Any weather forecaster looking at Europe’s economic climate will tell you that the outlook is cloudy at best and, at worst, there is one hell of a storm brewing. But in spite of the headlines and the horror stories, investment in European retail appears to be enjoying an Indian summer.
“If you want a good indication of how things are going, just look at the faces of the people at the BCSC conference,” says Knight Frank’s head of retail investment, Bruce Nutman.
This year’s British Council of Shopping Centres’ jamboree, in sunny Manchester, was hardly a return to the heady days before the crash, but, says Nutman, “despite the negativity, there was some optimism.. The propcos were there, and having a lot of meetings with retailers that were there to do deals. The retailers are prepared to regear and take space. I take that as a positive”.
The smiles are justified by the statistics. “There’s increasingly strong investor appetite for retail stock around the whole of Europe,” says Giles Wilcox, a director in Savills’ cross-border investment team.
Across the continent as a whole, prime shopping centre yields have remained at a stable 6.3% in the first half of 2011. However, investment is split between opportunities in the core markets of the UK, France and Germany and more opportunistic plays in Central and Eastern Europe.
Fractured
Even if the currency and sovereign debt crises are taken out of the equation, Europe is becoming increasingly fractured. The sense that it is, in some way, an homogeneous market has utterly vanished.
“You really have to drill down to the micro level,” says Nicola Robson, national director in Jones Lang LaSalle’s European retail capital markets team. “There isn’t one Europe any more. There are too many sweeping statements.”
Wilcox agrees: “Investor appetite is very much focused on the large core liquid markets, especially Germany.”
“It is increasingly a multi-speed Europe,” says Robson. “Germany, northern Europe into Poland and the Nordics are increasingly seeming insulated, while others are much less attractive.”
And, in northern Europe the increase in appetite, says Nutman, is “not a change, but a foot on the pedal”. And it doesn’t look to be waning. “Sovereign wealth is picking up. Despite the doom and gloom, they are looking at stock.”
According to DTZ’s recent The great wall of money report, the amount of capital being targeted at European property for next year is €82.5bn (£71bn), or $111bn, which is just more than one-third of the global total. In spite of the sovereign debt crisis, the uncertainty in the eurozone and a general dip in consumer and retailer confidence, that figure represents a fall of just 3% on the figure for 2011.
And of the funds targeting a single sector, retail remains the firm favourite, with 35% of single property-type funds shopping for shops.
The report adds that cross-border investment in the EMEA region accounts for three-quarters of investment of new capital. Of this, 31% is expected to come from outside the region, and a further 44% from within. This compares to total cross-border flows of 34% in 2010-11.
But, again, this is all being specifically targeted, and predominantly in the North. “In 2006-07 there was a crushing weight of money looking for product,” says Robson. “Geography and specifics went out of the window. The peripheral was just as much in demand as the core. Now it is all about safe havens and the funds want to protect their investments.”
But, she adds, “there is still a lot of money around”. Among those making a splash in the market are the Malaysian and Korean funds, which have begun to target 5-6% yielding retail stock, and the Australian pension funds, which have saturated their own back-garden of South East Asia, and are now mainly targeting the UK. The US and Canadian funds, especially pension funds, are also looking to the northern core for what could be seen as “wealth preservation plus”.
There have been some more interesting plays, such as Meyer Bergman and Ontario’s state pension fund buying two malls in the Czech Republic for €300m.
“This is what we are increasingly seeing – a partnership of equity and expertise,” says Robson. The banks are increasingly difficult. But the equity is pretty choosy.
Other notable plays have included Allianz upping its investments in retail and buying stakes with Hammerson.
“In terms of portfolio sales, the retail sector dominates in Germany and France. The main issue is accessing the stock, as the better schemes are the ones that owners don’t want to sell.”
So far in 2011, six of the 10 portfolio transactions in Germany have been in the retail sector. “There is real investor appetite for retail investment into Germany and this is differentiated between shopping centres, retail parks and out-of-town retail and prime in-town/high street retail.”
“In Berlin, despite what we we have been seeing about the PIGS countries, there is a thriving investment market,” says Nutman. This was perhaps most vividly shown by the US Teachers fund purchase of the PEP mall in Munich from RREEF, for a 4.75% yield.
“It is easy to see the attractiveness of Germany. Comparatively it has been a very stable market,” adds Robson. “It doesn’t have the peaks and troughs. There is a a feeling that it is a safe haven.”
Meanwhile, two-thirds of all portfolio transactions in France have been for retail stock, “with the focus on small retail units”, adds Wilcox.
Part of the appeal is the perceived level of risk, or rather, comparative lack of it, in what an Asia-Pacific investor might call “interesting times”. “The retail market is less volatile than the office market, especially for prime, well-located schemes with a good tenant line-up, and selling products that people either need or can afford,” he says.
“The real problem will come if the market gets too clever and overprices stock,” says Nutman. “If that happens, no one will look at it.”
In some senses that has happened already in the harder-hit eurozone countries, with much of the stock available in Mediterranean Europe priced too high to match the perceived risk.
Trickier
While solidly performing parts of the insulated north appear to be doing well, that low-risk formula is not the case in other parts of Europe, especially in those countries staring down the gun-barrel of a sovereign-debt crisis.
“It gets a bit trickier when you consider places like Spain,” says Nutman. The risk is really too high for institutions. But there will still be opportunities for other funds where there is growth and less risk, such as in Madrid.”
Because of the uncertainty, the market in Spain and most of Mediterranean Europe has dipped. “Nothing major has happened in Spain for 18 months,” says Nutman. In Italy, it is very similar.”
The reason for this, Nutman says, is simple. “The prices don’t reflect the risk. It is just too expensive. You won’t get any UK or US funds looking there.”
Meanwhile Poland is also reaping the benefits. “The main investors in Poland are German, Austrian and UK investment funds,” says Wilcox. “Blackstone would typify the strong appetite for Polish retail, most recently with its acquisition of Magnolia Park.”
And it is easy to see why. Prime retail yields in Warsaw now stand at 6.25%, rising to around 7% in major regional cities. “Poland has a lot of secondary cities and the market is also diverse and strong,” says Wilcox. “Around 60% of the total stock is situated within the eight largest cities and the share of medium and smaller cities has risen from 26% in 2000 to over 40% in 2011.”
The increasing market uncertainty, says DTZ, is leading some investors to retreat to core opportunities.
But Robson disagrees. “The wealth preservationists may [retreat]. But we will see a lot more activity in growth markets, such as Russia and Turkey.”
She adds that constraints on supply in France, for instance, will see more investment heading east. “Central Europe. That’s where the market will have to move to. In some areas, the development pipeline is healthy, especially in the second-tier cities. There certainly isn’t an oversupply and vacancy rates are very low in Central Europe.”
But DTZ adds that the sheer magnitude of money will decrease. “Despite the relative attractiveness of property compared to other assets, the current economic uncertainties are likely to impact on new capital-raising for some time to come,” says Hans Vrensen, the agent’s global head of research.
Added to that, much of the money being channelled into European stock in 2011 was raised before 2008. Now fund managers are being put under pressure to invest it or be forced to return it to investors.
What it also means is that the effect of the current economic situation has not really been felt, in terms of the funds’ allocations. But we can expect a pinch. “We are likely to see a decrease in capital available if these uncertainties persist, as listed companies may delay new equity-raising or IPOs and third-party funds are less able to attract new investments,” says Hans Vrensen.
In other words, we have yet to see the worst of this storm, and these guys are not saving for a rainy day.
UK could benefit from crisis
It is already Europe’s strongest retail investment market but, if Europe’s future remains uncertain, the UK could see a lot more investment coming its way.
“We are on the cusp of a real shift away from mainland Europe to the UK,” says Knight Frank’s Bruce Nutman. “Germany is a powerhouse. But there is a fear that it could take on too much responsibility for the problems of the other eurozone nations. That would play into the hands of the UK.”
DTZ’s Mark Williams agrees. “London is a massive beneficiary. It is a global market in financial terms. The language is a massive boost, there is transparency. In times of turmoil, those become big draws. There are no surprises, which makes it a safe haven.”
Nutman adds that while investments are still concentrated in the south of England, some investors are targeting hotspots in the rest of the UK. “A lot of investors are starting to look at good opportunities in other parts of the UK. Hammerson was delighted with Silverburn’s performance in Glasgow, for example. They are seeing growth in this environment. “
But that isn’t the case for the truly global money. “There is a particular draw to London for sovereign wealth,” says Williams. “For global money, the assets have to be slam-dunk good, so Westfield’s kit in London, or Regent Street are always being looked at. As soon as you go beyond that, they aren’t interested.”
The simple fluidity of the system in the UK is also a major attraction, Nutman adds. “In Europe, a quick deal is six months. Here, we can sell in three to four weeks.”
In spite of that, Nutman predicts that the market will slow down somewhat. “Things are taking longer because of preparation and due diligence. Now, that should always be the case, but before people were falling over themselves to buy and lend.”
But that doesn’t mean the UK is immune from the effect of bad headlines. “There are obviously the problems with the eurozone, but there are also other factors,” says Williams. “Headlines in Australia during the August riots said ‘London’s burning’. That did have a negative impact.”
Shopping centre development runs at two speeds
One of the factors fuelling the demand for existing prime and secondary retail stock in the core markets of Europe, is the fact that there is very little available.
“There is a dramatic reduction of supply,” says DTZ’s Williams, “especially in prime. People aren’t letting go and no there is no development coming on line.
The attitude is one shared by investors. “The one hole that exists is development,” says Nigel Robson – executive director of Resolution. “You look at the stands at the BCSC this year and the first thing you notice is that there aren’t very many of them. There isn’t anything proposed for next year.”
“No stock could create quite an interest dynamic in the market,” says Williams.
In Germany and the UK completions of new shopping centres up to 2012 are projected to be the lowest for more than two decades. In the UK more than four-fifths of all development for the second half of 2011 are accounted for by one scheme – Westfield’s Stratford behemoth. The only major scheme in the UK’s pipeline to 2013 is Trinity Leeds and completions are expected to hit a fifty-year low.
While the UK’s pipeline seems to be the subject of a hosepipe ban, other parts of Europe have a deluge of development. According to Cushman&Wakefield, the slowly dripping tap at the end of the development pipeline is about to be turned on. More than 2m sq m of new shopping centre space was added to Europe’s 135m sq m in the first half of 2011 – a 26% increase on 2010. And most of the new space is concentrated in 71 new shopping centres. And a lot more is expected.
Again, there are signs of the two-speed Europe. The majority of the new development, 58%, is in Central and Eastern Europe, with hotspots in Poland, Russia – which accounted for one-fifth of all development – and Turkey, which boasts the largest single new shopping centre, the 156,000 sq m Marmara Forum in Istanbul.
