Retail Market overview

Looking at things from a different perspective, based on the information we received from major landlords, after malls opened in June, foot traffic has gradually returned to towards 80% (or even higher) of normal levels for this period of the year, though for some retail parks, particularly in certain parts of the country, things are already above 2019-levels. Also, Google mobility indicators for Bucharest show that foot traffic in all retail and entertainment areas is some 25% ​ below a baseline set using figures for the early January-early February period, which tends to be much busier than summer months, when people travel a lot on holidays instead of going shopping. That being said, sales remain even half below last year’s in some segments such as restaurants and coffee shops, fashion as of mid-2020, so spending intentions have not fully returned.

Looking at consumer strength, things look quite ​ decent (though we cannot clearly grasp the whole picture right now): yes, inflation-adjusted consumer loans hit an all-time high in 2019, but then again, versus 2007, purchasing power of the real wage (also CPI-adjusted) more than doubled. This suggests that consumption should be in better shape to weather the storm assuming no major damage is done to the labour market – while wage growth has nearly stopped in year-on-year terms in May, we would assume that most of the potential loss in disposable income should come via job losses rather than wage cuts. For now, at least, indicators are rather friendly, in line with a fairly swift recovery to decent levels by mid-2021 (please see the macro section for more on this).

Rents & Vacancy

While the dominant shopping centers fared well and have not seen an uptick in vacancy, others have felt something like this, though vacancy remains, for the most part, manageable, i.e. in single digit territory (maybe increasing from sub ​ 2% levels – including non-existent – towards 5% in good, but not dominant shopping centers). Furthermore, we want to emphasize that as of July 2020, things are still not clear in terms of rent adjustments as negotiations between tenants and landlords are still ongoing. Based on our experience, we also want to emphasize that landlords will offer their tenants, based on their prior results, varying degrees of flexibility over the short term. What is clear is that landlords are taking a step by step approach in offering temporary rent discounts, by analyzing at the end of each month the performance of the retailers of each market segment and only them considering to allow rent reductions that can vary between 10% and 50% and in some special cases, on short term 1-3 months, that are frequently compensated by an increase in the turnover rent or prolongation of the contract.

Outlook

While we are fairly bullish on the economy, we do acknowledge that there are many uncertainties on the horizon. Modern retail schemes are under pressure from a multitude of factors that we cannot be sure how they will pan out: 1) the coronavirus outbreak and its impact on the economy; 2) the rise of e-commerce (adopted even faster now amid the pandemic); 3) on a more micro level, change in consumer patterns; 4) the entertainment component (a star attraction before this crisis) will need to be overhauled significantly amid health restrictions. For now, it is clear that the appetite for bigger/dominant shopping centers will dim, though we expect an even stronger focus on retail parks (with much smaller capex needs), which would focus on smaller and medium cities not saturated with retail schemes.

Another interesting trend to look out for is the fact that high street has been a bit favoured in this crisis: it was allowed to open earlier than malls by local authorities but then again, the argument of having the convenience of many brands in one mall may not convince too many to give high street a chance. That said, we would expect newer residential projects to give a bigger focus to a high street component.

We also want to underscore that the recovery up until July 2020 has been quite a bit better than most market participants had been expecting, so as the market returns to normal, we would expect retailers’ intentions to expand to also come back gradually over 2021-2022 (mass-market/discounters seem most favoured). On the other hand, the current situation could be an opportunity for brands that could not enter good malls until now either due to lack of spaces or unfavourable terms.

Overall, we believe that the retail scene should move more or less in tune with our view of the general macro situation, namely return to a decent level in a year’s time and be back to normal sometime in 2022.