ANALYSIS: Pimco to amass €1b retail portfolio in Southern Europe

US-based asset manager Pimco plans to amass a €1 bn retail portfolio in Southern Europe within the next three years as part of a joint venture with London-based asset manager GWM, according to market sources.

Pimco will invest €350 mln of equity in the venture, with GWM committing up to €200 mln. With leverage of 50%, this would give the duo a war chest of around €1 bn. They will invest in shopping centres, retail parks and factory outlets in both key cities in Spain and Italy as well as secondary locations and distressed assets. The venture aims to provide a leveraged return of up to 16%.

The team has already acquired its first asset: in August, it acquired the Da Vinci Market Central at Rome airport for around €130 mln from AIG Lincoln. The 56,021 m2 retail park, which is the largest in Italy, is now 70% owned by Pimco and 30% by GWM.

Although Pimco and GWM declined to comment, market sources told PropertyEU that the duo will likely seek to invest between €100 mln and €200 mln per deal with the aim of building up a €1 bn portfolio within three years. The venture will be very opportunistic in its investment remit and does not have a set allocation for Spain or Italy.

However, building up a portfolio of this size is not without challenges, given strong investor interest in retail in Southern Europe. ‘There is a lot of equity currently chasing retail and shopping centre transactions in Spain and Italy and there is a distinct lack of supply, which will create competitive tension for those assets that come to market in the medium term and drive pricing,’ said Mike Bellhouse, director of European retail capital markets at JLL in London.

Back in the game
Spain and Italy have undergone something of a resurgence in the past six months and are no longer regarded as the ‘bêtes noires’ of Europe. ‘It’s fascinating,’ said Michael Rodda, head of EMEA retail capital markets investment at Cushman & Wakefield. ‘After the UK, France and Germany, Spain is now the next most liquid market in Europe.’ There are also an increasing number of bidders for retail assets. ‘A year ago, we would have been surprised to get two bids on a shopping centre in Spain - now, we might have as many as 10 bids. Financing is increasingly available and increasingly competitive, which is fuelling investor interest,’ he added.

Such has been the increase in investor interest during the last year that there is not enough product to meet investor demand, according to Danny Kinnoch, European retail director at Savills: ‘Around 18 months ago, there weren’t really any buyers and now we’re in a situation where there’s not enough product for all the would-be buyers who are looking,’ he said. The change has been driven by attractive risk-return ratios and the widely-held belief that the market has hit the bottom, ‘so the only way is up’, said Kinnoch. ‘Despite record unemployment and low consumer spending in Spain, investors are banking on unemployment coming down and consumer spending recovering, so that they can increase rents.’

The attraction of retail assets is clear: the large lot sizes are appealing to investors such as Pimco who are looking to invest sizeable chunks of capital in one go. Last year, there were 38 retail deals in Spain totaling €850 mln, according to Savills, which is forecasting a deal volume of around €1 bn this year, the best year since 2008. While volumes are still down on the €2.4 bn of deals transacted in 2006, they are significantly up on 2011 and 2012, when just €520 mln and €320 mln of deals took place, according to Savills. Last year, one of the biggest retail sales was the sale of the 75,000 m2 Parque Princiado centre in Oviedo to a joint venture between the Canadian Pension Plan Investment Board (CPPIB) and UK REIT Intu for €162 mln in October. C&W advised CPPIB.

Rebound set to continue in 2014
This year has already got off to a good start. Earlier this week, CBRE Global Investors sold the 34,752 m2 Urbil shopping centre in San Sebastian to UBS Global Asset Management for €61 mln. JLL advised. Also, last week, Netherlands-based REIT Vastned sold seven non-core Spanish shopping centres and a retail park in Alicante to a consortium for €160 mln, reportedly almost 30% below its latest valuation.

Investors in the consortium included US investment firm GreenOak Real Estate and Spanish investor-developer Grupo Lar. And there are other sizeable retail properties up for grabs. C&W is advising on the sale of a 48,000 m2 unnamed regional shopping centre in the north of Spain that was put on the market in January for €160 mln. The Centro Moraleja Green in Madrid is also up for sale and is believed to have attracted 20 bids, including interest from European funds and private equity players, according to those who track the market.

Spain and Italy are rebounding now because the general consensus is that rents will not fall further: ‘The view is that rent levels are unlikely to fall any further, which gives a lot of comfort,’ said Rodda. ‘There is a depth of investors - ‘loaded tanks’ of capital, if you will, including European funds and US private equity players, who are now looking at the market,’ he added.

Investors are targeting distressed retail assets because they can grow income and turn them around, looking to exit in four-to-five years with a good return, Rodda said. ‘There are a lot of big investors like Pimco looking at the retail space. The successful investors will be those who can take a practical view of the usual deal issues, such as reps and warranties which will give them a better chance at pushing their deals through,’ he added.

Prime shopping centre yields in major cities, such as Madrid, are currently around 6.25%. High street yields in major cities are typically around 5% for larger deals with retail warehouses generating yields of around 7.5%, according to C&W. It is harder to gauge the typical yields for distressed centres - the ones that typically appeal the most to investors like Pimco - because it depends on the income and whether the centre needs an immediate capital expenditure. However, Kinnock estimates that a distressed shopping centre typically generates an initial yield of around 10%.

‘There are a lot of shopping centres that have seen rental values fall over the past five years. In that bracket, we have a lot of centres in Spain that are fundamentally good shopping centres, but where there has been a fall in consumer spending. Now, because of strong investor interest, a number of these centres are coming to market. The owners could possibly refinance them but strong investor interest is making it attractive to exit,’ Rodda explained.

In a further bid to deepen its Spanish footprint, Pimco is looking to subscribe to five million new shares issued by Spanish developer Grupo Lar’s REIT, representing an investment of €50 mln. Grupo Lar issued a statement to the Spanish stock market watchdog CNMV earlier this month that it intended to list its shares on Spain’s main stock exchanges and convert to REIT status.

Investors re-enter Italian fray
Investors are also starting to look at Italy again. Last year, due to banks disinvesting and price corrections, a number of investors re-entered the Italian market, including Morgan Stanley, insurers AXA Real Estate and Allianz, and the Qatar Investment Authority. While they have been targeting a wide range of asset classes, retail assets have been particularly popular as investors seek to bolster the low initial yields they can expect in markets such as the UK and Germany. Subsequently, last year was a strong one for Italian retail, with €1.6 bn of deals transacted (excluding high street), up from just €77 mln in 2012, accrding to JLL.

However, the Italian market is very different to Spain. One of the principal differences between retail markets in Spain and Italy is the position of the consumer. In Italy the consumer has been less affected by the crisis whereas in Spain unemployment and debt levels are still running high. On the other hand, Italy can be a notoriously difficult market for international buyers to crack, making it a challenge to build critical mass. It is also less liquid and less transparent than Spain. Moreover, international demand is principally focussed on the North given that the economic dynamics are more positive there, according to Bellhouse.

Retail yields in Italy are similar to those in Spain, at around 6% for prime yields and 10% for distressed assets, although Bellhouse said that deals are not always done at those levels.

Pimco is also targeting other distressed markets, notably Ireland. Last November, it acquired the Ulysses portfolio of 25 properties in central Dublin for around €140 mln. In July, it also part-financed Green Reit’s €310 mln IPO. In addition, Pimco is currently raising capital for its $4bn Bank Recapitalisation and Value Opportunities II fund (Bravo II) that will invest in distressed residential and commercial properties in both Europe and the US.