Core European retail markets are back on track

The European retail investment market has regained its traditional broad base following the return of Spain and Italy as core countries in 2014.

Poland and peripheral CEE markets are also returning to the fold, according to Jeremy Eddy, director of European Retail Capital Markets at JLL. ‘Since the outbreak of the global financial crisis, the focus was on Germany, France and the UK,’ he told PropertyEU in an interview. ‘But the bigger markets are really churning now. The tap has also been turned on in CEE.’

A ripple effect is already visible in Czech Republic which staged a strong comeback in 2014 and is now extending to Hungary, Eddy said. However, investors are more reticent in Hungary and will possibly become even more so on the back of the Swiss currency crisis and the regional fallout, he added. In southern Europe, Portugal is also back on the radar, he said. ‘Portugal turned in a huge uplift in transaction volumes last year.’

RISING VOLUMES
Last week, JLL reported that increased availability of stock in the five major European markets has pushed up volumes in 2014 to the highest level since 2007. According to preliminary figures, full-year retail investment volumes for 2014 will be in the region of €37 bn, marking a 39% increase over the €26.6 bn recorded in 2013.

While the ready availability of equity and debt is pushing down yields, Eddy said investors were not going in with their ‘eyes shut’. Many players are able to put cash on the table, but that is not making them any less cautious, he added. ‘We continue to live in a low-growth environment where inflation is very low and investors are factoring that into their cash flow models. There’s a huge degree of caution and reticence as well as real discipline, particularly in continental Europe. And that’s a good and healthy trend.’

As for the year ahead, Eddy foresees more capital chasing retail. ‘We had a very strong end of the year and a number of deals didn’t close. We also pitched for a number of new instructions at the end of the year which will most likely come through in January or February. All in all, there’s an awful lot of activity and I think investment volumes in the first quarter will be up significantly.’

In terms of product a number of maturing funds will start to bring product to the market, either in piecemeal form or as consolidated portfolios, Eddy predicted. He also sees some investors in the UK engaging in profit taking. ‘Some investors who made purchases two to three years ago will take advantage of the yield shift and reinvest the proceeds. There’s a little bit of churn going on, particularly in the prime market. Prime product is becoming increasingly scarce and there is downward yield pressure on core markets. I’m quite confident about the prime end of the market, it’s a good market to sell in.’

SERIOUS BIDDERS
Potential buyers are already lined up, he said. ‘I don’t think there’s ever enough product for this market. The indication is that there’s a lot of money chasing retail. Many investors are quite keen to bid and get in the game. At the same time, the market is not quite as deep as some think in terms of the number of players. There may be multiple bids on an asset, but in the end there are often only two or three serious players left. There’s not quite the feeding frenzy you might expect. And the investors that are out there these days are all sophisticated and savvy.’

Eddy expects to see further consolidation in the European retail sector in the next 12 months as the leading players further streamline their operations and optimise their portfolios and ownership structures. ‘We’re more optimistic that deals will happen this year. Debt is available and there is greater confidence in the Eurozone.’

Beyond the Eurozone the UK continues to be ‘a really attractive market’, Eddy said. ‘In terms of pricing and economic growth, more activity is certainly justified.’ An unknown further down the road is how sterling will be affected by the UK general elections in May and a potential decision to hold a referendum on whether or not the UK will remain part of the European Union. Eddy: ‘Sterling is currently strong but what will happen if a referendum is held? And there’s no grey area there, it will be a binary decision.’

While sterling is strong, the US dollar is even stronger, Eddy pointed out. ‘Further initiatives for consolidation could come from the US,’ he predicted.