Retail occupier market
Driven by the continued growth of online shopping, combined with demographic trends and changing consumer preferences, the majority of retailers are now focusing on the optimisation of their store portfolios rather than expansion. Thanks to this trend, retail take-up has not exceeded 500,000 m² over the past three years, compared with an average of around 725,000 m² in the period 2009-2017. On the other hand, retailers are generally reluctant to close shops, given that these are an essential element in their total brand experience and in maintaining their market share. Physical shops offer consumers an experience that cannot be duplicated online, plus they can act as essential links in delivery and return processes. In addition, physical shops help retailers to increase their online market share, so the closure of shops can lead to the loss of more than the revenue from the shops themselves.
Despite the absence of a sharp rise in vacancies as a result of the Covid-19 crisis, Bouwinvest does expect to see a rise in vacancy rates in many locations in the coming two to three years, partly driven by the continued rise in online shopping and the after effects of the Covid-19 crisis. Retail rents in the experience sector were already under pressure before the Covid-19 pandemic and this pressure has only increased in the 22 months of the crisis. On the other hand, convenience retail showed a modest rise in rents, led by smaller shopping centres (where supermarkets account for a major share of rents).
Bouwinvest believes the retail market as a whole will mostly rebound once the Covid-19 pandemic has been contained and all contact restrictions are lifted. Online sales, however, are likely to account for an ever growing share of retail sales in the future and will lead to a further reduction of retail space and city centres becoming more compact. Bouwinvest firmly believes that the high street will continue to be a key element in the strategy of leading retailers, simply because physical shops provide that experience element most consumers find important, and the fact that this is something impossible to recreate online.
Retail investor market
In recent years, annual real estate investment volumes have averaged between € 18 billion and € 20 billion. This continued in 2021 when, despite the Covid-19 crisis, the investment volume came in at € 18.2 billion. At the same time, initial yields have either contracted or remained stable and relatively low in almost all real estate segments. This indicates that investor interest in real estate has remained high.
Overall, in this persistent low interest environment, the yield spread of real estate compared to bonds still provides interesting investment opportunities. Bouwinvest therefore expects investor interest to remain substantial for growth sectors, specific opportunities and for core properties. Bouwinvest will closely monitor inflation and potential impact on interest rates.
Prime high street yields in the G5 cities have widened by 25-65 basis points since the start of the Covid-19 pandemic. While there is still a great deal of uncertainty regarding future rent levels and prime high street investments are still scarce, Bouwinvest expects the market to bottom out. On the other hand, Bouwinvest expects the yields for convenience shopping centres and supermarkets to contract further.
The Russian invasion of Ukraine and rapidly escalating events in late February and in March 2022 are a significant tragedy for the people and is causing disruption to business and economic activity in the region and worldwide. This qualifies as a non-adjusting subsequent event. These events and the related market uncertainty could have an adverse impact on the Fund, including but not limited to the fair value of its investments and/or cash flows. At this moment it is not possible to provide an estimate of the financial impact of this crisis worldwide and on the Fund. The Fund screens periodically its existing business relationships, including sanction lists where required. In respect to Russia and Belarus no determination of direct breaches of any current sanction rules were noted nor any material matters that affect the going concern of the Fund. The Fund will continue to monitor market conditions as information becomes available and evaluate potential impact, if any, on the value of the Fund’s real estate investments and its operations going forward.
Retail Fund plan
The Fund’s experience & convenience strategy and its focus on the very best assets in both categories has paid off in the current crisis. The Fund maintained its high occupancy rate. On a five-year basis, the Fund has outperformed the MSCI property index by a significant margin of 4.2 %-points (5.3% vs 1.1%). However, during the crisis the major cities have been forced to deal with a sharp decline in the number of visitors, which has had a negative impact on the performance of experience assets. This is why the Fund is careful with regard to the acquisition of any new assets in the experience segment and is more focused on strengthening the convenience segment.
Bouwinvest believes that it can only generate long-term stable financial returns for its investors if it takes the societal impact into account in every decision it takes. The Fund’s focus is on the city of the future and it aims to create real value for life by investing for the long term in a responsible manner. The Retail Fund wants to identify and help create experience and convenience shopping destinations that are fit-for-purpose today and that will remain so long into the future. In addition, it aims to reduce the environmental impact of its portfolio, striving for a net-zero carbon, nearly energy-neutral and climate-resilient Paris Proof portfolio before 2045.
The pandemic will leave its mark on the real estate markets. Many trends that were already evident before the pandemic, such as the growth in online shopping, accelerated during the crisis. At the same time, the Fund is convinced that once Covid-19 measures are lifted, people will want to shop, travel and meet each other again. With its long-term investment horizon, the Fund focuses on adding value for its investors, tenants and stakeholders by continuing to invest in attractive living and working environments.
Amsterdam, 21 March 2022
Bouwinvest Real Estate Investors B.V.
Dick van Hal, Chief Executive Officer and Statutory Director
Rianne Vedder, Chief Financial & Risk Officer and Statutory Director
Mark Siezen, Chief Client Officer
Allard van Spaandonk, Chief Investment Officer Dutch Investments
Stephen Tross, Chief Investment Officer International Investment