The health of bricks and mortar retail, and the resulting impact on retail property owners, have rarely been out of the news in 2018. In many western markets the pace of structural decline in retail has accelerated, and this has brought enormous challenges both for retailers and for the owners of the centres from which they trade.

There is sometimes an assumption that these trends are global, but from our experience, with a portfolio of leading shopping centres across nine Central and Eastern European (CEE) countries, we see a different picture and a continued desire by global retailers to expand their footprint in those markets where modern retail and leisure destinations remain relatively few. The interest in modern shopping centres from consumers in this part of Europe is strong and growing, as we can see from the 370 million people who visited our properties in 2017.

Independent data from respected bodies such as the Economist Intelligence Unit shows that the CEE region, home to a cumulative population of more than 100 million, is set to be one of the key engines of economic growth across the EU in the years to come. To take our home markets of Romania and Poland as examples, GDP growth in 2017 was 7% and 4.6% respectively, as opposed to just over 2% for the EU28.

Private consumption is growing at a significantly faster rate in the CEE region compared to western European countries. Of course, the CEE countries are coming from a lower base which should mean outstanding growth over the years to come, helped by tight labour markets and fiscal stimulus.

For instance, in Serbia, consumption per capita is low at under euros 4,000 per capita per year, but is forecast to almost double over the next decade. Another key indicator is unemployment, which clearly has significant social as well as economic implications, and is predicted to fall in all the main CEE markets over the next five years.

What does this mean for retail?

What does this mean for retail? The potential of these markets certainly has not escaped the notice of major international retailers. Alongside local retailers, who will always be an important part of the mix, some of our top fashion tenants are the Inditex brands such as Zara, the LPP group, owner of Reserved, H&M, C&A and Peek&Cloppenburg, complemented by anchor tenants such as Auchan, Carrefour and Cinema City.

These retailers recognise the potential of these markets and that they have historically been underserved with high quality retail destinations. In the first half of 2018, retailers in our centres delivered sales growth of 7.7%. In some markets – the Czech Republic and Serbia – our properties’ sales growth was closer to 20%.

These are rates of growth which store based retailers in western Europe or the US can only aspire to. We have sought to both develop and acquire prime shopping and leisure locations in major population hubs in the key CEE markets. The names of many of the places concerned would be unfamiliar to international observers but these cities are growing in both population and affluence.

Novi Sad

Take Novi Sad as an example. It may not be a familiar name to many, but that might be about to change. It is the second biggest city in Serbia after Belgrade, with a population of 319,000. The city is a regional university centre with a growing tech scene, is next year’s European Youth Capital, it was named Lonely Planet’s 3rd Best in Travel city 2019 and, in 2021, will be the first non-EU city to be European Capital of Culture.

When the first phase of our shopping centre, totalling almost 50,000 sq metres, opens there this month, it will take the retail offer in this city to a new level: the shopping mall has already attracted upmarket international brands such as Armani Jeans and Calvin Klein, plus no fewer than seven Inditex brands.

The CEE region

That’s not to say that the CEE region is immune to all the retail trends which are reshaping the sector globally. As elsewhere, the key to retail success is having scale in the right locations which are genuine destinations. Successful centres need to be places where consumers want to spend their time, which means they need to have a compelling combination of retail, leisure and entertainment space. And they need to be as good as comparable centres anywhere else in the world.

Multichannel retailing in CEE may lag other regions but there is no doubt it is coming and we have been watching trends elsewhere to ensure we are well placed to benefit by digitally integrating our marketing and updating our lease agreements to reflect how distribution has changed. Our centres already feature pop-up stores, demo rooms, food halls, and other avant-garde concepts such as showrooming, no checkout stores and personalised physical stores are coming our way and we need to be ready.

Nevertheless, we believe the CEE markets may be more resilient to online than others elsewhere. First, there are few (if any) old generation shopping centres of the type that have suffered most at the hands of e-commerce. Shopping centre supply is overall lower and more modern compared to the US or Western Europe.

Multichannel retail

Second, retail sales are growing at a pace strong enough to ensure growth for all channels. A Colliers report from October 2018 indicates that even if online retail would grow to represent 10% of all retail sales in 2022 (up from 5.6% in 2017, or a cumulative growth of 69% over 5 years), conventional retail would still account for 80% of the total retail growth over that period.

Third, people in CEE are more inclined in average to see modern shopping centres as preferred social and leisure destinations, compared to people in Western Europe. This trend is culturally rooted and likely to continue for the foreseeable future.

Being physical in the age of digital requires a mix of strong local knowledge with the reputation to be a partner of choice for international retail and leisure operators. In the context of new technologies, the battle for added value becomes a combination of tangible features, among which scale is crucial, with newer dimensions such as experience, community or wellness. For those who have these strengths, the future is bright thanks to the compelling economic and retail fundamentals which underpin these markets.