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Paul Nicholls

Spanish retail - is it safe to go back in the water?

With Spain being a hot topic recently, Paul Nicholls (Head of Asset Management, Herald) explains how important asset management and selection of the right asset will be for those considering to invest in Spanish retail.

The latest government austerity measures have had a profound effect on retail sales.

Following ECB intervention and a period of recovery on European share markets, one might have been forgiven for starting to believe rhetoric from the likes of José Manuel Barroso, President of the European Commission, who declared the European Crisis over in January. Of course no one expected immediate recovery, that will take years, but there was a glimmer of hope that the financial crisis had reached its nadir, and that once accustomed to circumstance, we could focus on recovery.

Last year belonged to Primark, Inditex and H&M, who offered high fashion at competitive prices, delivering the retail fix that cash strapped shoppers craved. In the relative calm of Q3 and early Q4, it was the consistent performance of these brands that underpinned shopping centres across the country and offered owners comfort as weaker brands struggled. Of note, not all Inditex brands fared as well, and even the mighty H&M struggled to match performances achieved further north in Europe, against tough competition from the home team. But few would question Primark’s continued performance, in a domestic market that is more sophisticated than many expect.

Then, as Shopping Centres prepared for Christmas, the government introduced its fifth austerity package of the year to appease the ECB, and with it a VAT hike from 18% to 21%, and even more eye watering, 8% to 21% on leisure. The Christmas bonus payment made to civil servants was also withdrawn, a move widely copied in the private sector. The combination of these factors, combined with collapsing consumer confidence, rising unemployment at circa 26% (with 16 – 24 year olds hit particularly hard), and the perceived wealth loss from falling property prices, proved to be a deadly combination for retail sales, with even the biggest players hit. Moreover, initial results from Jan (typically a busy sales period) are even more alarming. Inditex has made it clear that it will close non-performing stores, and has already delivered on that threat at Plaza Imperial in Zaragoza City.

Initially, one might have expected a sharp fall with a gradual recovery early in the New Year, but in the prevailing climate this should not be taken for granted and recovery may be further away than previously thought. What’s more, this performance reflects consumers' attitudes before the Italian elections, where voters in Europe’s third largest economy rejected austerity and with it, the prospect of European Union. There are parallels in Spain where declining living standards have already led to mass protest, and political corruption is being investigated.

To thrive, existing owners will need to boost marketing efforts; innovate, refurbish, re-let, embrace digital solutions, monitor effort rates and be prepared to offer measured support that allows tenants to keep their heads above water. Those seeking a new opportunity should focus on scale because aside from location and asset quality, to succeed in this environment, you’re gonna need a bigger boat…

Paul Nicholls

Paul Nicholls

Director, Asset Management

Paul's biography