The growth of e-commerce is transforming the retail market all over the world. Experts don’t believe that physical stores will completely disappear but owners of developers of retail assets will need to come up with new ideas in order to attract customers. Jan Kotrbáček, Head of Retail Agency CEE at Cushman & Wakefield analysed the CEE retail market for Property Forum.
What are the main trends driving the CEE retail market in 2017?
CEE is becoming the powerhouse of the European consumer market with growth rates significantly outperforming Western European countries. The region is still lacking volumes, but provides tremendous growth opportunities. Newcomers to the market are focusing on prime high street locations and well established shopping centres. E-commerce is forcing retailers and shopping centres to provide an excellent customer service and unique experience to top the convenience of online shops. Transportation hubs along railway lines are becoming important retail destinations with increasing demand of quality service and improving road infrastructure. The F&B (Food and Beverage) segment is growing and its importance is increasing. The premium and luxury segments are also playing an increasingly important role in the entire CEE region, thanks to tourists.
How are tenants responding to the growing popularity of e-commerce? Do you expect the downsizing of physical stores to become a common practice?
While e-commerce offers some obvious benefits, it actually reduces competition. The new generation of digital natives is very comfortable with online shopping but there is a potential pushback. Currently e-commerce penetration in the developed world varies from 6 to 15 percent of retail turnover. There is physical limit for e-commerce throughput. Cities were not designed for single item distribution and this concept contradicts the nature of urban culture. Shopping experience is still a significant factor in customer decisions. I think that in the coming time e-commerce will wipe out medium-sized stores. Efficient stock planning will allow retailers to achieve good results with smaller stores, while large scale stores will provide a special shopping experience.
What sort of opportunities do shopping centre developers have in Central and Eastern Europe currently? Which are the less saturated markets where there is room for new schemes? Are there markets where only expansions and renovations are in the pipeline?
With more demanding consumers focus will be on quality, not the volume. The CEE region is very fragmented with significant cultural differences and varying level of urbanisation. Flexibility and adaptability are the key factors for the region. For example in Russia, where over 20 million square meters of retail space were developed during the last 20 years, schemes that are just over 10 years old need renovation. We see expansions and renovations of older schemes predominantly in more saturated markets.
As CEE economies are getting stronger some developers find opportunities in smaller cities where there is no need for traditional shopping centres. What are your projections for the future of retail parks in CEE?
Retail parks are becoming more important in line with a gradual saturation of the market. They can provide a sufficient offer even in smaller cities to meet the demand for everyday needs and currently have a strong pipeline.
How has the role high streets play on the CEE retail market changed over the last years?
High street locations are strongly developing and best performing retailers are opening unique flagships stores in the most important and attractive high street destinations throughout the whole CEE region. Increasing interests and activities in relation to high street are also seen in regional cities. Modern urban culture is much more centre-focused than it was before, when families were looking for calm suburbs. Vibrant streets and public spaces are shaping the cities. Nowadays food concepts are driving not only street retail, but affect the habits and behaviour of citizens.
Which CEE cities and which market segments can see the highest rental growth over the next 12 months?
We currently see the best potential for rental growth in Prague where we expect another 5 percent growth within the next 12 months. Romania and particularly Bucharest also tend to raise its rental levels. We do not expect the decrease of rental levels in any of the CEE markets. The CEE market is rather mature and is unlikely to award landlords with booming rents in the short term. Usually markets on the low cycle may experience strong growth and CEE markets are already in the rising stage. There are still some undervalued markets, like Ukraine but strong potential comes along with high risks.