European urban retail investment has been increasing, what is driving investors' interest?

14th December 2015

Continue to the other two articles in this edition of Global Outlook.

Risk and return in real estate: Lessons from the listed market.

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Postive economic outlook but divergence continues.

The global economy has continued to grow at a steady but underwhelming pace through 2015. What are the expectations for 2016? Graham Parry, Group Research Director, Grosvenor Group, shares his views. Click here to read more. 

There has been increased interest from investors in European urban retail, what is driving it?
The European economy is growing again and real GDP growth forecasts for the next five years are robust across most countries. In addition, a strong consumer recovery is underway with consumption levels above the 2007 peak in core markets such as France, Germany, the UK and Sweden while consumption is expected to rebound over the next few years in Italy and Spain.  Urban retail is a sector that is expected to fare well in Europe over the long term. Europe is a highly urbanised continent with over 350 million of its citizens (75%) living in cities and towns. Among these urban areas Europe has a collection of rich and growing cities. A fifth of the world’s top 100 wealthiest cities are in Europe. Europe’s leading cities are also forecast to have significant population growth over the next 15 years, with average annual growth three times higher than the national average. Many of Europe’s historic city centres have stringent planning restrictions on new development, which ensures capital preservation in key locations due to restricted supply.  Another reason is that urban retail has proven to be structurally resilient to the impact of e-commerce and the polarisation that it is causing. Changing consumer demands are reinforcing prime city locations, which complement online retail, while peripheral areas seem to be on a declining trend. This is reflected in the rationalisation of retailers’ store portfolios and their focus on fewer, leading locations in key cities.
What makes European cities so compelling to retailers?
Europe has a collection of vibrant cities that offer strong prospects in terms of growing dynamic economies as well as attracting significant tourist spending. These locations all have common characteristics: a world class retail and leisure offer; they are well connected internationally and nationally; and their cultural and historic significance means that they attract high numbers of tourists, supplementing already dense residential populations. Europe’s leading cities are major tourist hubs attracting on average over 5 million international tourists a year. Their appeal to both global talent and tourists means they have high footfall and retail spend, making them attractive locations for international retailers. >/dd>
What has the sector’s performance been and what is the outlook?
European urban retail has historically delivered strong returns, with prime markets returning c 14% p.a. over the last decade. Certain cities have significantly outperformed enjoying robust rental growth and strong investor demand. For example rental growth in London has risen sharply since 2009 as international retailers continue to want flagship stores in key locations such as Regent Street and Oxford Street. Meanwhile average rental growth for all UK high streets has been stagnant.  The most attractive cities are the focal centres for retail in their respective countries and have achieved average annualised real rental growth of 2.0% p.a. since 2001. These cities offer rental growth potential over the medium and long term but some like London and Paris are advanced in the current cycle. Some southern European cities like Milan and Barcelona are at a mid-point and others like Madrid are at an earlier stage in the cycle and could offer greater growth potential over the medium term. Overall expected returns from the sector average around 7% p.a. over the next ten years, predominantly driven by robust rental growth and well supported pricing.

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