Fund facts Germany is drawing major investment despite unimpressive growth figures, while the UK is again attracting US attention. But for the decade ahead, the best retail prospects are in Eastern and Central Europe, writes David Quinn
It’s a fact of property investment that money tends to follow money. In the case of the European retail sector, poor sales figures and troubling forecasts are apparently doing nothing to stem the flood of money flowing into certain countries.
Take Germany. In March, Multi Development completed a €1.3bn deal to sell a portfolio including two German shopping centres and five retail schemes to Dutch investor Corio.
In September, private equity firm MGPA acquired 140 stores from Aldi for an undisclosed amount and said it was keen to invest up to €200m in the German retail sector by early next year.
Retail yields are falling amid general enthusiasm among investors. Figures from Cushman & Wakefield show that investors ploughed €4.3bn into German retail assets in the first half of the year – a year-on-year rise of 241%.
Yet according to Stephen Springer, head of retail research at King Sturge, which is about to publish its latest European retail property report, Germany is a “market built on sand”. He says: “It’s a parallel universe of investment that’s simply not supported by prospects for retail growth.
“The market has actually gone down by 3% over the past10 years and the forecast is 19% growth by 2020, compared with 30% in the UK. These figures should matter, but perhaps people aren’t taking stock of them as much as they should do. There’s a lot of herding going on among investors.”
The pain in Spain
Spain is another country where retail sales figures leave much to be desired. Forecast absolute growth is expected to be just 7% by 2020, slightly less than the meagre 8% growth seen between 2000 and 2010.
“With Spain and Greece, economics are coming into play, filtering into retail sales,” says Springham. “So the southern European countries are generally the lowest performers.”
Those poor sales growth figures did not deter Rockspring Property Investment Managers. In August, it completed a €45m sale-and-leaseback deal with Basque supermarket chain Eroski on 21 of its stores in Spain.
So what is going on? Mainly, it appears that the statistics can be interpreted in a number of different ways. This means that the situation for Germany, and other stalwarts of the European retail investment market, such as France, may not be as dire as Springham suggests.
“If you look at France and Germany in the first half of 2010, we have seen improving sales growth,” says Angela Keane, senior research analyst at Henderson Global Investors. “The retail market is very much location- and asset-led. It’s important to understand that there can be a large level of polarisation in a local market.”
Andrew Friend, who manages the Henderson German Shopping Centre Fund, agrees that it is important to “disaggregate” the numbers. He suggests that while some parts of the German retail sector, such as traditional department stores, may indeed be performing poorly, others are not.
“Shopping centres are seeing improvements in turnover of 5% to 10% year-on-year, so that part of the market is capturing more spend. This is why there is significant rebuilding of investment levels in Europe through German shopping centres,” he says.
France’s main attraction is a shortage of good-quality retail investment assets. This means that regardless of the sales statistics – which are not too bad anyway – money tends to flood in whenever anything comes onto the market, pushing up prices and causing yields to harden.
As for Spain, Rockspring’s Iberia managing director James Preston said at the time of the Eroski deal that food retail represented a “well-performing, defensive sector” and would provide a “high degree of insulation from any further effects of the downturn”.
For the biggest growth prospects, King Sturge’s statistics suggest that Central and Eastern Europe is the place to invest.
“The place that stands out as a shining light is Poland,” says Springham. With growth figures bigger than most, Poland “is coming from a larger base than other places in the region, so it’s all the better”.
Although the short-term prospects do not appear that appealing, Bulgaria, with average annual growth forecast at 4.7% over then next 10 years, looks like a good bet, as do the Baltic states of Latvia and Lithuania, where the annual growth forecasts are 5.1% and 5.3% respectively.
The major shortcoming of this part of Europe is market volatility, which Springham accepts is a problem. “You have to think of them as a long-term play,” he says.
The UK
Closer to home, there is little positivity to be found in the overall retail sales picture in the UK. August saw a surprise 0.5% month-on-month fall in retail sales volumes, and some analysts feel that signs of optimism around the retail sector are based on misplaced understanding.
“There’s a lemming-like obsession with the way everyone looks at the statistics, because they focus on year-on-year change without looking at the absolute numbers underlying it,” says Richard Hyman, strategic retail adviser to Deloitte. As an example, he points to figures for the final third of 2009, when year-on-year figures were interpreted as relatively strong but only because 2008’s figures were particularly bad.
Hyman predicts that annualised figures will not just become flat but will sink into negative territory in the months ahead. “The consumer represents 65% of the UK economy, and because we will all have less money to spend, sales growth will become a thing of the past,” he says.
Furthermore, Hyman suggests, retailer administrations of the Woolworths variety cannot be ruled out, since the polarisation between the stronger and the weaker performing retailers is likely to become marked.
Strike a hard bargain
King Sturge’s Springham does not believe the wave of administrations will be as great as during the previous recession but says all retailers are being “cautious”. He adds: “They will strike a hard bargain on rent and dig their heels in. That’s where the pressure point is – what they will pay in rent and how they will negotiate.”
All this suggests that retail may not be the best place to invest, but Hyman believes the picture is not straightforward, since retailer demand for the right property could get hotter – thus pushing up rents and values.
“The market needs less space to increase returns per square foot,” he says. “But at the same time, the need to be in the optimum site will get greater because the competition will be tighter. It’s a very interesting and quite dynamic position.”
Another factor undercutting the sense of doom that surrounds retail sales figures is the relative scarcity of top-quality assets, which – assuming there is no repeat of the debt crisis that was seen in 2008-09 – means demand will be strong when anything comes to the market.
Against this complex backdrop, King Sturge’s European retail property report gives pointers towards the UK areas likely to perform best during the years ahead.
The national retail growth forecast for the UK between 2010 and 2020 is 30.1%, so any town or region that is forecast to grow quicker than that is considered a hotspot.
In general, trends reflect wider economic patterns, with a close correlation between economically strong areas and those with the best prospects for retail growth.
Central London to shine
The numbers show that the strongest performing areas are likely to be in central London, particularly the West End, where growth is forecast at 38.9%. Outside London, the strongest performing town is expected to be Milton Keynes, with 38.4% forecast growth during the next decade (see table). Most of the other towns and sub-regions that make up the top 10 are in the south of England. Beyond that, Edinburgh is the likeliest hotspot, with forecast growth of 33.5%.
US retailers
US retailers are expanding into the UK. This trend may seem to have been on the radar ever since Gap opened its first London store in 1987. However, agents and developers believe that a new wave of US retailers are genuinely keen to enter the UK market and are becoming increasingly savvy about how to do it.
According to Mark Smith, director of retailer services at Jones Lang LaSalle, a number of factors are contributing to the trend, including depressed sales and market saturation at home, and the fact that UK consumer tastes are similar to those in North America.
For Smith, retailers entering the UK still view London as the place to start, because it builds brand awareness. JLL advised US retailers American Apparel (pictured below) and Guess on the rollout of stores in shopping centres around the UK. Guess now has 17 stores nationally, but its first opening was in Covent Garden.
“London is often the key to attracting US retailers to the UK, for three principal reasons: the high-quality retail tenant mix attracting global tourism; a domestic consumer with an appetite for US fashion; and the prospect of very strong sales densities,” says Smith.
Victoria’s Secret is another brand that has targeted a UK opening in a prime central London location. Its 7,000 sq ft unit on Bond Street acts as a giant billboard for the brand.
“There are still retailers who benefit from having one flagship London store,” says Sheila King, head of retail leasing at Hammerson. “For someone like Victoria’s Secret, it’s important to be there because it sets the scene for who they are.”
Yet King believes that things may slowly be changing. “In the past, the US retailers would all have looked first at London. It depends on the concept, but now they have a broader strategy and will look at prime regional malls,” she says.
Hammerson recently secured US fast-fashion retailer Forever 21 for a 50,000 sq ft store at Birmingham’s Bullring – its first store in the UK – where it will compete with the likes of Primark and H&M. “It had been looking at London but had been unable to secure a store,” says King. “It looked at its competitors and was happy to look at bigger city markets.”
Hollister, a sister brand of Abercrombie & Fitch, has followed a similar approach, taking space in a number of regional shopping centres rather than open a store in London.
King expects further retailers to cross the Atlantic in the near future, while Smith is advising an unnamed denim brand on a potential entry into the UK.
Another possibility is that US retailers that have so far operated department store concessions – such as Kenneth Cole, which has a UK link-up with House of Fraser – could branch out into standalone stores.
King says: “We are keen to get more US and European retailers into our schemes because customers like to experience new brands. So we’re very positive about it.”
Retail sales by country (%)
Estonia, Latvia and Lithuania look set to lead the charge of the Eastern
European nations in retail sales growth over the next 10 years
Forecast Forecast Historic Forecast annual average absolute absolute growth growth growth growth 2010 2010-20 2000-09 2010-20
Bulgaria -3.8 4.7 124 65
Czech Republic -0.4 3.9 54 53
Estonia -11.9 4.9 64 70
France 1.4 1.7 27 20
Germany -0.3 1.6 -3 19
Greece -2.1 0.3 23 3
Ireland -0.3 2.7 43 33
Italy -0.4 0.8 -7 10
Latvia -8.9 5.1 62 73
Lithuania -4.2 5.3 53 76
Netherlands 1.4 1.9 7 22
Norway 2.2 1.9 35 23
Poland 2.7 4.6 50 64
Portugal 0.2 0.7 10 8
Romania -3.8 4.7 132 66
Spain -0.9 0.7 8 7
Sweden 1.9 2.3 32 28
UK 1.9 2.4 41 30
Source: King Sturge
UK retail sales hotspots: top 20
Outside London, Milton Keynes is forecast to be
the fastest-growing retail hotspot over the coming
decade
Forecast growth 2010-20 (%)
UK 30.1
Inner London – west 38.9
Milton Keynes 38.4
Inner London – east 37.0
Outer London – south 36.1
Surrey 35.8
Outer London – west and north-west 35.5
Hertfordshire 35.2
Berkshire 34.6
Peterborough 34.5
Cambridgeshire 34.4
Essex 34.0
Hampshire 33.7
Edinburgh 33.5
North/north-east Somerset 33.5and south Gloucestershire
Thurrock 33.4
Warwickshire 33.0
Halton and Warrington 32.9
Outer London – east and north-east 32.8
Brighton and Hove 32.2
Darlington 32.2
Source: King Sturge
