Capital Economics bullish on German high street retail rents

A separate study produced by UK research group Capital Economics also takes a bullish view on the direction of German prime high street retail rents. The researchers see further growth in rent levels as growing populations in Germany's biggest cities will offset a slowdown in consumption.

According to the researchers in their latest report, demographic factors will improve prospects for retail sales in the largest cities more than for Germany as a whole. Despite the surge in immigration over the past year, the report notes that, “Forecasts from the UN and Germany’s Office for Building and Planning suggest that Berlin, Frankfurt, Hamburg and Munich will all experience population growth over the next five years, whereas Germany’s total population is set to fall.”

“Combined with the importance of well-located stores for multi-channel retail strategies, that suggests the outlook for prime high street rents is positive,” Capital Economics said in a new report. It expects rents to rise by 2.9% p.a. on average between 2016 and 2020 in the four biggest cities.

Although German consumer confidence rose in April, retail confidence fell back, according to the latest European Commission sentiment indicators. Capital Economics said it believes that the retail indicator is behind the curve, while the consumer confidence indicator is more forward-looking. “Even if consumers are being unduly pessimistic, we would be wary about overstating the retail outlook”, the report said.

German retail sales growth has already slowed to 1.6% y/y in February from 3.7% six months ago. The decline did not come as a surprise as falling energy prices led to inflation of just 0.1% last year, which provided a boost to consumer spending power. “Yet as the effect of low energy prices fades, inflation will pick up and real wage growth will weaken,” said Capital Economics. It forecasts consumer spending growth slowing to an average of 0.8% this year and in 2017, down from 1.9% in 2015.