Retail markets across CEE are being affected by the intensifying impact the financial crisis is having on the real economy, leading to lower retail sales, downward pressure on rents in many markets and decisions by retailers to cut their expansion plans in the region, according to CB Richard Ellis' forthcoming report, CEE Retail Investment Market View H1 2009.
Another consequence of the downturn has been significantly lower investment in retail properties across the region in recent quarters. Nonetheless, there are signs that the region's retail markets are weathering the storm relatively well. Despite declines to consumer spending, negative growth to retail sales is limited in most markets across the region. In addition average rents are maintaining stability in prime shopping centers in especially Central Europe (CE) and less outward movement to shopping center prime yields occurred in Q2 2009 than in either Q4 2008 or Q1 2009, offering some hope that yields will bottom out later this year.
After years of strong growth to retail sales, year-on-year (y-o-y) growth has turned negative in most CEE markets in 2009, with the exception of Poland where positive growth has been maintained. This is a consequence of negative economic growth, rising unemployment, exchange rate fluctuations and falling consumer confidence across the region.
Jos Tromp, Head of CEE Research & Consulting, explains: "Despite recorded declines to consumer spending, negative growth to retail sales has been limited in most markets across the region so far and slightly below figures for major Western European economies. While unemployment has increased across the region, it is still at about the average EU-16 level and countries such as Czech Republic, Poland and Romania have unemployment levels below the EU-16 level. While still low, consumer confidence levels have improved in recent months in most markets. And most importantly, the IMF believes that the world economy is beginning to pull out of recession and that initial signs of a global economic recovery may be taking hold."
Expansion of CEE retail markets slowed significantly in H1 2009 as a result of these changing economic conditions. Significantly less new shopping center space will come to CEE markets through the end of 2010 than was forecast a year ago. According to Tromp: "Retailers have also curbed expansion plans, opening shops that were already announced but otherwise forgoing expansion. An exception to this trend is discounters that are now seeing increasing revenues and have unique opportunities for gaining market share. These changes to pipeline and retailer expansion plans bring CEE's retail markets more into line with current economic sentiment than in H2 2008."
Shopping center rents across CEE also came under pressure in H1 2009 due to more difficult economic conditions. This led to corrections to prime rents in most CEE markets on a y-o-y basis, although some declines have been more the result of weaker local currencies than of weak property market fundamentals. Tromp explains: "Lower turnover for some retailers, depreciation of local currencies and slower retailer expansion all put rents under downward pressure across CEE. Retailers are now seeking more flexibility from landlords in this climate. On the other hand, average rents in prime shopping centers in markets such as Poland and the Czech Republic have remained resilient thus far which shows why quality is so important in today's market."
In line with the overall decline in investment activity across the region, investment in retail properties also slowed dramatically in H1 2009. Retail investment in the first half of the year was 112 million, down 92% on H2 2008 and 94% on H1 2008.
Patrick O'Gorman, CEE Capital Markets, explains: "This decrease in retail investment can generally be attributed to the relatively large lot sizes associated with core retail investments, which in the current market are more difficult to finance and involve different risk/return profiles than offices. In addition, prime re