#Mapic2014 Retail sentiment swings back

Europe’s retail yields have recently come down to levels not seen since the boom years, reflecting a ‘fundamental change’ in sentiment.

Appetite for retail investment has returned in Europe, according to panellists at PropertyEU’s European Retail Investment Briefing held at the Expo Real trade fair in early October. ‘Two years ago, investors were asking themselves whether it made sense to invest in retail with all the talk about the threat of e-commerce.

But there has been a huge shake-up in the industry and investment sentiment has massively swung back,’ commented John Welham, head of European retail investment at CBRE. ‘Investors are now seeing that yes, shopping centres do have a future. There are new things that are now happening in the sector, and investors see now that they are still a good place to invest money into. Two years ago that was still a question andtoday it isn’t. This is a fundamental change.’

In a number of European markets retail yields have recently come down to levels only seen in the boom years, noted Welham, although there is one major difference. ‘Yields reflect the opportunity cost of money but also the growth prospects for your investment. If yields are low you would expect the income stream from your investment to grow considerably. It is interesting that back in 2006 we were expecting enormous rental growth of an average 6% a year, while today we are seeing yields at the same level but no rental growth prospects,’ Welham said.

Even so, investors are still piling into the sector because retail offers a relatively good opportunity for fixed-income players compared to historically low government bonds.

‘Prime yields have come down but the cost of money has also come down. The relative benefit of investing in real estate is still quite good. Perhaps we should just accept the fact that yields on property are lower than what they used to be,’ added Welham.

LOW YIELDS
In a low-yield environment, experts seem to agree that it is more important than ever to extract value through active asset management as well as extensions and redevelopments.

‘It is crucial to work on the asset during the holding period,’ commented Henrike Waldburg, head of Investment Management Shopping Centre at Union Investment Real Estate, which has around €6 bn of retail assets under management.

During the downturn, a number of secondary shopping centres were not upgraded due to the general lack of funding. This was particularly the case for shopping centres owned by overleveraged companies or real estate funds with limited access to capital or at the end of their life period. ‘Not all shopping centres are managed to the same standards,’ commented Will Rowson, chief investment officer at CBRE Global Investors EMEA, Europe’s largest non-listed manager and owner of shopping centres with €14 bn of assets. ‘Listed retail specialists which could raise their money at 2% kept investing in their assets. Other shopping centres owned by funds which had gone through their investment period and did not have access to further equity did not receive any capital during the crisis.’

These undercapitalised assets may offer a good play for opportunistic investors willing to take the risk for a higher return, added Rowson. ‘The owners are funds that have run their course, and their malls are looking pretty tired because they have been underinvested. Even if these assets might not have any fundamental location issue they are today secondary assets and represent a good opportunity to be turned back to core.’

Commenting on the sector’s performance in the past few months, Herman Kok, international research director at European shopping centre developer Multi Corporation, said he was surprised by just how quickly the investment market bounced back in a number of European countries. ‘Europe is less attractive on a global level, because it shows slow growth from both a demographic and economic point of view. Even so, we were amazed at how fast the interest has recovered in a substantial number of markets and by the extent of the yield correction. People have been focusing on similar types of projects and markets, so investment yields in these markets have come down incredibly quickly,’ commented Kok.

Multi, which is owned by US private equity firm Blackstone, is currently refocusing the business from development to asset management and mall management. Germany, often seen as Europe’s safe haven, has possibly witnessed the strongest appetite and core investors have been forced to shift their focus from the country’s largest cities to a number of secondary markets.

‘Investors were forced to move elsewhere because the product was no longer there,’ Commented Dirk Wollweber, executive director at German asset manager Corpus Sireo Asset Management, which last year established a new shopping centre division. ‘Buyers understood that shopping centre number 25 in one of the major cities is less attractive than a dominant retail asset in a secondary city so they have started looking for good-performing, regional schemes.’

Even during the crisis, dominant schemes have continued to perform well, reassuring investors about the sector’s attractiveness, noted Welham of CBRE. ‘Even in crisis-hit regions such as Spain, projects with the right fundamentals operation-wise have been continuing to perform relatively well throughout the cycle and this has made investors more comfortable about retail,’ he noted.

NEW PLAYERS
New players of the ilk of Alaska Permanent Fund, the oil-rich US state’s wealth fund, as well as Singapore’s sovereign wealth fund GIC have recently made an entry or boosted their presence in the sector. Alaska Permanent Fund Corporation has just created a retail partnership with Immochan, the property arm of French hypermarket’s group Auchan, and completed its first acquisition with the purchase of two existing shopping centres in Spain and Portugal. Singapore’s GIC spent €200 mln on the acquisition of the remaining 50% interest it did not already own in the Roma Est Shopping Centre.

‘Investors’ interest will continue,’ predicted Rowson of CBRE GI. ‘There are lots of different aspects in retail, the various parts of the market can serve different clients. UK pension funds tend to invest in smaller-ticket high street assets, while the Asian pension funds focus on big-ticket shopping centres. But they all focus on income.’

CBRE Global Investors is active across geographic markets and retail segments, Rowson added. ‘We are active throughout the Continent but we are struggling with the far part of eastern Europe because of concerns about Ukraine. Nonetheless, we are still buying in Poland. We are also buyers and sellers in southern Europe, it depends on the product we are dealing with. There has been a dramatic turnaround in the region and particularly in Spain, and product which used to get only a couple of offers is now receiving over 20 bids.’

CONVENIENCE VERSUS EXPERIENCE
As the retail sector encompasses a wide range of products from neighbourhood retail schemes to dominant shopping centres, it is crucial to have a specific strategy for each retail segment, according to Waldburg of Union Investment Real Estate. ‘At the end of the day we have
to make a distinction between shopping centres which provide convenience and fulfil people’s daily needs and malls which provide experiences and offer not only shopping but also entertainment. Our investment fo√cus will be on either one or the other.’

Corpus Sireo’s Wollweber agrees that the most relevant issue for an asset manager is to understand the product it is dealing with. ‘Our job is to be a doctor and when we get a new management mandate the first thing for us is to make a survey on how the asset is perceived. This allows us to understand the patient.’

Interestingly, e-commerce is no longer perceived as a major threat to the industry by any of the market experts participating in the panel discussion. ‘A few months ago, investors were worried that tenants would move online. What happened is that retail has adapted, owners have adapted, and shopping centres have retained their importance,’ commented Welham. In some cases, online retailers such as Bubbleroom, a fashion group, have even decided to open up stores in shopping centres.

‘The key for a shopping centre is to be relevant to its customers,’ commented Herman Kok of Multi. He also reckons that ageing populations are today more of a threat than e-commerce. ‘Shopping places have always been there throughout the history of our society, and they will continue to exist. However, it is important today for shopping centres to have both an online and offline dimension. Retail schemes nowadays need to be able to offer both experiences.’

Top investment picks
Asked how they would spend a notional €500 mln, the panellists opted for the following:
Dirk Wollweber (Corpus Sireo) would look out for under-managed shopping centres with a good catchment and the potential for repositioning and retenanting them.
Herman Kok (Multi) would opt for under-managed schemes which offer opportunities for extension. He would focus on one region in one given country.
Henrike Waldburg (Union Investment Real Estate) would put all of the €500 mln in one acquisition. She would focus on one of the malls in her Top 10 wish list.
John Welham (CBRE) would look at the Nordics, which offer a good balance in terms of return versus risk and quality of stock available.
Will Rowson (CBRE GI) would buy a dominant mall in a market where zoning regulations are very tight like Germany, France and, to a certain extent, Spain.

VIRNA ASARA
CORRESPONDENT FRANCE & SOUTHERN EUROPE

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