Prime European retail assets remain in demand

8 Oct, 2008, London

• Turkey and Russia see strongest annual rental growth
• UK prime retail yields back to 2003 levels
• Retail investment volumes down 60 per cent; €60 billion transacted in Q2

The latest European Retail Marketbeat from Cushman & Wakefield says that pricing for retail assets in many markets could soften further in 2009 although investor demand for good quality high street, shopping centre and retail park space should remain strong.

Consumer confidence remains weaker in Europe with retail sales growth slowing in most markets although in Central and Eastern Europe the trend remains positive. Annual growth figures for the Eurozone as a whole were negative with July sales down 2.8 per cent against a forecast decline of 2.1 per cent.

Despite this general slowdown in sales, leasing activity has remained relatively robust across the continent although retailers are being more selective on location. Of the western European markets, Austria and the Netherlands saw significant average high street rental growth on the prime locations in the largest cities of 35 and 20 per cent respectively. Turkey actually saw the highest growth overall at 90 per cent respectively but this rise was flattered by a number of key deals.

Gulsin Hakman, head of retail Turkey, Cushman & Wakefield said: "These latest prime rents in Turkey have been on the very best new retail space. Demand for new stores from international retailers is good news for the market but it is unlikely that rents at this level will be sustainable. We expect that as new development comes through, prime rents will level out once again."

Likewise in shopping centres, Turkey had the biggest rental growth (a 61 per cent annual rise) with Austria and the Netherlands rising 39 and 17 per cent respectively. Annual rental growth was flat in both high street and shopping centres in Greece, Portugal and Spain.

Darren Yates, European research associate, Cushman & Wakefield: "Whilst secondary retail rents may be more adversely affected during the current economic slowdown, we expect rents in the prime high street locations of major European cities to remain resilient and, in some cases, to show continued steady growth. It is true that retailers are generally more cautious, but demand for the key high streets remains relatively buoyant in the face of limited supply.

"Retail sales growth is in negative territory in a number of European countries, but so far it is the smaller, independent operators who are bearing the brunt of the consumer slowdown. In contrast, the larger more sophisticated players have fared quite well and are continuing to take market share. Indeed, if anything, the current economic turbulence is likely to accelerate the process of consolidation in many retail markets.

"The shopping centre market has become increasingly competitive given the rapid pace of new development in recent years. This has led to over-supply in parts of Europe and some of the weaker schemes will suffer as a result. That said, shopping centres and, of course, new retail parks remain the main expansion routes for retailers. Central and, in particular, Eastern Europe remain hotspots for new shopping centre development."

John Strachan, global head of retail, Cushman & Wakefield said: "In the vast majority of markets transactions are holding up well. Many retailers are coming under pressure but sensible landlords and developers have recognised this and are offering realistic packages. Some tenants are being forced to ask for concessions such as rent holidays and it is a judgment call for landlords facing the risk of voids in their centres and parks.

"Prime locations in all markets are still in demand but less so for sites and schemes in secondary locations. In general, new schemes by the leading developers across Europe are opening substantially let. Even in the UK, which to date has been the most affected by the credit crunch, large new shopping centres such as Liverpool One and Leicester Highcross have opened to great acclaim and with a great tenant mix. Part of the success of these new schemes is their ability to meet the needs of international brands who demand Grade A flexible space. These international brands are driving the market for the best streets and shopping centres and there is no sign yet that they are letting up on expansion."

Retail yields continued to increase in many parts of Europe with finance increasingly more difficult and expensive to obtain. The UK and Norway saw the biggest annual increase with high street yields increasing 1.25 per cent. Pricing in the UK market now looks attractive compared with the rest of Europe with prime yields essentially back to their 2003 levels. Dominant regional shopping centres and large retail parks remain highly sought after across the continent although overall investment volumes declined by 60 per cent year on year, down to €60.6 billion in the second quarter.

The economic outlook for Europe is subdued to say the least and as outward yield movement continues investors will be increasingly looking for income growth to drive returns. This may be limited in the short term although an increase in cross border retailer activity and a general lack of prime space will help to drive demand.

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