TOP RETAIL DEVELOPERS: Running out of ground

With a few notable exceptions, retail developers are running out of ground in Western Europe as a new phase in the industry begins.

Good news for retail developers: a growing chorus of investment managers and advisers are signalling a shortage of stock as one of the biggest obstacles facing retail investors in the coming years. Earlier this year, JLL reported that increased availability of stock in the five major European markets pushed up investment volumes in 2014 to the highest level since 2007 and the adviser foresees more capital chasing retail in the year ahead. Potential buyers are already lined up, Jeremy Eddy, director of JLL’s European retail capital markets, told PropertyEU at the time. ‘I don’t think there’s ever enough product for this market,’ he added.

David Hutchings, head of EMEA investment strategy at Cushman & Wakefi eld, echoed the sentiment in a recent update on retail property investment across the EMEA region. Investment activity last year would have been even higher had there been sufficient available stock in target European markets, he added.

That is not to say that all available retail stock would be snapped up in the current market cycle. According to market experts, at least 25% to 40% of secondary and tertiary stock in mature markets needs to be taken out of the market. Indeed, the ready availability of equity and debt may be pushing down yields, but investors are not going in with their ‘eyes shut’, JLL’s Eddy said. 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.’

The same may be said of Europe’s leading retail developers. Since the outbreak of the crisis, both small and larger players have put the brakes on new projects as financing dried up. But even though debt is returning, so far there are no signs that they are throwing caution tothe winds, at least not in the mature markets of Western Europe. According to PropertyEU’s latest survey of retail landlords and developers across Europe, pipelines for new developments are decreasing in western Europe as ground runs out while the bulk of new projects is concentrated in the less mature and less saturated markets of Turkey, Russia and Central and Eastern Europe. At the same time, Western Europe heads the ranking for planned refurbishments including redevelopments and extensions of existing malls, the survey found.

The UK is well ahead in this category with 1.2 million m2. This is more than a fifth – or 21% – of the total 7.6 million m2 recorded for the whole of Europe. Germany and France rank second and third with 814,000 m2 and 714,000 m2 respectively.

Western Europe has its own mega projects
But although Russia and Turkey are witnessing the largest number of new mega projects, Western Europe still has a select number of its own. One of the largest redevelopments in the UK revolves around the Croydon Partnership – a redevelopment of the London borough of Croydon by Sydney-listed Westfield and UK REIT Hammerson. The £1 bn (€1.2 bn) project aims to transform Croydon town centre into a modern, 139,000 a new public area, new car parking space and up to 600 new residential units, including affordable housing.

Another major mixed-use scheme involving the redevelopment of an existing shopping centre is St James in Edinburgh. The €1 bn project is being developed under the umbrella of TIAA Henderson Real Estate’s UK Retail Shopping Centre fund which was recently extended for another 10 years. With an estimated value of over £850 mln (€1.07 bn), the St James project will create 1 million sq ft (92,900 m2) of retail space, a luxury hotel and up to 250 new homes.

Neither is mainland Europe completely saturated in terms of greenfield developments as two major projects in Unibail-Rodamco’s portfolio poignantly illustrate. While Europe’s largest listed real estate company failed to deliver any new developments or extensions in 2014, it has quite a lot in the pipeline. In December last year, the Franco-Dutch retail giant signed an agreement with the city of Hamburg to develop the Überseequartier district in HafenCity. Representing an investment of €860 mln, the project fits in ‘perfectly’ with Unibail-Rodamco's strategy to focus on the largest assets in prime catchment areas in Europe, the company’s CEO Christophe Cuvillier said. Under the deal, Unibail-Rodamco will acquire and develop land in Überseequartier, which is located in the heart of the HafenCity area, Europe's biggest inner-city development project. The project will include retail, restaurants, a multi-screen cinema, a cruise terminal, offices, housing and a hotel, covering a total of 184,000 m2 of which 50% will be dedicated to leisure and retail. The development will also offer 2,950 new parking spaces. The opening of the retail and entertainment components of the project is targeted for the second half of 2021.

Elsewhere in Europe, Unibail-Rodamco is gearing up to co-develop the giant NEO 1 project in Brussels. The Paris-listed retail specialist will develop and operate the 112,000 m2 Mall of Europe, the centrepiece of the mixed-use NEO project, for an estimated investment of €550 mln. The mall will provide retail, leisure and restaurant space and is expected to open in 2021. Besides the shopping centre, the NEO project will provide 590 housing units, two day nurseries, 3,500 m2 of offices and a retirement home. Developers CFE and Besix have been contracted for the residential element.

And in Milan Australian shopping centre giant Westfield is on track to open Westfield Milan, its first mall in Mainland Europe, in 2018. Late last year, the company announced that Galeries Lafayette, France’s largest department store, will open a 18,000 m2 flagship in the centre – its first store in Italy. With a market potential of €4.9 bn and a population of over seven million people, Milan has one of the highest per capita retail spends in Europe. At the same time, Milan has a major undersupply of quality retail and leisure attractions, Keith Mabbett, director of leasing, pointed out. ‘Westfield Milan will create a significant opportunity for new international and Italian retailers to invest in the Italian market and generate strong retail sales. It is anticipated that Westfield Milan will deliver sales in excess of €1 bn, comparing favourably to both Westfield London and Westfield Stratford City in the UK, at €1.4 bn each.’

Redevelopment gains traction
While the UK leads in redevelopment, that trend is also gaining momentum in mainland Europe. In August last year, Europe’s leading retail developer ECE announced it is planning a redevelopment of the Odense Rosengårdcentret, the second-largest mall in Denmark. The site, which was bought by the privately held German retail specialist in early 2013, covers 100,000 m2 of gross lettable area. Under the €16 mln refurbishment, the 10,000 m2 Kvickly hypermarket section will be developed into 32 new shops, taking the total number to almost 200.

ECE is getting aboard the redevelopment bandwagon after virtually exhausting the potential for greenfield projects in its home country. The Hamburg-based company is scheduled to open its Aquis Plaza mall in Aachen later this year after completing the Milaneo shopping centre in Stuttgart in October 2014, six months ahead of schedule. Another project in Mainz is scheduled to open in 2018 while a refurbishment in Bielefeld is due for completion this year. More new developments are in the pipeline, but increasingly these are concentrated eastwards of ECE’s home base. Late last year, the company announced it had started the development of a new major shopping centre in the Polish city of Bydgoszcz. The mall, dubbed Zielone Arkady and scheduled for opening later this year, represents
the largest project by ECE Polska to date and will involve an investment of around €150 mln. ECE is also stepping up its activities in Turkey together with local de- veloper Sur Yapi. The two companies will initially work on the realisation of the Axis Istanbul Shopping Center & Office project in Istanbul’s Eyüp district and the Sur Yapi Marka Shopping Center & Residence project in the Nilüfer district of Bursa. ECE will provide concept optimisation, leasing and long-term management services for both malls.

The alliance with Sur Yapi gives ECE a valuable foothold in the market: Turkey is one of the most promising countries in Europe for new development alongside Russia. It takes guts to enter either of these markets given the current volatile geopolitical situation but ECE has a track record in Turkey and a property management arm in place.

Sweden’s Ikea has a parallel history in Russia where the company is investing €260 mln to develop a new 215,000 m2 modern shopping mall in Mytischi, northeast of Moscow. Mega Mytischi’s development is part of a wider investment programme being undertaken by Ikea Shopping Centres Russia between now and 2020.

While most western companies have labelled the country a no-go area following the outbreak of the Ukraine conflict, Ikea claims to have a long-term commitment to Russia and its growing retail market. Ikea Shopping Centres Russia already has Mega malls in 11 of Russia’s 15 ‘Millionniki’ cities with over one million people. Plans for new Mega malls will continue to focus on cities with a population of over one million, but the shopping centre developer has confirmed it is also looking closely at cities with populations of over 500,000. Mega Mytischi will be Ikea Shopping Centres Russia’s fourth super-regional mall in the Moscow region, and its 15th overall. Footfall at all 14 Mega malls rose by around 4% in the 2014 financial year to more than 270 million, and has risen by 27% over the last five years. Tenant sales at Mega malls grew by around 6% in 2014 and 44% in the last five years.

Altogether, Ikea’s Mega malls in Russia provide about two million m2 of retail space, with each centre typicallycomprising around 130,000 m2 with an Ikea store as an anchor and about 200 other retailers including a food hypermarket and a DIY store. The company has set aside €2 bn for its investment programme in Russia which is aimed at building new, modern Mega centres throughout Russia in the coming years and the strongest Retail destinations in each of its local markets by 2025. While the emphasis is on new centres, the company has also embarked on a major upgrade programme at its existing centres with new food court concepts and mall extensions.

The times have changed
Altogether the Swedish furniture store chain plans to invest €3 bn over the next few years in the construction of 20 shopping centres anchored by an Ikea store. To this end, the group has established a new division, Ikea Centers, replacing Inter Ikea Center Group which previously managed 34 Ikea shopping centres and three million m2 of retail space across Europe, China and Russia. The new real estate unit was launched following the acquisition by Ikea Group last December of the remaining 51% share in Inter Ikea. The Russian and Chinese stores will continue to operate under their respective brand names of Mega and Livat.

Since PropertyEU began its Top Developers ranking in 2007, Multi Corporation has featured in the top 5 thanks largely to its steady delivery of major shopping centres in Turkey. But although it still has a number of greenfield developments in the pipeline in Turkey and Ukraine among others, the focus is shifting under the ownership of US asset management giant Blackstone and the leadership of former Redevco CEO Jaap Blokhuis. ‘The times have changed,’ Blokhuis told PropertyEU in a recent interview. ‘The European shopping centre market is in the next phase of its development. For more than 30 years, Multi created value by developing new shopping centres across Europe. But development is no longer the main game. It’s now about creating value on the income side. We are being forced by market circumstances to reposition ourselves for the next phase in our development. The new company we are building is an asset manager. Multi may become a next Rodamco.’

Judi Seebus
Editor in chief