EPRA Conference 2018

RE-think in Berlin: E-commerce and flexible co-working spaces are altering traditional landlord and tenant relationships in the core retail and office investment markets profoundly and at lightning speed. Companies that can adjust to this new reality will be the winners in Europe’s emerging listed real estate landscape, speaker after speaker concluded at the EPRA Conference.

Technology is clearly the driving factor, Dror Poleg, managing partner of the Rethinking Real Estate platform, told the audience gathered at the Adlon Hotel in early September. He predicted a future with a fundamental decoupling between property values and square metres. Static rental levels could be replaced by a dynamic online network linking supply and demand far more closely, which would become the main determinant of the value of a space at different points in time.
“A network is able to generate superior returns, which can increase the value of the separate locations that are part of it, simply because the available space can be used more efficiently,” Poleg said.
“Why not work in a restaurant before it opens in the evening?” he added. “In the long term, the boundaries between office and retail space, and even residential real estate, will be blurred. Investing in technology is not in the DNA of many listed real estate companies. They are used to stable cashflows. But they should experiment with this.”
Go-Popup, Europe’s leading marketplace for temporary locations, is a prime example of combining networks and real estate. More than one-third of the voters at the EPRA conference thought this start-up was the most promising on the Berlin stage. Co-founder David Perez Corral said: “Brands are becoming more global and are having to be more flexible, like popping up for seasonal sales.” He predicted that one-third of London retail space will be pop-up in the near future. “For landlords, this will develop into a permanent offering.”
Holding out an iPad and an iPhone in each hand, Porter Erisman, former vice president of giant Chinese online marketplace Alibaba, declared: “This is the future of shopping, right here. Do you want to study the present in retail? Study the United States. Do you want to study the future? Study China. The biggest challenge today is a technological one, and Europe is way behind China and the US.”
Professor Geoffrey West of Santa Fe Institute, presenting during the EPRA Conference
But what does this mean for the future of retail bricks and mortar? Christophe Cuvillier, CEO of Unibail-Rodamco-Westfield, said: “The future belongs to both online and physical retail. Look at Amazon; it’s opening stores now.”
While the market share of physical stores will decline, Cuvillier said it is unlikely you will be able to smell a new perfume or test a lipstick, via a computer screen in the same magical way as in a store. Proximity and experience will remain key for the consumer.
Markets are, however, clearly being shaken up by the internet revolution. In the UK, 25% of non-food sales are already online. “Where does it end?” retail intelligence expert Richard Hyman said. “A lot will depend on how good physical retail is at defending what it’s good at – adding value, experience and inspiration. But it has to do better. There is a huge difference between shopping and buying. When you know what you want to buy, online is very suitable. The key to shopping is that the consumer purchases a product when it’s presented attractively.”
Cuvillier said physical retail has to become less boring: “We have been lazy. It was too easy. Look at the US with all these shopping malls. The bad news is that they will require more and more work to keep them up to quality against a background of an increasing rotation of tenants.”
Philippe Grasser, deputy head Europe of ADIA real estate, told the conference that the relationship between the tenant and the landlord has to evolve: “We need a more collaborative approach. Now the pattern is that the tenants complain about increasing rental costs and we complain about increasing investment.”
Alibaba veteran Erisman concluded it was inevitable that the market share of physical stores will decline to roughly half of total retail sales. “Parts of stores will be subsidised by online sales. Design for the future, not for the world of today,” he said.
The growth of e-commerce is clearly benefitting the logistics sector, Joost Uwents, CEO of WDP, the largest listed logistics company in the Benelux markets, said: “For me, retail is logistics. It is all about being able to deliver the right goods on time. Doing the last mile and staying profitable at the same time, that is the trick.”
Real life drawing of EPRA Conference
The online disruption of the office market is, for now, less apparent than in retail, but that is changing fast. Flexible co-working office space is becoming more and more popular. In a city like Amsterdam with many start-ups, it is already around 6% of the total office stock. Flexible supply is here to stay, Simon Robson Brown, Portfolio Manager at CBRE Clarion Securities said: “My primary concern is if that this has to be done within the right structures. We are in a late-cycle market. If there is a 95% occupancy, life is great; but I hope operators are able to meet their liabilities when the downturn comes because their tenants do not have long-term contracts.”
Like Christophe Cuvillier, the CEO of German listed office company alstria REIT, Olivier Elamine, has doubts about his online and short-term lease challengers. “We offer co-working space and perhaps it is twice as efficient in terms of utilisation, but in the end, most companies want their own offices. Having your own building is seen as part of your culture, a way to differentiate yourself,” Elamine concluded.