Sellers and buyers are increasingly meeting in the middle in the European shopping centre market. Shayla Walmsley reports
A year ago, institutional investors were unlikely to buy UK shopping centres, not least because the few vendors in the market were unwilling to come down to buyers’ pricing levels.
Today, investors are faced with what they believe to be more credible pricing and are meeting halfway with vendors who have been made more confident by investor interest that sales will not fall through.
In the meantime, the market itself has changed. For example, the old distinctions between prime and secondary assets have not necessarily held up. Location is no longer the sole determinant.
“When we look at a centre, we’re looking for a managed retail environment and a sustainable place in its location, and a location with sufficient economic firepower to support the business plan for the asset,” says Orchard Street partner John Humberstone.
“It could be Westfield with its high-end shops, but you can also make good returns from a scheme in a sustainable location in northwest England, even though it is not a location you would immediately associate with prime.”
Centres offering a day out are thriving at the expense of shopping centres once considered prime, says Orchard Street partner Barney Rowe. But although these ‘destination centres’ will influence the overall retail market, it does not mean that non-destination shopping centres will become obsolete.
“When does secondary become tertiary, and when does tertiary become rubbish? There’s no doubt that the past few years have seen an increased polarisation between the best and the rest,” he says. “Balance-sheet values for anything but the best assets have moved down. Enough? For some, yes; for others, no.”
Vendors, reluctant to sell for fear of a failed sale that would damage the asset’s valuation, have been made more confident by investor demand – although there is potential over the next 12 months for failed sales involving weaker and higher-risk assets, says Humberstone.
“There are a million different permutations. But over the last quarter we’ve seen a marked increase in stock with a reasonable prospect of being sold.”
Many of them are lender-driven “consensual sales where one party consents and the other doesn’t have a choice”. But more broadly there is evidence that values and price corrections are working through.
“Valuations have caught up,” he says. “The aspirations of buyers and sellers are much closer and there is more potential for deals.”
So what could go wrong? The biggest risk for investors in European shopping centres is deterioration in the economy. Florencio Beccar, manager of CBRE Global Investors’ European shopping centre fund, admits that to invest in retail is counterintuitive given the current headwinds.
“You’d think sales would go down. That’s true – but not for the type of assets we’re focusing on,” he says. In Germany, where CBRE Global Investors is scouting assets in a couple of growth cities, GDP growth is above-trend, household debt is relatively low and stable household balance sheets are allowing consumers to continue spending. Beccar says he would not look at East Germany with its shrinking cities, but Berlin and Hanover are characterised by low unemployment and positive demographics.
In contrast to Germany, Beccar is cautious about the economically beleaguered Dutch,
Belgian and French markets. He does not rule out acquisitions given sufficiently attractive micro characteristics but the approach is restrictive.
As a whole, the market in continental Europe is polarised, he says. Because it is difficult to assess the yield for secondary assets there is little interest from investors. Because there are no deals, it is difficult to take a view on pricing. “The market is only playing in prime,” he says.
Beccar sees value in the €100-250m category, especially in Paris, even though trophy shopping centres in the city have traded at low yields over the past 12-24 months.
“Immediately beneath the big €400m assets, you have shopping centres that are core, prime and dominant, but just not as big. Fewer investors are willing to buy them,” he says.
In the UK, Legal & General Property is targeting assets valued between £50-100m, even though it is not a deep market, rather than £150m super-prime assets. In the mid-range, says Barrie, “we’ll invest when it’s right for pension funds [investing in its funds] but we’re not competing head-on with other pension funds”.
Despite evidence of a resurgence in investor appetite for assets, Mike Barrie, director of Legal & General Property, says that, in the evolution of many schemes, the scale is much smaller. “You won’t see many new schemes in the next few years. Most activity will be modest extensions to successful schemes – enough to enhance the offer,” he says.
Bouwfonds CEO Jaap Gillis told the ICSC European Conference in Stockholm in April that the immediate future would be about the refurbishment and improvement of existing stock. Investors were still reluctant to target Turkey and Russia despite the former’s sound demographics and the latter providing opportunities to develop new retail assets, he said.
The nearest long-term investors have got is Finnish insurer Ilmarinen’s acquisition of a shopping centre in Lappeenranta, a university-and-tourism city near the Russian border, via a joint venture with property firm Citycon in March.