Cushman & Wakefield Reports On European Retail Property Investment Volumes
15 Nov, 2010, London
Total property investment activity fell 12.5% in Q3, whilst trading in the retail market actually increased, rising by 7.6% overall. This continues a strong run over recent quarters, with investment for the year to date 66% up on the same period of 2009 compared to a 42% increase for the rest of the market.
“Greater investor demand has been met, at least in some areas, by more opportunities coming available but the increase in investment supply has been steady rather than dramatic, coming from institutions reorganising their portfolios as well as bank and corporate sales. Its clear that if supply were greater, activity would be higher still.” said Michael Rodda, head of the Retail Cross Border Capital Markets team. “A fall in yields has helped bring stock to the market and pricing for core product is definitely getting more aggressive. It is also notable that more investors now have the confidence to relax their requirements a little: everyone still wants prime but definitions of what prime is are a little less stringent, for example with respect to required lease terms.”
“The market has also been supported by a further slight easing in credit availability as well as a stronger appetite for joint ventures or part interests and an increased ability to do larger deals, including single assets or portfolios, such as Simon Ivanhoe’s shopping centre portfolio in Poland and France or Tesco’s UK sale & leaseback deal” added Rodda. “Over the year to September, retail investment totalled €32.5bn, the highest figure we’ve seen since late 2008, and at 33% of all trading for the year, this is the highest share the sector has enjoyed in at least 10 years, comparing with less than 20% a decade ago.”
Both overseas and domestic buyers have played a key role in the growth in activity seen to date and according to Rodda “the buyers who are active are not in general new money coming into the market –rather they are investors spending money already allocated to the sector. Confidence to spend has clearly increased and this suggests that not only will we have a strong year end but that demand will increase further next year as the current new interest is converted into fresh allocations to the sector. We’re expecting volumes for the year to hit €36-37bn, over 60% up on 2009, and to possibly reach €45bn in 2011 if stock continues to come available.”
As in other sectors there is a strong focus on core markets, with the UK, Germany, France and the Netherlands the top 4. Together they account for 76% of all activity and growth of 66% on 2009, with Germany in particular performing well with an increase of 164%. Spain is in 5th place, with demand somewhat subdued by the economic scene and deflation in the retail market, but a number of investors viewing this opportunistically and some of the deals available such as rarely marketed shopping centres or food store sale & leasebacks, clearly proving attractive. The Nordics in general and Sweden in particular are also now of increased interest, although trading activity has yet to fully respond as much as might be expected given that in the past this was one of Europe’s most active retail markets, with Swedish volumes topping €3bn per annum between 2004 and 2008, the third highest in Europe.
According to David Hutchings, Head of European Research at Cushman & Wakefield, “Core markets remain the priority for most investors but stock shortages and a search for income and growth are pushing some to expand their search horizons. To date many have chosen to stay focussed on core markets but shift their attention to tier 2 centres. However some interest has also spread to less mature markets, with Turkey and Russia both more popular for example but Poland the real star, jumping back into the top 5 in the third quarter. Other Central European markets are attracting interest but can’t offer the scale of Poland while further afield, Bulgaria and Romania may be favoured over other eastern markets because of their relative scale and position inside the EU. While it is too early for many to consider such fringe locations, a growing number of opportunities are being seen in these and other emerging markets as refinancing demands increase and businesses look to recycle capital into new ventures.”
A stirring of interest in eastern markets is also leading to greater clarity on pricing – and yields in general have hardened. Shop yields in eastern markets have fallen by over 100 basis points so far this year while shopping centres and retail warehouses have seen a correction of between 50 and 75 bp. Central Europe saw a somewhat more modest yield fall of 40-60bp while gains in western markets were considerably more meagre at 10-20 basis points. “Overall in Europe, retail yields fell just 4 basis points in the third quarter as market pricing stabilised over the summer. However, with retail yields down just 33 basis points since their peak last year – reversing just a small portion of the 158bp rise seen between 2007 and 2009 – bonds yields seemingly set to remain low and demand for secure incomes increasing., prime retail yields have further to fall – and the deals now being negotiated are likely to confirm that by year-end. “ said Hutchings.
Capital values rose 3.4% in the past year, driven by shops more than shopping centres or retail warehouses. According to Hutchings“The stabilisation of occupational markets will add to pressure for yields to fall. Prime headline rents fell 1.9% in the year to Q3, with shops actually registering a gain, albeit of just 0.3%, after 2 straight quarters of growth. By contrast quarter on quarter results remain negative for shopping centres and retail warehouses. Despite pressure on consumer spending, improving confidence, recent gains in employment and low interest rates should support the market and we are optimistic that rents will stage a modest recovery next year, albeit growing only by 1.5-2% overall. With falling quality supply a key driver of growth as opportunities for retailers start to reduce, shopping centres may well be the best performing segment.”