Rich pickings as retail market recovers

Rapid changes to the retail landscape are posing huge challenges and significant opportunities for investors as the market recovers.

Retail is one of the most dynamic sectors in the economy, but the rewards are high for those who successfully manage the risks, a roundtable discussion on retail at Expo Real concluded.

‘We have a very active market,’ said John Welham, head of retail investment for CBRE. ‘We have seen a recovery to pricing levels which are higher than the peak of the last market for prime property, so in terms of yields they are lower than they were in 2007 for prime property in most markets. ‘Because rents didn’t decline as much in the prime sector that means the capital value is higher than it was last time around.’

The picture is different in the secondary market, said Welham, as rental levels fell more dramatically during the crisis years and are still recovering. ‘What we’re seeing for good quality secondary, quite strangely, is real core institutional capital bidding at the same level of price as traditionally opportunistic bidders, who can get to a similar level by using leverage and taking an active management attitude as well.’

One major challenge is the impact of online shopping on consumer behaviour, which in turn affects retailers’ priorities. Large out-of-town retail parks are giving way to smaller urban shopping centres focused on convenience stores.

Dick van Hal, CEO of Dutch investor Bouwinvest, said he expected a shake-up in the next 10 years as the balance shifts from experience properties to convenience stores. ‘We see problems in retail in the shrinking areas, but we also see the need for new shopping centres in new residential areas, for example in the bigger cities.

‘There are opportunities, but the landscape will be very different in 10 years’ time. The properties which will survive are in experience areas, so prime property in the biggest cities, or in the convenience area for fresh food and drink in the neighbourhood of residential developments. It’s a risky market and we have to be careful.’

Redevelopment is the key both to managing portfolios and keeping tenants on board, argued Van Hal. He cited the example of the Damrak in Amsterdam, where Primark is opening a flagship store.

Bouwinvest’s investment in redeveloping the building was equivalent to the book value of the property. ‘The returns are very good and this is a typical prime asset for a core investor, as we are, but if you want to buy this asset finished and rented it’s a 3.5% initial yield,’ Van Hal said.

Not all types of store are affected in the same way, Welham pointed out. ‘Certainly that whole food store sector is changing a lot - they don’t need those big stores any more. So that’s a big risk element, because so many of Europe’s shopping centres are anchored on a big hypermarket.

‘But a lot of the internet impact has sort of happened. What we’re seeing with the demand for fashion-led retail is that the consumer still wants to see a shop. If you look at the performance of factory outlet centres they’ve been consistently growing their income. Some of them have grown 30% during the recession and coming through to the current day.’

With rents expected to decline by up to 20% by the end of the current cycle, the panel said landlords and managers were having to invest more to maintain the quality of their product. That extends to recruiting and retaining good quality tenants. But at the same time tenants are reacting to the changes in their customer base by looking more critically at their lease agreements and their business strategies.

‘The international chains are becoming more professional, more strategic... and definitely more demanding,’ said Herman Kok, head of research for Multi Corporation, Blackstone’s European retail platform. ‘You have to be very nice, you have to be very factual and you simply have to deliver what you promise.’

The same approach applies to local specialised tenants and small entrepreneurs, said Kok: smaller national chains have become more aware of the cost of failure since the recession. And shopping centres need small entrepreneurs to add the distinctive local flavour that gives them the edge over their competitors.

The main challenge to investors, said Kok, is identifying the right product at the right price. ‘In today’s market with extremely low interest rates and extremely hard state bond yields and prices going through the ceiling it’s very easy to sell and very difficult to buy. The main task is to be critical and stick to the fundamentals of your project. It’s very easy to acquire something these days which in a couple of years’ time may face trouble.’