What makes retail parks so resilient?

What makes retail parks so resilient?

Going into this year, the one word used by many market commentators to describe the retail park sector was “resilient”.

Research by JLL found that EMEA retail investment volumes bounced back from 11% post-COVID to 17% of total real estate investment volumes at the end of last year, on the back of attractive relative yields and increasingly strong fundamentals. JLL highlighted the continued demand for defensive retail real estate, in particular retail parks and grocery-anchored assets, which together accounted for 39% of retail investment volumes in 2023.

While inflation and higher interest rates have challenged consumer spending, Savills says this has led to a subsequent strong performance in the discount and value-oriented segment of retail, which in turn has proved very beneficial for European retail parks.

As consumer finances have tightened, Savills says this has buoyed discount and convenience-driven retail spending, as consumers look to make savings on everyday items. Savills highlights food-anchored retail parks as the best performers and often insulated from macroeconomic headwinds as consumers continue to spend on essential shopping.

Changing shopping habits have also benefited retail parks. As consumers have continued to become more purpose-driven and value-oriented in their shopping, they’ve been choosing retail parks for their essential spending. With more consumers working from home during the week, PERE says that shoppers are increasingly favoring the convenience of neighborhood shopping centers – located on urban infill locations in densely populated suburban areas, retail parks remain well placed to benefit from this trend.

Consumer demand for in-store shopping has also remained robust – while online shopping continues to expand, this has not been at the expense of necessity retail at physical stores. What has emerged is a mutually beneficial relationship between retail parks and e-commerce, with the retail park format ideally suited to support omnichannel retailers offering click-and-collect orders, processing customer returns and servicing home deliveries.

As a long-term investor in retail parks, we at Mitiska REIM are not surprised by the success and resilience of the sector, which we highlighted in our earlier blog “Convenience remains top of the shopping list” back in October 2021. While other sectors of commercial real estate such as logistics, offices and residential enjoyed an investment party in the years leading up to the pandemic, retail investment volumes were more sober and, as a result, did not experience the hangover that subsequently hit other sectors.

Looking longer term, retail parks have consistently shown lower volatility and higher income compared to other sub-sectors within retail and real estate throughout the various market cycles since we launched our first fund back in 2012.

Today, fundamentals continue to be strong – vacancy rates are below long-term averages, rental growth remains healthy while total occupancy costs remain low for the retail tenants, and yields continue to be attractive compared to other sectors.

A lack of new construction has led to heightened demand and increased occupancy, which we are seeing across our European markets. In Western Europe, the retail park proposition based on convenience, essential shopping and value for money continues to be very attractive for both retailers and shoppers. In our Central European markets, there is continued strong demand for necessity retail which is modern, sustainable and conveniently located. Here, our new retail park developments have become the most significant and popular retail destinations in their area.

This year has also seen healthy and well-capitalised retailers continuing to roll out their expansion plans. At our annual investor conference in March, we were delighted to welcome guest speakers from TEDi and Rossmann, both of which are major tenants across our retail park portfolio.

TEDi, a European market leader in the non-food discount sector, opened 300 new stores in its 2023/24 financial year, with aims to expand from 3,200 to 5,000 stores in the medium term. Rossmann, which is one of the largest drugstore retailers in Europe, plans to open 120 new stores each year with the goal of having 2,000 stores in over 500 European cities by 2025.

Offering large, flexible units in locations convenient for shoppers, in combination with relatively low and affordable rents, we expect the retail park format to remain a top choice for retailers’ expansion plans.

Despite an overall challenging market, we at Mitiska REIM continue to see solid demand for high-quality retail park assets in Europe. During the recent sales process for portfolios in Romania, Belgium and Portugal, we saw significant interest from a number of potential buyers, securing around €500 million of divestments in December alone and delivering excellent returns to investors.

As we look forward to the rest of this year and into 2025, we expect the resilience of the retail park sector to continue and remain bullish on the opportunities ahead, both in retail parks and wider convenience real estate such as multi-let light industrial, self storage and urban logistics. As we continue fundraising and deploying capital for our latest fund, MEREP 3, we believe that this year and next could become an exceptional vintage for those investors with dry powder available and specialist know-how to take advantage of the current market conditions.

 

Past performance is no guarantee of future results. Investment in MEREP 3 is open to professional investors only. MEREP 3 is a private AIF under the Belgian 2014 AICB Law. Mitiska REIM is a licensed alternative investment fund manager under the Belgian 2014 AICB Law. Mitiska REIM acts in its capacity as fund manager (AIFM) of MEREP 3.

Links to market reports referenced in this blog: