Retailers bank on quality shopping experience

Solid leasing demand for prime European retail space

May 26, 2023
  • Tjard Martinus

Retail trade confidence is improving as concerns regarding gas prices and inflation ease. While short-term prospects remain uncertain, optimism has been boosted among larger European retailers, largely fuelled by consumers signalling increased intentions to make major purchases over the next 12 months. Prime retail is leading the way.

Most notably, premium brands are focused on delivering fantastic instore experiences, seeking footprint in prime shopping destinations such as London’s Regent Street, Covent Garden, both of the city’s Westfield shopping centres and Spitalfields Market.

Take luxury retail group LVMH, who posted what it called an “excellent start” to its financial year. Their new Sephora store in Westfield London saw queues of 5,000 people on its first trading day. In Regent Street, Swiss running specialist On recently opened an innovative three-story, 860 sq ft store featuring a high-spec wall with hidden gait-cycle analysis technology. Renowned music chain HMV is set to return to its flagship Oxford Street store, as well as opening shops across Europe.

Prime rental growth

Thanks to strengthening retailer demand, some pockets of prime rental growth are emerging across Europe’s largest cities. Well-capitalised retailers are taking advantage of better units that have become available across Europe’s main high streets and dominant shopping centres. However, retailers remain watchful when signing leases, opting for some degree of flexibility by including the use of step rents to manage occupation costs.

Southern European cities are seeing a rise in demand for quality space, as retailers look to benefit from the recovering tourism industry. Rome has seen strong prime rental growth for both mainstream and luxury retail pitches due to lack of supply of quality retail space.

Prime rents are also edging upwards in Barcelona and Madrid where Puerta del Sol continues to attract luxury brands and is experiencing an uptick in rents thanks to the regeneration of the main square. Meanwhile in Milan, there is moderate growth as retailers take space in emerging retail destinations.

In the U.K., London saw demand for quality retail space strengthen considerably in February and March following a slow start to the year. Beyond London, the U.K. has witnessed solid prime rental growth across larger regional cities such as Leeds. Yet the broader backdrop remains in the balance.

According to Eurostat, Consumer confidence across the EU (27 countries) continues to improve and reached -18.9 in April 2023. While this was up from the historic low of -29.8 in September last year, it remains well below the long-term average of -11.3.

Inflation has contributed to positive sales growth for many retailers. According to Eurostat, the value of retail trade across the EU has risen by 6.6% year on year in Q1 2023 and by 1.0% on Q4 2022-levels.

However, as some consumers reined in their consumption, the value of retail trade across the EU appears to be stabilising in recent months, while the volume of retail trade continues to edge downwards.

The divergence in retail sales value and volume continues to be most notable for food, beverage and tobacco products, while the traded volume of non-food products, excluding fuel, was relatively stable, despite price rises.

Meanwhile, online revenue and goods volume continued to slide downwards.

A mixed shopping bag

Retailers’ reported financial performance has become more mixed amidst slowing consumer demand and rising costs.

The majority of retailers have reported strong revenue growth, ranging from luxury groups on the upper end of the market to discount operators on the lower end of the market.

Consumers have become more selective about their shopping preferences due to the impact of inflation on their retail spending budgets. Not all retailers have been able to successfully hike prices and offset the sharp rise in costs, resulting in store closures and insolvency announcements from chains in Germany, Netherlands and the UK.

As Covid-19 support measures have been wound down, higher levels of restructuring are likely to continue across parts of Europe over the next two quarters.

While retailers remain uncertain about the short-term prospects, some optimism can be seen among larger retailers across Europe. Various international retailers have announced major store expansion plans over the next couple of years.

As shoppers continue to return to stores, it remains to be seen how the broader high street market will fare as operating conditions remain challenging and consumer spending remains selective. Europe will likely see a multi-speed recovery in demand across geographies as it continues to face headwinds, such as high inflation, and tailwinds, including a recovery in tourism spending. Prime high streets are poised to see a recovery. Only time will tell whether non-prime retail catches up or follows a similar path.