension schemes with potential opportunities. In contrast to the availability of existing assets, development projects are "practical and attainable".
"Speculative development is hanging over the market, I agree, but there's a lot of secondary stuff vacant and it may be offloaded in a resurgent market," he says. "Banks with non-performing assets on the books will seek to offload them. We never stop looking and at this stage of the cycle development projects are accessible."
What is negatively affecting retail is not online shopping but a clearer differentiation between prime and secondary - and it's broader than the distinction between city centre high streets and out-of-town shopping centres. Nadja Savic de Jager, associate director of CBRE Investors Research, says: "In the UK the gap between yields on short and long-income property is now at a 10-year high. The UK prime retail yields are at 400bps above secondary. We expect the gap to narrow in the medium term, as the occupier market strengthens."
"You might see the divergence come down slowly. More demand will have an impact," she says. "There has been no significant difference between prime and secondary in the last few years. Now that's reverted and the difference is probably at its peak. Investors are too scared of any risk, especially of taking on the leasing risk."
But there is oversupply and over-oversupply. According to CBRE figures, prime fell 34% in Madrid, and Copenhagen took a hit of 22%. "The development programme has been cut off. The problem is, in Madrid, there is a huge overhang of space, with 30-40% empty schemes," says Savic de Jager. "That is the distinction between Madrid and Copenhagen."
In contrast to Spain, Scandinavia is seeing robust consumer spending growth - always the driver of shopping centre rents. "We don't expect the prime shopping centre rents in Madrid to fully recuperate over the next five years. Many of the new shopping centre schemes have opened with around 70% of the space let and some of them reported only 50% of the space let at opening. Copenhagen prime shopping centre rents have declined by 22% in the period from 2006 to 2009 and we expect another year of declining rents in accordance with weak retail spending. Nevertheless, when spending resumes rents should fully recuperate."
Watson points out that because of retail's longer gestation period - unlike retail, office doesn't require an additional layer of political permits - prime retail is "rare and hard to replicate". He claims, for example, that after secondary anchor Oviesse acquired Melablu and faced closing one of two local stores, it chose to stay within the prime centre rather than the secondary retail box outside the centre. "This is an example of a flight to quality theme among retailers," he says.
The same flight to quality has also been apparent in logistics. Between November 2008 and the following September - at the bottom of the market - LaSalle was the major buyer of retail warehousing in the UK with 30% of the market. "It was a strategy-driven tilt that has proven successful," says Watson.
ING Real Estate had already pre-leased 50% of a Frankfurt logistics development it announced it had acquired in January. "Although the times are difficult you can still find logistics tenants if you can offer prime locations," says spokeswoman Sara Thijssen, although she also acknowledges that deals this big don't happen that often.
From the city limits, operators claim even non-prime shopping centres aren't just about shopping, in any case. Finnish shopping centre operator Citycon Oyj, whose largest shareholder is €26bn pension company Ilmarinen (0.85%) and which also includes VER, the €12bn Finnish State Pension Fund (0.23%) among its top 10 shareholders, segments its centres according to their role in consumers' lives. (VER invests 33% of its €785m alternatives allocation to indirect real estate investment, 1% of it in listed.)
Meeting points in city centres are designed for leisure time and social interaction - in other words, "for hanging around", and are dominated by fashion (36%). Local shopping centres are close to the community and fulfil basic family needs, dominated by groceries (33%) and department stores (21%). Finally, ‘partners in everyday life' centres offer compact convenience designed around everyday routines, likewise dominated by groceries (32%).
None of these types seem unduly threatened by the mooted online trajectory. "I must say I don't feel that online shopping has had a direct impact on shopping centres," says Tiago Vidal, a spokesman for shopping centre specialist Sonae Sierra. "Retailers mostly see it as another channel that allows sales but does not replace shops within shopping centres. People go there to meet, to socialise, to have fun - not only to shop."
He adds: "In that sense online shopping is a complement to existing shopping centres. Although in the beginning people talked a great deal about the likely impact, claiming that sales would move online, that hasn't happened. The online channel is a growth channel - in some sectors there is a lot of growth - but only for certain types of products. In fashion, touch and feel is of huge importance. The physical place is crucial for branding awareness and retail won't suffer from online shopping."
Yet at the same time Vidal claims to see a stronger emphasis on design and architecture, partly as a result of the need to add value to the shopping experience compared with shopping online. This emphasis on physical infrastructure is a trend affirmed by Matthews, who claims the key for managers is to understand what retailers need in terms of location and configuration. As an example he points to Apple stores, which feature training as well as trading areas. "The architecture reflects the brand," he says. "The property is part of the brand and retailers use it as such."
This emphasis on active asset management emerged in a joint venture agreed in January between the CA$123.8bn (€82.8bn) Canada Pension Plan Investment Board and developer Hammerson to acquire a £297m shopping centre outside Scotland's second city, Glasgow.
Savvy managers are at a premium as retailers seize the opportunity to renegotiate. In Vienna, despite a weak economy and fragile consumer spending, there has been tight supply and an increase in rental value.
Describing retail's performance in Vienna as " a happy exception" and "a surprise to all of us", Savic de Jager points out that schemes due for completion in 2011 will potentially add pressure. "But we've seen a doubling of incentives. Vacancies pick up, and retailers use the opportunity to renegotiate better deals. Austrian retail has proven to be very resilient to the current downturn. Prime rental values increased both for shopping centres and main retail high streets in 2009. Nevertheless, many schemes are scheduled to be completed in 2010 and some of these projects will not be finalised before 2011. If the planned schemes are completed, increased supply will have a knock-on effect on rental values."
One of retail's strengths, of course, is that obsolescence takes longer than it does in other sectors. "Within five years an office building will cease to be A-grade without investment," says Matthews. "In many high street shop units, the shell was built 200 years ago. Then the retailers use the shell as a canvas to paint their brand on. The right location provides retailers with the right consideration for their brand."
"We're looking at places where retailers are keen to showcase their products," he adds. "If you look at Nespresso, it is opening flagship stores that don't sell much. Retail is about experience and retailers want to showcase their goods."
What consumers want may have changed, but what investors want in retail has changed very little: dominant schemes with immediate income, secure long leases, sustainable income streams and low rent-to-sales ratios.
Yet, from the investor perspective, the traffic is heading in both directions. In recent months LaSalle has acquired a UK shopping centre on behalf of an unnamed pension fund - part of a £400m (€444m) portfolio built up for the same client over the past year. It has also acquired a £48m (€53.5m) UK regional shopping centre for Coal Pension Properties, the British Coal Pension Plan's real estate subsidiary. At the same time, a newly launched continental European retail fund, run jointly with Cushman & Wakefield Investors, has taken SWIP back into continental European retail with a focus on inner-city retail assets and a target first closing in Q1 2010. According to SWIP, the European retail recovery will be swifter than that of office.
Neither the high street nor out-of-town shopping centres are out of danger yet. Despite government intervention, such as that in France via changes to planning rules designed to enable the discount market, the removal of fiscal easing and tax increases will threaten consumer spending. Yet according to Matthews, the economic environment is strengthening, consumer expenditure is increasing, and employed people are spending on big-ticket items whereas before they might have held off hoping for an economic improvement.
So if his assessment is correct, who's right? Is it under South Yorkshire pension fund, investing in discreet retail units with a focus on the high street? Or is it shopping centre investors maintaining their faith in the darkness on the edge of town?
Perhaps both. "There will be polarisation," says Watson. "Experience and convenience will both draw consumers. What will struggle is the middle."