Retail sector braces for a tough year

After the unprecedented meltdown of the global financial sector, property professionals appeared to be in a mood of quiet resignation at the Mapic retail fair in Cannes last week. While official visitor figures have not yet been released, the impression of many attendees was that numbers were down on previous editions and the champagne was flowing visibly less freely than in the past.

The slowdown in the property sector itself is also becoming increasingly apparent. 'At around EUR 120-130 bn, investment volume in 2008 will be down about 50% on 2007,' noted Michael Rodda, partner cross-border retail investment at Cushman & Wakefield during an investment panel discussion at Mapic.

Rodda believes the market may start to bottom out by mid-2009 but warns that tighter lending requirements will remain as economic conditions continue to weaken. 'We will see greater risk aversion and underlying quality will be central.'

Despite the malaise, there are some bright spots, maintains Rodda. 'Development was dismal in 2008 and that will continue into 2009 as debt financing evaporates. The positive thing is that oversupply will ease.'

In terms of location, most of the bright spots in the current landscape are still to be found in Central and Eastern Europe, claims Guido Audagna, managing director of US-based private equity group Carlyle. 'Hungary, Bulgaria and Romania are still seeing significant growth. These countries have a relatively low number of shopping centres and their pipelines are not so big.'

The brightest spot of all is Turkey, says Boris van Haare Heijmeijer, partner retail services at Cushman & Wakefield. Speaking during a panel discussion entitled 'Is Turkey still on an upward trend?', he pointed out that the country's demographic and economic growth figures are good, and will remain so in the longer term. 'Turkey has a young and dynamic population. And while economic growth may be falling from the recent levels of 6-7%, it is still around 3%.'

Dutch shopping centre specialist Corio is one of the listed companies betting on the country, it emerged during the panel discussion from comments by the company's CEO Gerard Groener. 'France and Netherlands currently account for two-thirds of our portfolio, but Italy and Turkey are the fastest growing markets in terms of new developments.' The company's existing portfolio was valued at EUR 7.1 bn at end June, Groener said, adding that another EUR 3 bn worth of projects is in the pipeline. 'We have four shopping centres in operation in Turkey and another 11 in the pipeline. We are focusing in particular on selected second-tier cities.'

Even in Turkey, however, new development projects are being shelved and acquisitions are being frozen. 'Turkey is not immune to the global recession,' Groener conceded. Lack of zoning regulation is another problem, he added. 'Lack of zoning regulation spurs entrepreneurship, but you mustn't overdo it. If the market becomes too liberal, it can choke it up.'

While most market watchers are agreed that 2009 will be the year of the squeeze, they also see opportunities as distressed assets come onto the market. 'There are still pockets of equity around,' noted Rodda. 'But the buying activity of opportunity funds will remain limited without debt as their return criteria cannot be met.'

Rodda also sees some listed REITS returning to the market when the markets stabilise. 'They have seen their shares tumble but many are well-positioned for an upturn. When the markets stabilise they will be some of the early buyers. The sovereign wealth funds are also becoming more visible and are hunting trophy buildings in the major cities.'

Meanwhile Nick Axford, head of research at the world's biggest adviser CB Richard Ellis, believes the German open-ended funds will return to the market towards the end of the second half of 2008. 'The underlying confidence in the sector is still good,' he said, pointing out that the unexpected wave of redemptions that a number of German funds witnessed in September and October was prompted by the desire for capital preservation rather than a crisis of confidence in property.

'The outflow had nothing to do with property fundamentals, but was prompted by Merkel's guarantee for all bank deposits,' he said. 'I have a measurable degree of optimism for the medium term. The German funds will be back.'