European Macro Outlook: What's in a Number?

CUSHMAN & WAKEFIELD RESEARCH European Macro Outlook

RETAIL

The slight improvement in confidence has not been reflected in the latest retail sales figures yet, although confidence is not strongly correlated with actual spending outcomes. Retail sales in the euro area fell by 1.1% in the fourth quarter, which follows a decline of 0.5% in the previous quarter. A detailed breakdown reveals that sales fell for nearly all items, except fuel. Sales of food and drink suffered the largest decline, an indication of high food price inflation beginning to bite. Looking ahead, H1 2023 will not be any different, with a mild recession keeping consumer spending in check. Consumers will be grappling with the squeeze on real incomes, higher interest rates, and still-elevated levels of inflation. As we expect inflation to fall substantially in H2 2023 (allowing real wage growth to resume), consumer confidence, and subsequently consumer spending, is expected to improve.

The retail sector has been constantly evolving over the last half-century, with many retailers already having undertaken significant cost cutting and painful adjustments, particularly during the early years of e-commerce penetration and more recently, during the pandemic. This, in effect, will help the sector withstand the upcoming recession, and why we call for retail vacancy to tick up slightly in 2023 before starting to trend down gradually from 2024. We believe that after a brief correction in prime rental levels of 0.2% in 2022 and stability in 2023, a recovery in leasing activity will take hold, translating into positive rental growth and averaging 2.1% across Europe in 2024. For investors, the impact of the outward shift in yields across Europe will be relatively contained, as retail yields were comparatively higher than other sectors prior to recent movements in interest rates. European prime retail yields have been above 4% on average for the past 10 quarters, compared to sub-4% yields seen across office and logistics. From Q2 to Q4 2022, retail yields moved out by 29 bps, a smaller outward movement compared to other sectors. Thus, some of the existing spread has and will continue to absorb larger debt costs. We only call for a 65-bps expansion in yields from 2021 in total—the lowest of all sectors.

PRIME HIGH STREET RETAIL RENTS (YOY % CHG)

Q4 21 Q4 22

Budapest Berlin Frankfurt Warsaw London (Bond St) Paris Stockholm Zurich Brussels Munich Rome Amsterdam Lisbon London (Oxford St) Prague London (Regent St) Madrid Barcelona Milan Dublin

-20 -15 -10 -5 0 5 10 15 20

YoY % chg

Source: Cushman & Wakefield Research

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