Over the next five years, retail sales will grow by 2% per year on average across the 11 gateway cities. Against this background, we expect retailer demand for prime retail areas to remain robust in all cities, especially in premier luxury, international flagship or premier domestic locations.

London and Paris’s appeal to expanding international brands is unrivalled in Europe. However, the other gateway cities examined in this report will all appeal to different types of retailers, some more than others. So, what makes these cities retail ‘gateways’ to expanding brands?

‘Flagship’ gateways

London and Paris are obvious destinations due to their large populations, high level of retail spending and their strong appeal to international tourists. In Paris, the general slowdown in luxury spending, on the back of the of the recent terrorist attacks, is resulting in short-term headwinds. This partially explains why Savills does not expect rental growth in 2017, notably on the Champs Elysées. The very high total occupational cost is also restraining demand and, in turn, rental growth. On the other hand, the positive Brexit knock-on effect on tourist-focused retail sales in London should translate into sustained retailer demand, albeit focused on prime retail locations.

Barcelona and Madrid will also increasingly appear on international retailer’s radar. Both Spanish cities attract a high and fast growing number of international tourists with high propensity to spend on shopping. Since luxury brands already have a strong presence in both cities compared to other European gateways, there is perhaps more room for mid-market and aspirational retailer expansion. In both cities Savills expects the annual prime rental growth to be at circa 3% next year.

‘Opportunity’ gateways

Warsaw and Amsterdam, where Savills retailer ‘opportunity’ measure highlighted the greatest prospect for expanding retailers, we expect international expansion to pick up pace going forward. Demand will come from a wide spectrum of retailers, from luxury to the value-market tier. This is particularly the case in Warsaw, since retail sales expectations for the next five years are high. Additionally, Warsaw is considered by many retailers as the gateway market to the other CEE countries. Nonetheless, prime rental growth in the Polish capital is forecast to remain flat next year. This can be explained by the high proportion of transactions signed in recent years on a turnover-base rent. In Amsterdam, we expect the prime rent to rise by 3% next year backed by the ‘opportunity’ gateway evidence coupled with the high and fast growing number of international tourists (7.6% pa over the past two years).

^{Source: Savills Research} 

‘Margin’ gateways

Mid-market and aspirational retailers should regard Madrid, Barcelona and Warsaw as good gateways, where the total occupational cost is relatively low compared to retail sales volumes. In Warsaw, the profit margin potential is expected to improve next year since retail sales are expected to grow by 5.3% whereas rents will remain stable.

‘Youth’ gateways

Beyond Paris and London, Madrid, Berlin and Warsaw are all cities with a sizeable young and relatively affluent shopper population. This is where brands targeting this demographic should consider locating, but this may also be where consumer expectations in terms of shopping experience will be the most demanding. In this battle, creative and innovative store concepts will win. However, the high costs involved in delivering and regularly refreshing shopfits and fascias could be a challenge for some retailers’ margins in these locations.

Each gateway city will hold an appeal to international retailer brands, some more than others, based on the specific expansion requirements of the brand in question. Some cities will strengthen their position as international tourist retail destinations, enhancing their appeal to those expanding brands keen to tap into a ‘new’ international audience. Others will benefit from improving domestic conditions, as will some of the international tourist cities. While London and Paris have previously dominated new entrant expansion in Europe, we expect the improving appeal of other European cities will help lure expanding brands into a wider range of gateway cities going forward.

^{▲ Paris no longer dominates new entrant expansion in Europe}