Slower growth in European online shopping to benefit non-high street retailers

The retail sector is a key driver of European commercial real estate valuations

Retail valuations notched the largest gain in Altus Group’s Pan-European Valuation Dataset in Q3 2024, with the all-retail aggregate increasing by 1.3% quarter-on-quarter. In this insight, Capital Economics discusses developments in the broader online and out-of-town retail sectors in the EU.

Online retail shares across Europe are stalling

Consumers have more discretionary income of late, which should provide optimism for retail property as 2024 comes to a close. Labour markets across Europe have been rather tight, allowing for significant wage growth to occur. Inflation has now eased significantly and the European Central Bank has started cutting interest rates, providing additional relief to consumers via lower interest costs.

In addition to this positive macroeconomic backdrop, recent estimates indicate that online retail shares have been growing more slowly across Europe. There has also been little sign of convergence in online shares throughout the region, which supports Capital Economics’ long-held view that online competition will be less of a drag on southern European high streets than in the north.

Knight Frank reports that online shares increased only marginally in most markets in 2023. This echoes other data suggesting the pandemic boost to online spending has waned. For example, Eurostat online retail sales volume data have fallen almost 15% from their 2021 peak in the euro-zone, though remain about 25% above end-2019 levels. Second, lower online shares have persisted in southern Europe. In fact, the difference between online shares in Italy and the Netherlands was around 8 percentage points in 2023, similar to the gap in 2019. Lower online shares are one factor which Capital Economics think will aid prime retail rents in southern Europe in the coming years, along with a generally brighter consumer spending outlook and greater support from high-spending foreign tourists than in northern markets.

Online shares were also lower in 2023 in markets that have some of the highest e-commerce penetration, including Germany and Sweden. While this could point to scope for online shares in southern Europe to catch up to their northern counterparts, other data suggest that there has been little change in the structural factors and preferences that held back e-commerce engagement in southern Europe pre-pandemic. Indeed, online shopping was still notably lower in southern Europe in 2023, suggesting that the gap between online shares in northern and southern markets will endure.

Even though Capital Economics views that the worst of the pandemic-driven drag from online competition on high streets is over, our base case is that online retail sales shares will continue to trend upward, but at a pace more in line with the pre-pandemic trend. That said, there will be further store closures to come, especially in markets where online shares are higher.

Out-of-town retail likely to beat the street

Non-high-street retail subsectors have seen a more substantial rental recovery from post-pandemic lows than high-street shops across both average and prime quality assets. Prime retail parks have led the way overall, but retail warehouses/big box retail and neighbourhood and convenience (N&C) centres have also seen strong rent recovery. As a result, rent growth in these out-of-town subsectors is likely to continue to beat high-street gains.

Both supply and demand factors are contributing to out-of-town retail performance. Supply conditions for these assets have tightened more than for high streets. Although new development in out-of-town retail could be more elastic compared with land-constrained high streets, with the exception of malls, vacancy rates have fallen below pre-pandemic averages. In the case of retail parks, reported vacancies in H1 2024 have been as low as just 1.5%.

Demand drivers also favour non-high street locations. Increased at-home work enables consumers to substitute more of their town and city centre spending for that closer to home. Indeed, there is evidence that footfall at inner-city shopping centres has underperformed since 2019. Furthermore, while the rise in e-commerce is clearly a headwind for physical retail spending across the board, some out-of-town subsectors could be relatively insulated. For instance, sales of convenience goods typically offered by N&C centres face less online competition, while warehouses and big box units benefit from abundant parking, options like ‘click and collect’, as well as their ability to serve as last-mile delivery hubs.

Not all non-high street assets are made equal though. Increased availability suggests that mall/shopping centre rent growth will continue to lag. Vacancy could continue to rise for malls given that the fashion and electronics retailers that have historically been key anchor tenants face the stiffest competition from online.

That said, assets, including shopping centres, which can cater to shifting consumer preferences by providing additional services such as food options and entertainment are likely to continue doing better than those with a more traditional occupier mix. Consistent with the stronger sales growth in these sectors, there is anecdotal evidence that footfall at ‘experience’ shopping centres has been much stronger than for other shopping centre types, with retail parks again leading the way.

The stronger demand backdrop for higher-quality assets has been reflected in rental performance. The gap between prime and average rent growth for shopping centres and retail parks (around 13 percentage points) since 2019 is even higher than the 10-percentage point gap between prime and average offices.

Although there are headwinds to retail across the different subsectors and along the quality spectrum, within retail, there is scope for rent growth in retail parks and warehouses as well as N&C centres to continue outpacing high streets in both the prime segment and the wider market.

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