Investors who hoped to make a quick profit buying German shopping centres may have to think again, because long-term asset management is often required to raise rental values
When Curzon Global Partners recently agreed to sell a big portfolio of clothing and DIY chain stores at a big profit, chief executive Ric Lewis said that it would be difficult, but not impossible, to achieve similar profits in Germany because yields had fallen and interest rates had risen.
“You have to be a little bit more picky and more shrewd, given the maturity of the market in the past five years, but it is not inconceivable,” said Lewis.
Curzon agreed to sell the 41 German assets, plus 18 in Hungary and Greece, for around €957m, having paid €680m for the package less than two years ago.
Many do not share Lewis’ optimism about making profits in Germany as Curzon has done. Investors who have assembled retail portfolios in the hope of selling them at a premium may be in for a nasty surprise.
Lars Breuer, a managing director of Savills in Germany, foresees a crash in the outlet store segment (Fachmärkte). “Investors who have bought at a multiple of 14 times the rent in the belief that they can sell at 16 times the rent will find that it does not work that way. Developers are offering new products at 13 times the rent,” says Breuer. “That means that the portfolios on offer are too expensive and that the leases do not come with the full ten-year term.”
Breuer also notes that the credit crunch means bankers will no longer finance assets bought for 16 times rental value at a high loan-to value ratio.
But many investors realise that they have to manage the assets to make money. “A lot of people went into the market and out again,” says Tony Quayle, managing director of Edinburgh House. “They were never going to undertake asset management in Germany.”
Edinburgh House has 15 staff in Germany to manage 155 properties worth €900m. The company is in the process of buying more retail. For Edinburgh House, asset management means moving tenants around. “To have a large portfolio gives the flexibility to do something with the tenants,” says Quayle.
Others investors see opportunities to turn around less successful shopping centres. The saturation of shopping space in Germany has resulted in an overhang of outdated and unproductive malls. In the next three years, Germany will get 60 new shopping centres, according to Hubertus Kobe, a managing director at Donaldsons Deutschland, part of DTZ.
Closed-end funds seek exit
Many closed-end funds are selling shopping centres because they feel it is time to exit their investments and they are not interested in updating or renovating their properties, according to Michael Englisch, managing director of fund manager Henderson Global Investors. Henderson sees value in renovating older shopping centres where leases are expiring. Englisch reckons that about half of Germany’s 600 shopping centres need renovating. Top shopping centres trade at 5% net yields, but the smaller ones can provide net yields of 7.5-8%, Englisch says.
Investors are looking for retail property with a bit of vacancy to generate extra rental income. Long fixed leases do not provide much upside in Germany, because rents are indexed.
Investor Reit Asset Management has managed to increase rents by buying smaller, income-producing assets with vacancy. In the past 18 months it has increased its rental income by 10%, says Iris Schöberl, managing director of Reit Asset Management in Germany.
Excluding the impact of asset management, rents have risen only in the very best locations in the 10 biggest cities, says Karsten Burbach, head of retail at CB Richard Ellis in Germany. “A classic 100m2 space in Munich was let last year for €270 per m2, but there have been a few deals between €300 and €400,” he says.
Whenever foreign investors bought German retail property, they often argued that consumer spending would improve as the economy rebounded. Some believed that the Germans would regain their confidence by hosting last year’s World Cup. At the start of this year, there were worries that the German consumers would stay away from the shops as value-added tax increased to 19% from 16%.
In the end, neither event had much impact on German consumer spending. Consumer confidence has improved somewhat as unemployment falls and the economy grows. “Consumer spending has always been lousy and Germans won’t spend like Brits and Americans,” says Elfi Garthe, head of corporate finance at Jones Lang LaSalle in Germany.
Misreading the German consumer
This is partly due to the relatively low percentage of Germans who own their homes. Owning a house gives British and US consumers a rich feeling. UK consumers have kept up their spending habits thanks to a continued increase of house prices. This allowed them to take out more equity against their property. If the German consumer is so different, has the international investor misread him?
“The majority of serious, institutional investors expect a minimal rise in consumer spending,” says CBRE’s Burbach.
The German consumer may not spend much, but he knows what he wants (see pie chart above). German consumers are mostly interested in value for money, says David Roberts, chief executive of Edinburgh House. Discounters such as Aldi, Lidl and Edeka control the market and investors want these chains as tenants.
However, knowing the mindset of the German consumer also helps investors with practical decisions. Edinburgh House, for example, does not bother with elaborate shop fittings. After all, consumers may think they are paying more for them in their shopping bill. An upmarket supermarket, such as the UK’s Waitrose, would be a difficult business concept in Germany.
Although Germans love a bargain, they don’t like shops that “pile them high and sell them cheap”. That was the main reason why US retailer Wal Mart failed to win over the German consumers. Edinburgh House also says it is important to have food courts and coffee shops: Germans, more than Brits, see shopping more as a form of social gathering.
The German retail market has attracted not only property investors. TK Maxx, a UK chain that sells designer brands at cheaper prices, is expanding. Other chains, including UK clothing brands Monsoon and Accessorize and the US’s Urban Outfitters, are to launch in the German market.
Even Marks & Spencer, which retreated from Europe only a few years ago, is thought to be mulling over a return to Germany with a new concept. As many property investors have found, retailers are discovering that the market is simply too big to ignore.
