Although occupier demand appears to be holding up in Germany, a combination of structural and cyclical factors has weighed on retail rents. And with meagre economic growth expected until at least the middle of next year, the prospects for retail rents are downbeat across most major markets.
- Although occupier demand appears to be holding up in Germany, a combination of structural and cyclical factors has weighed on retail rents. And with meagre economic growth expected until at least the middle of next year, the prospects for retail rents are downbeat across most major markets.
- The latest evidence suggests that occupier demand has remained robust. Granted, retail lettings edged down in most of the major cities, including Berlin and Cologne over the first three quarters of this year, compared to the same period in 2018. But, across Germany as a whole, take-up of retail space was up by around 5% y/y in Q3 2019.
- Yet, retail rents in Germany have continued to falter. Having fallen by 0.2% in 2018, the latest data show that the downward trend has continued. Indeed, rents have fallen by a cumulative 0.7% in the first three quarters of 2019. The city breakdown for Q3 revealed that Munich and Hamburg saw declines of 0.4% q/q and 0.6% q/q. We think that a combination of structural and cyclical factors is to blame.
- The well-documented move towards online sales is causing a shift in the type and behaviour of retailers. While clothing and textiles retailers dominated in the past, their share of letting activity has fallen by around 15% over the past five years. (See our Update “Structural changes take a toll on German retail sector”.) Instead, food retailers and health & beauty retailers have filled the gap, increasing demand for smaller units. This has been compounded by the move towards pop-up stores among fashion retailers too. Indeed, while lettings activity has increased this year, so has the amount of retail space available.
- Looking ahead, cyclical factors will act as a further headwind. Even though Germany appears to have avoided a recession following the 0.1% q/q contraction in Q2, we think that German GDP will only have edged up in Q3, perhaps by 0.1% q/q. And looking ahead, we don’t expect to see a rebound anytime soon. In turn, household consumption will be subdued over the coming quarters compared to the standard of the past five years. This will weigh on retail sales.
- Admittedly, the relationship between consumer spending and retail rents has broken down over the past few years. But the big picture is that the economic backdrop is unlikely to provide much support to German retailers over the coming quarters. Indeed, based on past form, retail sales will most likely edge down from over 3% y/y to around 2% y/y in the coming months. (See Chart 1.)
- All in all, with the German economy sputtering and the ongoing structural shift, we expect rents will decline in all the major markets this year and in 2020. And while we expect a recovery further ahead, that will only leave rents slightly higher than now in five years’ time. (See Chart 2.)
Chart 1: Consumer Spending & Retail Sales (% y/y)
Chart 2: Retail Rents (€/sqm/p.a.)
Sources: Eurostat, Federal Statistics Office, Capital Economics
Source: Capital Economics
Gabriella Dickens, Assistant Economist, 020 3974 7421, email@example.com