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Grocery’s growing popularity will persist beyond covid

Its “essential” status meant grocery retail was expected to be one of the stand out segments of both Europe’s economy and real estate markets through the covid crisis in 2020 and beyond. A new report from JLL & Union Investment illustrates just how strong the segment is.

In real terms grocery real estate attracted €6.7bn of the capital flows targeting retail property in 2020, and this trend will continue through 2021.

Grocery retail’s share of total retail real estate investment hit 22% in 2020, up from 6% in 2016. Yield compression is occurring, states the report, The European Grocery Real Estate Market.

But real estate investors have historically under-allocated capital towards grocery real estate assets which between 2014 and 2020 averaged only 10% of Europe’s overall retail investment volumes while grocery stores attracted 37% of the EU retail spend.

The report identifies longer term trends that will affect grocery real estate. For instance, the growth in online food sales through the covid crisis should slow in the post-pandemic environment. Retailers are embracing both online and bricks-and-mortar retail and low profit margins will not sustain widespread online sales. Retailers meanwhile continue to invest in physical stores, thus enhancing the physical shopping experience. And in some cases the physical stores have become distribution hubs for online sales.

The comparative recent performance of food retailers against other types of retailing such as fashion and the strength of grocery retailers’ covenants, helped make grocery-anchored real estate more attractive through the pandemic. And, the report says, the sector is able to offer both core long-term income for more risk averse investors as well as value-add assets where shorter leases and older property can be acquired.

Growing urban populations will create more opportunities for grocery stores. Urban populations across Europe are expected to rise 3.4% by 2035 (3.7% including UK) which means that well-connected grocery stores within growing conurbation can attract new customers and offset periods of weak GDP growth.

Sweden, Netherlands and France will see strongest population growth

Among the key grocery markets, urban population growth by 2035 is forecast to be strongest in Sweden (+14.7%), the Netherlands (+8.4%) and France (+8.3%).

JLL and Union expect changes in customer preferences to be the key drivers of grocery consumption notably sustainability, affordability and quality. Changing shopping preferences driven by demographics, changing work patterns, technology and sustainability are key drivers for productivity of different grocery store formats and adaptability will be key to the grocery sector’s ability to respond to changing preferences.

“Despite a sharp rise in demand for home deliveries, physical stores continue to fulfil an irreplaceable role in the food distribution process, supporting both in-store and online grocery sales. While many grocery retailers increased their investments in strengthening their online capabilities and infrastructure, growing conurbations are set to increase demand for physical stores in urban areas which will offset shifts in retail spending,” said Union Investment’s head of investment management retail Henrike Waldburg.