Retail properties are key drivers in the European property investment market

15 Nov, 2010, Frankfurt

• Investment volumes in retail properties increased by 66 % -Profits fall to 6.9 %
• More aggressive pricing for core products
• Falling profits expected for 2011
• Great Britain, Germany, France and The Netherlands are the top investment targets
• Investment volume expected to reach 36 to 37 billion Euro

Whereas investment activities overall in the European property market showed a reduction of 12.5% in the third quarter 2010, the investment volumes in retail properties increased by 7.6%. This meant that this investment sector has continued its positive development, demonstrated since the beginning of the year. In Europe as a whole, the investment volume in retail properties rose by 66%, while other property sectors in total showed only 42% growth.

Dennis Börgel, Associate in the corporate finance department of Cushman & Wakefield (C&W) in Germany, commented that: “The demand by investors for retail properties has shown a visible increase, whilst the offer for products suitable as investments has shown only limited growth.” He went on to explain: “If the offer in suitable retail properties were larger, the investment volumes would grow even more. In addition, deceases in profitability have partly caused more products to become available. Price levels for core products have also become more aggressive.” This has meant that the average European profitability for retail properties in the third quarter fell by 4 base points, and now lies 33 base points below last years’ peak at 6.9%.
In addition to this, property consultants have observed that the product requirements are changing: “It is true that everyone is looking for premium properties, but the definition of what a premium property is, has in the meantime become a little less strict, so that for example, people are now accepting shorter periods for leases in good locations.”

Retail property investment in Europe

This development in the market was supported by an easing in the situation regarding the supply of credit, which once again permits investors to acquire larger portfolios, although the portfolio volumes observed in past years would not yet come into the picture again. So we have seen that the Dutch shopping centre Reit Corio has made sure of taking over the German portfolio of the shopping centre developer Multi Development for 1.3 billion Euros, by means of a capital increase. In France and Poland, Simon purchased the shopping centre portfolio of Invanhoe Cambridge, while in Great Britain, Tesco completed a sale and lease-back transaction.
From the beginning of the year up to September, the retail investment volume reached 32.5 billion Euros, which is the highest level since 2008, and with a 33% share represents the highest proportion of this sector in the overall annual volume during the last ten years.

Looking at the investors, both international and local buyers have played an equally important role, although it was not necessarily “new money” that is flowing into the market, since the investors who have active were previously involved in this sector.
The strongest European markets are Great Britain, Germany, France and The Netherlands. These top four account for 76% of the retail investment volume (2009: 66%), with Germany showing a particularly positive development with an increase of 164%.

“Confidence on the market has shown a clear increase. At the end of this year, we will be able to look back on a strong retail investment market – for 2011 we can expect a further fall in profits and rising investment volumes”, says Börgel in summary. “The stabilization of user markets, growing consumer confidence, increasing employment rates and low interest levels will generate correspondingly positive signals for moderate rent price increases.“
Consultants at C&W expect the retail investment volume in Europe to reach between 36 and 37 billion Euro in this year - 60% above 2009 - and consider it to be quite possible that an investment volume of 45 million Euros could be achieved in this segment in 2011, providing that an adequate product offer continues to be available.

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