International real estate advisor Savills has reported that investors into Europe’s retail sector are shifting their interest to some of the continent’s non-core markets, with Ireland, Poland and Italy benefitting from the trend.
While investment in European retail assets in the first three quarters of 2016 was down 28% year on year for the 15 markets covered by the research, marginal markets outperformed the likes of Germany (-46%) and the UK (-18%). Ireland's investment volumes rose 223% to €1.46 bn, Poland's climbed 126% to €1.4 bn, and Italy was up 119% to €1.8 bn.
'The strong performance of some non-core markets such as Ireland and Poland in terms of size of deals is likely to be attributable to the fact that these markets are slightly behind the core markets in the current investment cycle,' commented Eri Mitsostergiou, director of European Research, Savills. '2015 was a record year for total investment volumes across Europe, underpinned by the numerous mega deals and large portfolios, yet activity this year has been constrained by a lack of stock in core markets. It is the ready supply of retail product and in fact portfolios, which is driving investors to the non-core markets.'
Savills also recorded that the polarisation between prime and secondary locations is becoming increasingly marked. Rents rose for the best units in high street (HS) & shopping centre (SC) locations, particularly in cities where international retailers are expanding, such as Brussels (8% HS), Copenhagen (11% SC, 5% HS), Amsterdam (2% HS), Stockholm (2% SC) and second tier cities where retail rents have not yet fully recovered such as Athens (12% HS) and Dublin (3% HS).
Yield compression due to rising investor interest is another trend, with the lowest yields noted in London (2.9%) and Paris (2.75%). The highest annual yield compression was recorded in Milan (-75bps) and Cologne (-50bps), while in almost all markets prime yields are at record low levels.
‘Investor appetite for prime high street retail in Europe has been extremely strong, driving down yields to record levels. In Europe alone last year, Savills was involved in high street deals which set new record yield lows in Milan, Copenhagen and London, and similar records were set in Paris and Germany,' commented Oli Fraser Looen, director, Savills Cross Border Retail. 'In 2017, we are likely to see further yield movement in Europe’s most desirable shopping streets and there could be a great deal of activity as owners of prime retail assets consider exiting into new market conditions.
'As some investors become priced out of the core markets, we would expect to see further demand for non core high street locations, such as Amsterdam, Madrid, Dublin and Madrid. This again will have the impact of potentially driving up prices in these markets by the latter end of the year,' Fraser Looen concluded.
