The first half of 2023 saw low new modern retail projects delivered, but the second half of the year is going to be more active, with about 260,000 square meters of new retail schemes announced for the end of the year, mostly in small and medium-sized cities, according to Colliers mid-year market report. Looking at the consumption structure, after years of high inflation, it is likely that households are starting to become more cautious and more oriented towards good quality- price ratio acquisitions (“value to money”). We estimate customers will not necessarily scale back their own consumption, but they will just scale back the price bracket.
„Construction costs are beginning to stabilize as lower prices for materials finally start to become visible, and this will further support the wave of retail expansion we have seen in recent years. At least until 2024, the project's pipeline looks quite strong, most of them being retail parks, but works on larger schemes are also set to either finish or start soon. We see the bulk of deliveries mostly in small and medium-sized cities, but we are also seeing increasing interest in larger cities. For example, NEPI Rockcastle's upcoming Promenada Mall in Craiova (approximately 64,000 square meters) is the largest project delivered in Romania since ParkLake in 2016, developed by Sonae Sierra”, explains Liana Dumitru, Director Retail Agency at Colliers.
The new schemes are well received by the market and we see strong tenant’ interest to open new stores, especially in retail park schemes. Also for older dominant schemes, particularly in big cities, the interest of tenants (especially smaller size concepts or premium brands) is high as each scheme has had a waiting list for some time now. Consequently, vacancy is relatively low or virtually non-existent in stabilized and dominant schemes. On the rents side, although landlords would expect higher base rents to cover the higher development cost, retailers are cautious in negotiations as the high indexation rates and service charge increases already put pressure on their results. Service charges are a particularly tough point of contention, as they have increased quite sharply (e.g. in retail parks from 1,5-2 euro/ sq m to upwards of 2,5-3 euro/sq m).
Looking at recently published official statistics for 2022, Colliers consultants point out that, all in all, it has been a good year for discounters and retailers offering goods at lower prices. With regards to overall consumption, there are some signs of growth petering out. The expansion rate in overall non-food retail sales, for instance, clocked in at around 4% in the first semester of 2023. Yet most of this is due to favorable base effects and in fact, if we look at the post-pandemic period, the first semester of 2023 is equal to less than one tenth of the growth we have seen compared to 2019.
„Consumption overall is higher in Romania both in terms of spending and quantity of goods purchased and the key element in this equation is the robust labor market, which has helped keep wage growth in double digits (15.7% year-on year in May 2023), with the growth rate already surpassing the inflation rate as of spring 2023. This means that purchasing power erosion took place less than a year and a half, and even during that period, average wage growth was still fairly robust”, clarifies Liana Dumitru.
Further on, with real wage growth firmly accelerating and companies’ hiring intentions also holding firm, Colliers consultants believe that the consumer side should remain broadly supportive. After years of high inflation, it is likely that households are also starting to become more cautious and will be waiting for a bit longer to confirm that prices are stabilizing before they go on a shopping spree again.
Looking at the longer-term outlook, we see that the vast majority of the new schemes expected this decade will be in towns with limited retail presence or in new suburbs of large cities where the catchment areas are significant and relevant in terms of consumption power. Omnichannel sales will make or break a retailer’s position in the coming years, as the integration of personal preferences and added flexibility will push forward a mix of offline-online commerce. A change in generations could also define a lot of things: generation Z, which consists of the first individuals truly raised in the digital world and with a more conscious attitude towards consumerism and ecology or spending ethically, will be more relevant as consumers. We would also look for Romania’s wages to continue climbing much faster than the EU average in the next decade, which would likely lead to both higher consumption and to an increased predilection for upscale goods, to close in on 90% of EU average from below 80% currently.
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