For every retail rule, there is an exception. That's the message from the eclectic mix that is the European retail market. Shayla Walmsley reports

European shoppers complain about homogeneity - all the chains seem the same - but investors know different. Europe has no two retail markets quite the same.

What has converged across the continent over the past few years is a focus on prime. Georg Allendorf, RREEF managing director in Germany, says investors are holding on to their assets, resulting in a shortage of inner-city prime high-street retail. "We're strongly searching in that sector but we haven't seen an uptick in supply. As values recover, more investors will be willing to part with assets," he says.

The passion for prime parallels an aversion to secondary - manifested in retail as an aversion to provincial, dated, out-of-town shopping centres, for example. A recent report by Hahn, the €2bn AUM German fund manager, identifies central shopping malls and professionally developed shopping centres as loci for demand, in contrast to "hefty rent discounts" for secondary downtown locations and department stores.

Yet in Denmark such department stores provide a rare transaction opportunity. ATP Ejendomme, the direct real estate subsidiary of the DKK476bn (€63.8bn) scheme, and the DKK98.4bn PensionDanmark recently acquired a portfolio of three Magasin department stores, all outside the capital. The acquisition of the Magasin assets, which ATP Ejendomme will operate on a 25-year lease, is -PensionDanmark's first foray into retail, although it has DKK7.3bn - 7.3% of its overall portfolio - in commercial and residential. The acquisition is also its first joint venture with ATP Ejendomme, which has a DKK11.3bn (€1.5bn) domestic portfolio.

Michael Nielsen, managing partner at ATP Real Estate, points to the limited institutional-sized opportunities available in Danish retail property. "In the last three or four years we've been reluctant to invest directly. But we see this as an attractive opportunity," he says. "We don't see many opportunities like this in Denmark."

In any case, the focus on prime locations is not universal. Fund manager Rockspring sees out-of-town retail parks, which it has been buying for four years, as an alternative to retail warehouses. According to Brussels partner Jo de Clercq, although planning is still tight, the uses are wider. "It used to be only DIY and furniture. Now you get more relaxed use," he says. "That's why we believe there is an uptick in existing centres."

There's another cross-border exception to the prime rule: supermarkets. Swedish pension fund Alecta last October acquired a €216m 12-asset supermarket portfolio via a joint venture company it co-owns. Prupim, the UK asset manager, in January acquired three provincial Sainsbury supermarkets for £125m (€148m) for an M&G fund targeting pension schemes with an inflation risk management offer that it claims comes at lower cost than government bonds. The assets are leased for 25 years with inflation-linked rent reviews - in other words, they offer secure income and a high-quality tenant. In a separate acquisition, L&G acquired a Tesco supermarket in Merseyside for £13.7m for a fund it set up last year for defined benefit schemes seeking inflation-linked income.

The lesson from the German market, which has demand potential of around €400bn, is to avoid the middle - the declining medium-sized stores and department stores, victims to retail warehouses and the discount trend. If you avoid that, across markets, it's perfectly reasonable to head in two directions at once.

Cushman & Wakefield Investors European CEO David Rendall identifies polarisation in the German market between luxury and discount. "The discount market is big in Germany, but less pronounced in other markets. What European markets have in common, though, is polarisation," he says.

The discount model, which doesn't exist in many European markets and is limited in others, such as the UK, is big business in Germany. "The discount market is growing in importance," says Christian Schulte Eistrup, MGPA's head of capital markets in Europe. "The economic environment won't go away and it's is a well-established sector in German retail."

He adds: "These assets are not easy to find but they do exist. We're looking for opportunities with short leases, or with longer leases but short covenants. You can span the whole risk and return spectrum."

German retail is its own market in more ways than one. While most European markets are dominated by a capital and perhaps one or two second cities, Germany has 20 cities with populations of more than 300,000.

Annualised figures from the first three quarters show transaction volumes increased 10% in 2010 across Germany to €110bn, according to the IVD German Real Estate Federation. Although the steepest increase was in Berlin (20.8% to €6bn), the highest volumes were in North Rhine Westphalia (€22.8bn) and Bavaria (€21.6bn).

"Retailers realised earlier than institutional investors that money could be made in mid-sized cities," says Iris Schöberl, managing director of F&C REIT Germany, pointing to retail-specific drivers such as turnover, per capita purchasing power and demographics. The fund manager towards the end of last year landed $120m from an unnamed North German pension scheme to spend on German retail. It is also raising capital for a €240m fund comprising 75% German retail.

The risk, in Germany as elsewhere, is price inflation as a result of demand. "It could get very expensive," she says. "There is an argument that big cities offer more liquidity, but concentration can create ridiculous pricing."

Schöberl believes you need experience in the German market to exploit the opportunities in smaller cities. Demand there for prime properties is limited but there is also a lot of secondary, not all of it good. "There is extra risk for real estate investors as soon as they go out of prime locations. Right now, investors are looking for core and core plus, not value-added," she says. Yet she also cites a recent separate account agreement with a German pension fund to deploy €130m in more opportunistic and value-added assets.

The European retail market isn't a clean split between the UK and Germany. Opportunistic investors such as Atrium are still looking to acquire shopping centres in Central and Eastern Europe. In February it acquired land adjacent to its recently acquired Promenada shopping centre in Warsaw for €10.7m - potentially for a standalone addition to the existing asset.

But even with this opportunistic investor you see some risk reduction going on. As it completed the Warsaw transaction, it was simultaneously selling assets in Turkey and Russia.

"Poland's economy has really proved itself over the downturn," says Atrium CEO Rachel Levine. The firm is also bullish about the Czech Republic and Slovakia. "As always, it is the quality of the asset itself and its ability to create long-term sustainable cash flow that is our primary concern."

In Poland, as in other European retail markets, institutional investors are interested in strong returns, and retail returns tend to be stronger than for other sectors. "The strongest appetite among investors is for core western European retail markets - the UK, France, Germany and Scandinavia, especially Sweden," says Rendall. "It's a function of investors wanting to get their money out there - but with less risk."