European retail turns a corner

The first Europe-wide lockdown in spring 2020 sent retail markets from Scandinavia to the Iberian peninsula into an unprecedented state of collective shock. A deeper crash did not occur, though. Optimism has already returned.

Optimism is returning to the European retail markets, even though the coronavirus pandemic is still not fully under control. They turned the corner in the third quarter of 2021 as shown by the Retail Attractiveness Index (GRAI), which is compiled jointly by Union Investment and GfK. The Index recovered significantly, climbing to 113 points (see chart below). That figure is 14 points above the prior-year period and represents a three-year high for the retail index in Europe.

The previous peak was 115 points, recorded in the third quarter of 2018. The Index measures the attractiveness of the 15 most important retail markets in Europe. A figure above 100 points indicates an above-average reading. The Index reached its lowest level to date by the second quarter of 2020, when it had fallen to 89 points.

The strong increase now measured shows that we’ve really left the challenging lockdown times behind us, and that both consumers and retailers now have a much more positive outlook: Returning optimism is reflected in the index’s two sentiment readings. Consumer sentiment and retail sentiment both increased by 21 points over the course of the year, taking them back into above-average territory at 109 and 110 points, respectively. The labour market continued to be a source of major support in the third quarter, as did retail sales.

Compared to the third quarter of 2020, the index strengthened across all 15 European countries covered. The changes are mostly in the double-digit range, highlighting the vigorous recovery that is now under way. At country level, Germany regained its top spot.

However, the effects of the pandemic differ significantly depending on the industry. While grocery and drugstores are experiencing a surge in sales, brick-and-mortar retail in particular has been hit by a harsh wave of consolidation, leading to loss of earnings, vacancies and falling rents.

Retailers selling everyday goods benefited doubly during the pandemic. On the one hand, they did not have to close their stores; on the other hand, sellers of everyday goods are relatively resistant to online competition, as the sale of everyday goods has low margins and the cost of prompt delivery of goods, some of which perish quickly, is very high.

Since the end of the lockdowns, there has been a significant recovery in footfall and sales, although the pre-crisis level has often not yet been reached again. At the same time, sales by online retailers have declined slightly. Nevertheless, the division of the retail markets into stationary and digital will continue for a while. The coronavirus pandemic is accelerating the change in retail markets. Part of the turnover has shifted towards online retail, even though the stationary shopping experience is and remains irreplaceable.

‘Retail space in top locations of city centres will retain its importance in the future, but it will shrink in perspective and be reduced to the sections with the highest frequencies.’

Olaf Janßen, head of real estate research, Union Investment

Retail space in top locations of city centres will therefore retain its importance in the future, but it will shrink in perspective and be reduced to the sections with the highest frequencies. As a result, many B and secondary locations will become significantly less important.

In the future, the large metropolises, touristically attractive cities and university towns will be increasingly attractive for retailers and internationally operating chains. Only the best locations have a long-term perspective. Top locations and centres with a strong appeal for their catchment area and a high quality of stay and experience will continue to be attractive.

For the less attractive retail spaces Municipalities are increasingly dealing with the transformation, especially in inner-city locations. The most common after-uses currently include hotels, offices and residential uses, in other cases logistics and distribution centres.

The transformation of real estate through conversion and change of use is not a new phenomenon. European cities have reinvented themselves time and again in the past, and with each era buildings have taken on a different meaning. However, we are observing a trend towards transformation that is driven, among other things, by ESG (environmental, social, governance) issues, (re-)urbanisation and the new role of city centres, as well as the correlating social and political framework conditions.

An essential goal that can be achieved with the transformation of real estate, in addition to immediate economic success, is the creation of lively, integrated urban squares and city spaces.

Learn more about the transformation of real estate through conversion and change of use with the Market Study Transformational Real Estate – How ESG, E-commerce and Social Trends Accelerate Mixed-Use, which Union Investment conducted together with bulwiengesa