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European high streets brace themselves for change

Hardly a day goes by without at least one negative headline bemoaning the impact of disruption in retail markets on high streets and shopping centres. While this is true in the US and the UK, Chris Urwin examines whether European high streets will face a similar threat.

3 minute read

Street in Paris, France

The negative consequences associated with structural change are less evident in Europe and retail property has – so far – been more robust. But this should not lead to complacency: Change is coming. We expect online retail to grow as technology is improving, and European consumers are as demanding as British and American ones. It is highly likely that, in time, the total demand for physical retail space will be negatively affected.

However, the changes in how we shop will have different effects on retail property across Europe. The best high streets will be able to thrive despite a challenging backdrop. In contrast, apart from the highest-quality shopping centres, suburban and edge-of-town retail is likely to struggle as consumers demand more from their shopping experiences and retailers retreat to a smaller number of brand-enhancing stores. As ecommerce reduces the need to shop in store, it alters shoppers’ expectations and creates a distinction between high- and low-engagement retailing.

Some high streets will therefore be more robust than others. Cities that are attractive destinations, have affluent and growing catchments, and stringent land-use regulation will be in the best position. Exploring these success drivers, we identify the city-centre retail locations that should be best-placed for the change to come – some today and others over the longer term.

European Catchment

Supply conditions

Loose land-use regulation has led to significant retail development over time in the UK and even more in the US. This has left investors in retail real estate particularly exposed to the online diversion of business. In contrast, many European countries – including Germany, the Netherlands and Nordic states – have sought to protect their high streets through much more stringent land-use regulation. As a result, past construction levels have been lower and future development pipelines are modest. As well as being one of Germany’s most attractive shopping destinations, Munich high streets have benefited significantly from highly restrictive planning rules that have limited the number of shopping centres.

Catchment characteristics

In cities where populations are stagnant or growing slowly, online sales are likely to take a larger proportion of a relatively static total spend. This is the case, for example, in some smaller German and Southern European cities. However, those cities set to experience growth in population, employment and spending power will see the total level of retail sales increase, mitigating the impact of the rise in ecommerce.

Paris is a city characterised by a large and healthy catchment. It is one of the strongest global retail locations, serving a broad geographic area and a catchment population of over ten million. It also has one of Europe’s most skilled workforces and is among the most affluent cities, pushing personal spending levels well above the European average.

These factors should make demand for central Paris retail robust. Similar logic applies to central London retail, despite the difficulties afflicting the wider UK market. Affluent populations and high levels of purchasing power also add to the robustness of cities like Stockholm and Dublin.  Both are thriving centres of high value-add economic activity, which supports their long-term growth potential.

Destination qualities

The more resilient high streets will tend to be those that make shopping a pleasure by combining shopping and leisure activities. As shoppers become increasingly selective about the type and frequency of their shopping, successful high streets will need to be places where people choose to spend their time. The physical store is no longer a distribution channel, but a platform for discovery, engagement, experience and interaction. Düsseldorf is an example of a desirable high-street location that attracts the wealthy local population and, consequently, international luxury brands. In Copenhagen, the world’s longest pedestrian street creates a unique prime pitch that acts as a vibrant space for social and cultural activities.

Tourism numbers

An influx of tourists can boost the level of spending in a city, and the type of spending visitors typically indulge in is unlikely to move online, so cities that benefit from high tourist numbers and spending look more robust than most. For example, many tourists are attracted to Barcelona’s rich culture, fabulous architecture, and a world-class dining and night-life scene. As a result, foreign shoppers contribute up to 80% of total retail sales in the city centre. Berlin is another city that attracts a lot of visitors, with international tourists spending nearly three billion euros there in 2017.

Resilience to ecommerce

While tastes, preferences and customs can play a role in determining the appetite for internet retail, they can change quickly. But to grow rapidly, ecommerce also requires appropriate infrastructure to be in place. Internet penetration must be high, suitable logistics facilities available and local postal services reliable. While such infrastructure exists in most northern European countries, this is not always the case in southern Europe. In Spain, ecommerce rates are very low and brick-and-mortar stores remain consumers favourite mode of shopping. In Madrid, the large catchment population and impressive tourism spend combine with these barriers to ecommerce, making it a robust location for retail property in our view.

As the threat from ecommerce grows, city-centre high-street locations that have scale as well as affluent, growing catchments should do well. We prefer cities which are attractive tourist and leisure destinations. High levels of tourism are particularly attractive as clear indicators that people choose to spend their time there. We expect continued polarisation in retail – top sites thriving, while those on the fringe are increasingly replaced by ecommerce. 

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