The need for stable cash flows has been identified as the main overall trigger point needed to spur the investment market.

A new update from ULI to the Reshaping Retail report, which was published earlier this year prior to the coronavirus pandemic taking hold across Europe, forecasts that the impact of COVID-19 will accelerate the restructuring of the retail property sector, particularly in the United Kingdom.

Apart from the lockdowns that have already had a significant impact on rental income, the negative economic outlook is expected to continue to affect rental income for a longer period of time, as well as valuations, which will be an important trigger in order for the sector to adapt to a “new normal.”

Available for ULI members to download on Knowledge Finder.

The latest research, based on recent interviews with industry leaders, reexamines four triggers, identified in the original report, that may break the near-paralysis in the European retail real estate investment market. The four triggers that had been observed prior to countries entering lockdown periods include the following:

  • the economic picture;
  • the European listed sector;
  • banks; and,
  • private equity.

The closure of many businesses has undoubtedly created a new, unexpected layer of challenges for the already struggling retail sector but may pave the way for new and existing players to step in to buy, revitalize, or repurpose those assets.

“It has been a very uncertain time for the retail real estate market,” says Lisette van Doorn, CEO of ULI Europe. “Prior to COVID-19, the sector was already facing structural challenges due to the growth of e-commerce and other shifts in consumer behavior, but the benign economic environment kept the sense of urgency to act relatively low. However, at the same time, the general uncertainty over how sustainable income was for the future had resulted in an investment market characterized by a lack of liquidity.

“The lockdowns have already resulted in a rapid decline in operating income for many retail real estate owners. This, coupled with the concerning economic outlook, will have a major effect on longer-term sustainable rents and vacancy levels and subsequent valuations. Looking ahead, social distancing and the investment required to meet safety expectations and make assets fit for purpose again strongly calls for all stakeholders to come together to collaborate on how the sector can succeed in the longer term.”

The report identified a number of potential triggers that could force the market to move forward, including the macro-economic environment, the state of the listed sector, as well as the response from banks and private-equity players. The report concludes that for any trigger to kick off the transformation process, a better understanding and clearer outlook is needed related to the stability of cash flows.

However, it will be hard to know, at this stage, when that clarity will exist given the ongoing unknowns such as the impacts of the phased lifting of lockdowns across Europe, potential future lockdowns, and the longer-term adjustments for social distancing.

The report was commissioned by ULI Europe’s Retail and Entertainment Product Council, made up of senior members representing the most influential companies in the sector, which met as part of a virtual meeting on May 28 to discuss the latest findings.

Andy Watson, co-chair of ULI Europe’s Retail and Entertainment Product Council and a partner at Europa Capital, comments, “The various retail real estate markets are in a uniquely difficult period. Navigating through this will require communication and cooperation. It will be key for the industry to gather tenants, landlords, and their banks around a table, virtual or otherwise.”

Watson’s fellow co-chair, retail adviser Chris Igwe of Chris Igwe International, stresses the importance of understanding likely consumer behavior: “There is still a lot of uncertainty as to how consumers will respond to the retail experience as countries emerge out of lockdown. What is not in doubt is that the retail sector will need to adapt to the ‘new normal,’ which will require restructuring of the market to take account of emerging health and safety regulations. This updated report reflects on the early learnings that have emerged from the lockdown period and we will use this as the basis to continue to learn from best practice that emerges globally.”

The full report, Reshaping Retail—Accelerating Change, can be downloaded on ULI’s Knowledge Finder.