When you invite a select group of retail heavyweights to a round table discussion titled “German retail and Covid-19 – panic or potential“, you can expect a lively and lengthy debate, which is exactly what we got in our most recent event.

Representatives from retail companies, investors, consultants, and financing banks analysed the possible effects of the current crisis on physical retail vs online retail, new concepts for retail assets, and efficient management of and suggested solutions for tenants.

A light at the end of the tunnel?

When we held our first retail event with British experts in April, many were still reeling from the shock of the Covid-19 crisis, but in Germany we are now starting to see some light at the end of the tunnel. As expected, over the last few months, grocery-anchored retail has performed well, and in the big shopping centres, sales are already at 50-60% of pre-Covid levels, despite a lack of footfall from tourists. These levels have been boosted by the re-opening of restaurants and bars.

However, it’s important to note here that this is only the case in the German A cities. Progress in smaller cities remains slow.

Fewer opportunities for online retail in Germany?

The presence of well-resourced regional hubs in Germany means that 80% of Germans live only 10 minutes away from a supermarket. The proximity to physical stores and the Germans‘ saving mentality allows little room for e-commerce compared to other countries. In fact, in Germany, e-commerce makes up only 1% of grocery sales. According to some participants, this will not be changed by C19 in the long run. The margins don’t justify the logistics costs, especially in food retail.

Not everyone agreed with this view – it’s been reported by retailers that those who successfully set up online stores over the last few months were able to increase their sales. Businesses like Shopify, a well-established and wide-ranging e-commerce platform, have made it possible to build an online store professionally and efficiently. And even the government is giving online retail the upper hand, by not slapping online retailers with the same taxes and regulations as physical retailers.

These developments force us to rethink the use of retail real estate but also offer new opportunities. Unprofitable spaces can be used for last mile logistics – this is particularly true for inner city shopping centres.

Stress test for the relationship between landlords and tenants

The relationship between landlords and tenants has also been tested through C19. Our panel all agreed that transparent communication and tailored solutions, even for the smallest tenants, like independent bakeries, are the key to keeping your tenants for the long term.

But before offering a rent reduction or extension, you need to separate the wheat from the chaff through careful analysis: tenants with difficulty paying but convincing long term business plans vs those who, regardless of C19, are on the edge of insolvency. And frank discussions must be had with those profiting from the situation – one of the participants brought up a nation-wide supermarket chain who applied for a rent reduction despite healthy sales levels.

That said, pure sales-based rents should be offered with caution: these are generally a red flag for investors and hit valuations like a bomb, as several participants confirmed. Looking over the border, perhaps we can take a leaf out of Poland’s book, where pragmatic solutions have been found to benefit both retailers and their landlords.

So what are the top tips for investors? The focus should be on local supply and food retail in a mixed-use context. Open-ended real estate funds still have an appetite for big shopping centres in impeccable locations as well as well anchored retail parks. If you add alternative finance providers to your rolodex and maybe accept less favourable terms, nothing can stand in the way of a successful transaction, even in this market.