Where to shop in retail real estate

Retail real estate has had a tough time, but we think has been unfairly written off by many investors.



Jeff O'Dwyer
Fund Manager, European Real Estate

Online sales have put enormous pressure on physical, “bricks and mortar” retail in recent years. In 2015 only around 5% of retail sales in the EU were generated online. By the end of 2019, this had almost doubled to 9.5%.

Covid-19 has only exacerbated things. The closures of almost all physical retail - through several lockdowns – has accelerated the shift to online.

In 2020, it is estimated that almost 15% of all retail sales in the EU were generated online. And while some consumers will come back to the physical stores when the pandemic is over, a fair share of spending will have moved online permanently. By 2025, the share of online sales in the EU is estimated to grow to over 20%.

However, we think this generalisation of retail under pressure is not justified. Not all retail is the same; the sector is highly differentiated. For income driven investors, we think there are sustainable returns to be had, if you focus on the most resilient part of the sector.

Where are the opportunities?

The online shift is undeniable, and indeed some retailers are - often aggressively - reducing their physical footprint and negotiating for lower rents (and turnover rents) to “optimise” real estate portfolios. Vacancy for shopping centres and high-street units is increasing.

As a consequence, retail investment has fallen out of favour with many real estate investors. According to data from Real Capital Analytics, retail investments regularly accounted for between 20-25% of investment volumes in Western Europe between 2007-2016. That share dropped to just 12-15% in 2017-2020.

We think investors writing off all retail are missing out. Two formats in particular have shown excellent resilience and growth in recent years and in the current crisis.

  • Supermarkets
  • Retail warehouses  

A closer look at online sales reveals huge differences in products consumers buy online and those they do not. On the one end, there is fashion and consumer electronics, these have very high rates of online penetration. On the other end of the spectrum however,  are groceries, drug store items and DIY & gardening.

That is not to say that both, retail warehouses and groceries are not free from the pressures of online. However, the nature of the goods they are selling and consumer preferences (i.e. self selection) continue to make them highly robust. Many grocery retailers have also successfully integrated online in their businesses by e.g. click & collect options or online sales for selected products.

Online grocery retail (with home delivery in particular) remains in its infancy in major continental European countries such as France and Germany. This is even more true in southern Europe, where consumers still favour physical shops and where building a comprehensive delivery network is extremely costly for retailers.

In Germany, where consumers remain extremely brand and price sensitive and grocery margins are low, establishing a profitable home delivery model remains challenging. And in France, where the online penetration in grocery retail reached 5.0% in 2020, the “click & drive” model still requires physical stores as points where consumers pick up their online shopping from designated bays in the car park.        

Even so, many grocery retailers continue to adapt and embrace new technologies. Many have introduced apps and are experimenting with new in-store technology like digital price labels and - hand-scanners that allow shoppers to avoid tills. Real time data analytics allow sales monitoring and stock level optimisation, making supply chains more efficient. They are also starting to open smaller, city-centre formats to capture a larger share of convenience demand.

Grocery retailers and especially discounters have also continued to adopt to customer demand, making their stores more attractive with regards to e.g. the interior and lighting as well as offering more organic food or fresh products like bakery counters.

Preferred formats

In terms of formats, there have been two obvious winners through the pandemic. The first is grocery retailing in urban locations. The second is retail warehouses.  

While almost all other retail formats had to close, supermarkets, DIY and to a lesser extent large retail warehouses, were allowed to stay open or enjoy significantly lower downtimes. Supermarkets saw sales increasing, often absorbing spending that would have normally occurred in restaurants, cafes and bars. Retailers in DIY, gardening and sports benefitted from people renovating their homes, improving their gardens or exercising at home or outside.   

The stark difference in the threat from online and the resilience in face of the current pandemic is also reflected in rent collection statistics and real estate yields. Rent collection for shopping centres has been challenging given closures and or restrictions on trading hours. Investment demand and yields for supermarkets and retail warehouses actually improved across most of Europe in 2020.

Most real estate asset classes saw a decline in the number and overall volume of transactions in 2020. But while shopping centres have been out of favour, supermarkets and retail warehouses witnessed slight increases compared to 2019.Another big plus from an investor’s point of view is, that many supermarket and retail warehouse occupiers are still happy to commit to longer leases, in stark contrast to sectors like fashion or gastronomy. 

Sustainable rents

Ultimately, we are very focused on retailers that are paying sustainable rents. Good quality supermarkets and retail warehouses, with internet-resilient occupiers, located in large or growing catchment areas that are leased affordably remain attractive investments.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.


Jeff O'Dwyer
Fund Manager, European Real Estate


The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.