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AXA Real Estate has warned that the impact of online sales on retail real estate has been underestimated and that investors need to act to protect value.

Europe's largest real estate manager has sounded the alarm in a new report on the implications of internet shopping on physical retail assets.

Entitled 'Retail will never be the same again', the report concludes that the reduction in the financial viability of physical retail units because of loss of trade to the internet will significantly affect rental values, in some cases taking them down close to zero.

The study examines the UK, French, German, Swedish, Polish Spanish and Italian markets, and sets out guidelines for future-proofing their retail real estate portfolios.

AXA RE says that investors are erroneously pricing in a recovery in physical sales that is unlikely to occur because, 90% of future growth in retail sales in the UK, France and Germany from 2012-2016 will be captured by online spending. This amounts to €91.5 bn of the €101.2 bn total.

Another finding is that investors have so far been unable to differentiate between whether weakening physical sales are due to the shift online or to the current recessionary environment

AXA believes that current predictions that 25% of total UK retail sales may be captured online by 2020 are understated. AXA Real Estate believes that the figure will be at least 30% (equating to a projected €165 bn of sales)

AXA Real Estate suggests that investors should favour large formats, such as shopping centres, where they are better able to control external factors and where there is flexibility to provide complementary leisure and entertainment elements. These formats, the report says, also allow comparison shopping and are better able to integrate multi-channel retailing

Another recommendation is that investors should be cautious in their allocation to retail in France as the worst affected of Europe's big three economies, due to the shift in online sales being compounded by a significant development pipeline, as well as Southern Europe, where online sales continue to grow despite consumer spending falls.

Alan Patterson, global head of research and strategy at AXA Real Estate said: 'Retail is undergoing an indelible structural change, and an inflection point has now been reached where investors need to start to protect the capital held in retail real estate investments. The conclusions from this research do not mean that retail as a sector is a poor investment, but investors need to consider very carefully whether the medium-to-long term risks associated from expanding online retail sales are appropriately priced into the assets that they are buying.'

See the full report below