Amid early signs of activity in European retail investment markets, King Sturge's latest research on the sector warns that the retail occupier market faces at least two more years of hardship and is therefore seriously out of kilter with any investment recovery.
European Retail Property 2010 reports that, given the well-documented decline in capital values in the last two years, the focus has invariably shifted to income streams. But King Sturge says that these have fared little better with average underlying rents across Europe's retail markets set to fall further in 2009, and many unlikely to return to positive rental growth until 2012.
As the investment and occupier markets are inextricably linked, improvement in the former may be derailed by occupational weakness, cautions the report. "Some investment markets are running before they have got their occupier 'legs'," comments Stephen Springham, retail research partner at King Sturge and the report's author. "Investment volumes are starting to come back and yields on properties let on secure income streams, typically for 10 years or more, have experienced dramatic yield compression since the spring. Rents, however, are generally at best stagnant or more commonly going backwards, in some cases significantly. Whether the rally has continued momentum is therefore extremely questionable.
"Vacancy rates in a few markets are now past their nadir, having peaked in most European markets in the first half of 2009. Whilst the pace of retailer fallout has slowed as the year has unfolded, a considerable number still have uncertain futures, and the next six months will be telling."
Future revenue streams brighter
In many European countries, where retail leases are pegged to annual indexation (such as the consumer price index) during the lease term, the prospects for future revenue streams are brighter, particularly longer term. Most will see a return to positive CPI indexation by 2010 with the notable exception of Lithuania and Latvia which are forecast to experience the sharp correction that Estonia has seen this year. Between 2013 and 2020, all the European countries monitored by Oxford Economic Forecasting will witness average annual rises in CPI of between 1.5% (Switzerland) and 3.1% (Slovakia and Bulgaria). "In simple terms, rapid increases in rents on the back of a bull market may be a thing of the past, but income from indexed retail rents will ultimately return," says Stephen.
Retail sales growth, another important indicator of the health of the retail property market, paints a similar picture. All 29 European markets assessed by Oxford Economics and King Sturge will see negative retail sales growth this year, including the five largest EU27 markets albeit the UK is forecast to experience a dip of just 0.5% at worst, with a positive outturn even conceivable. But over a ten-year horizon, all markets are expected to return to growth with Poland leading the way on a predicted 4.9% per annum rise until 2020 and Italy lagging at the other end of the scale at just 0.6%.
When expressed as total cumulative growth over the 2010-2020 time period, these sales figures provide even greater comfort, ranging from 12% in Italy up to 91% in Lithuania. Indeed, the Baltic States and Slovenia and less mature markets like Romania and Bulgaria are expected to resume higher growth trajectories over the longer term, albeit this growth will be leveraged off low bases.
"In the current climate where retail sales growth is hard to come by, it may seem difficult to believe that future growth could be so positive," remarks Stephen. "But, in the longer term, most markets will re-establish a sense of 'normality' after the severe and painful correction they have had to endure, particularly in Central and Eastern Europe and other 'tiger' economies in the West, such as Ireland.
"Perhaps the greatest lesson to be learnt from the downturn should be a re-evaluation of the traditional landlord-tenant relationship and the degree to which the market as a whole stands to