The ongoing pandemic is the largest economic upheaval in generations. Its effects are widespread, varied and largely negative, but there are also some opportunities. Parts of retail could be one beneficiary.
Performance in the retail sector in 2020 was volatile, but at the end of the year we saw that retail sales growth in fact accelerated in three of the four Nordic countries, most notably in Norway, where it is estimated that retail sales increased by 9.1 percent in 2020, the strongest year on record. This of course contrasts to the rising unemployment that was seen throughout the year, as a result of the economy being in recession.
A big part of the explanation is that the negative impact from a weaker economy was completely offset by the positive liquidity boost many Nordic households experienced from less spending on travel and other types of experiences (F&B, theatre, concerts, etc.).
Some of these shifts in consumer spending preferences are unlikely to be sustainable in the post-covid world, but some will likely prove to show a degree of stickiness. There are certainly strong arguments to be made that some changes in consumer behaviours are here to stay for the longer term, most notably:
- International travel is unlikely to return to pre-pandemic levels, at least in the short term. The potential health-associated risks (whether perceived or real once vaccines have become widespread) combined with increased climate consciousness will contribute to people spending a greater proportion of their income within their home country than before.
- The most homogenous shopping experiences mostly continue to move online. The pandemic has only contributed to give online retailers more reason to invest in tech and supply chains that improve the service offering. More and more consumers are finding this convenient and preferable, and the ecommerce market share is only forecasted to continue growing.
This means that there certainly is scope for that outperformance can continue and even accelerate in selected retail sectors also in coming years, thus making the tenant mix, and as an extension of that – property types, absolutely crucial for landlords.
Although the growth in groceries will slow down as more meals are had at job cafeterias and restaurants, it remains a sector that will stick around and not be largely replaced by ecommerce. However, the sectors that both really will benefit from increased consumer spending post-covid and are not particularly threatened by the growth in ecommerce are (1) the typical retail warehouse sectors like furniture and home improvement shops, and (2) F&B.
We also note that shopping centres in many cases have performed well over the last year. Although also here the data shows very mixed realities, Norwegian shopping centres in total had their strongest year since the 2008-09 financial crisis. This is particularly the case for shopping centres outside the city centres, as people are avoiding using public transport and would rather drive. As most people are creatures of habit to an extent, the longer current social distancing measures are maintained, the longer this type of consumer behaviour will stick in the population.
Given this, we expect in particular that grocery-anchored retail at good locations with ample parking and a favourable tenant mix will outperform, both in 2021 and in the years ahead.
With regards to the real estate market, we think that these trends are not fully reflected in current pricing of retail properties, which overall have experienced a rise in yields. There are therefore good opportunities for investors who are able to identify the right assets and take advantage of the still volatile and uncertain economic situation to do deals at favourable terms.