- Top 30: Schroders Global Cities index
Which areas have been impacted most?The impact so far has been most visible in the US. Weak sales figures have led to numerous store closures and layoffs. Perhaps the most important question is whether the US experience will be repeated in Europe.UBS as of May 2017
Is Europe next?The march of Amazon and other e-retailers is unstoppable. Real estate investors can’t afford to be complacent about the implications. However, as outlined in the data above, there are mitigating factors in Europe. Malls on the Continent are less likely to be anchored by department stores, with supermarkets, electronics and fashion brands used to pull in shoppers instead. In fact, the two largest European retail REITs, Klepierre and Unibail, only lease negligible amounts of space to department stores. The geography of malls in Europe is also different. Planning is more restrictive so shopping centres tend to be nearer population centres rather than built further out in rural areas as is often the case in America. European shopping centres are often on in-fill sites in easy reach of large numbers of affluent shoppers. Westfield serves as an example with locations in densely populated and well connected areas of east and west London.Apple uses its stores as showrooms, to allow customers to try before they buy. In France, 70% of Apple stores are now located in shopping centres with just 30% found on the High Street. Its push into flagship malls may be followed by other brands. Nine out of Apple’s 20 stores in France are owned by one real estate investment company, Unibail, which is focused on super-prime centres. Real estate investment companies (REIT), and the funds that back them, could benefit. It may also be that the closure of department stores for some centres will be manageable. In Singapore, department store closures have had little impact on malls, or at least those with the highest footfall. Even in the US Simon Group, the biggest mall operator that has seen its share price tumble in the past year, has seen some success in backfilling vacant department stores. Other groups with lower grade malls are having less success.
The futureThere are clear differences between the US and Europe but the broader trends within retail are unassailable. It is clear to us that few of today’s prime European malls will remain prime in 10 years’ time. Malls near to large, affluent catchments of consumers will retain rental pricing power and occupancy. Some will become centres for leisure – places where consumers interact with brands. They will benefit as companies dedicate more of their marketing budgets to their stores. Some of these mega malls remain sensible investments. Secondary malls with weak sales and declining footfall, often a symptom of below-peer demographics, will be marginalised, suffering declining rents and rising vacancies. The lesson from America is that much of Europe’s shop space is on borrowed time. The trend is clearly not the mall’s friend.
- For more views on investing in global cities – and to see the full index – go to theSchroders Global Cities website.