Shopping centres: frontline performers in real estate
Elsevier Food International Vol.9, Number 1, February 2006 Pascal Kuipers
In 2004, retail was the best-performing sector in seven of the 12 European markets covered by the latest CB Richard Ellis/IPD survey on European real estate. Shopping centre returns exceeded all retail returns in six countries. Chronic complaints that low consumer spending exacerbates economic malaise belies the fact that when the going gets tough the retail market actually shows less vulnerability than the office sector when waves of development occur.
The mantra of chronic complaints coming from retailers that low consumer spending underpins the general economic malaise may yet be contradicted by salient facts in the real estate sector. The 2005 European Shopping Centre Digest report issued by CB Richard (CBRE) and the Investment Property Databank (IPD) showed that shopping centres and the retail sector in general were actually one of the best performing parts of the European property market in 2004.
In most countries in western Europe, retail performed well when it comes to investment in real estate property. Denmark and Spain – where residential property performed best – are the exceptions to the retail real estate success-story (Figure 1). In most markets, this is a result of shopping centres, which overall outperformed stand-alone shops. Outside continental Europe, in the UK and Ireland, investors recorded the best returns via retail warehouse facilities. In France, shops have been performing badly due to the French government’s strict planning controls on new developments in past years, which, in turn, put pressure on store development. On the other hand, the UK showed shops performed much better than shopping centres in 2004. The UK is also an exception when it comes to shopping centres being self-financing assets in the whole of western Europe. This might as well add to UK shopping centres’ lower appeal to investors. Income yields are much higher than interest levels in all of western Europe, except in the UK where both are at par (Figure 2).
Still, the UK is the leading shopping centre market in western Europe, accounting for 24.5 per cent of the number of centres and 53 per cent of total capital value in 2004 (Table 3). According to Mark Callender, research director of IPD, a remarkable convergence of yields is happening. “If you compare shopping centre yields in 2001 with 2004, you can see that the higher yield countries in 2001 witnessed a reduction of yields in the following years to 2004, whereas the lower yield countries in 2001 recorded yield increases in these years,” he says.
Size matters
“One can also see that smaller shopping centres have higher yields while larger shopping centres have lower yields. This convergence trend has not yet been finished as there are still strong differences, yet anomalies, between country yields,” Callender points out.
Callender refers to neighbouring countries Germany, the Netherlands, Norway and Sweden, which still show a large difference in shopping centre yield levels. An explanation might well be the difference in average shopping centre size, which – as Callender points out – affects yields.
Investment levels of small shopping centres are much lower than the capital needed for the larger centres. The lower capital intensity of smaller shopping centres is a better match with the shopping centres’ income (rents) and capital growth. Shopping centres in the Netherlands are, on average, the smallest, whereas Germany has the largest shopping centres. Between Norway and Sweden the difference in size is smaller and so is the yields gap.
Due to the success of retail real estate and its self-financing character, property investors are keen on adding such assets to their portfolios. Especially since investors find their investment portfolios in retail undervalued. Retailers are also willing to capitalise on their real estate assets, and to invest the proceeds back into their core businesses. Metro Group clearly experienced this new buying zeal from investors. In 2003, the German retailer tried to sell a €3 billion property portfolio, but failed to find an investor willing to pay that price (Elsevier Food International’s November 2005 issue).
Under the current climate, however, it has become easier for retailers to sell off assets. Dutch retailer Vendex/KBB and the Scandinavian co-operative group Co-op Norden are also in the process of clinching deals with property investors to sell and often lease back large parts of their real estate property. And more retailers are expected to follow the trend.
Selling spree
The 2005 European Shopping Centre Digest of IDP and CBRE – a consultancy specialised in real estate services worldwide – shows that a similar trend is happening in shopping centres where over the last five years retailers were actively selling property. The buyers were collective investment vehicles (e.g. pension funds) and property companies. Especially the latter have been active traders with the amount of property purchased being slightly larger than the value of assets sold. Collective investment vehicles on the other hand have been strong net buyers of shopping centres in the last five years and in the first half of 2005.
“Investment in shopping centres has increased strongly, especially in 2004 when investments in shopping centres in the whole of Europe exceeded the €14 billion level,” says John Welham, head of retail investment of the EMEA region at CBRE. “In the first half of 2005 investment levels already reached over €8 billion, almost €1.2 billion of which is invested in shopping centres in Poland. By contrast, France has seen a dramatic change in the first half of 2005. It used to be one of the leading markets in shopping centre transactions, but in the first half of 2005 only a few transactions have happened there. It’s a market dominated by long term traders, therefore there was limited short term activity.”
Remarkably Poland dramatically outperforms the Dutch shopping centre market (runner up with €440 million in the first half of 2005) and the central and eastern European (CEE) average investment level which is some €370 million for the same period. “Poland is a large consumer market that has been a prime target especially for food retailers desperate to get market share ahead of competition,” Welham explains. “Developers reacted to this aggressive expansion and in the last four years a large number of new shopping centre developments have occurred. And there is a continuing strong development pipeline.”
Poland’s prime yields
Since 2002, prime yields of Polish shopping centres have been Europe’s highest. Also other CEE markets – Czech Republic and Hungary – recorded much higher yields than the European average. However, the yields of CEE shopping centres did go down fast in recent years. In 2002, the average prime yield of shopping centres in Poland was ten per cent, but in 2005 this went down to seven per cent. Hungary and the Czech Republic show a similar yield decrease from some 9.8 per cent in 2002 to seven per cent in 2005. Yields in most of the western European markets were less volatile in this period and range between 5.5 and 6 per cent in 2005.
“It’s a logical development that the yields in central Europe would reduce over time to western European levels,” says Welham. “This is due to increased investor demand, lowering of interest rates, improving quality of tenants and shopping centres and the expectation of currency convergence.”
Uncertainty around other asset classes and attractive income characteristics of retail real estate – especially shopping centres – are increasing demand and pressure shopping centres’ yields. In combination with uncertainty on how interest rates will develop, the question is forced upon investors if shopping centres (especially in the CEE countries) are a sustainable investment.
“In the short term, investors can deal with increasing interest rates as they have created a financial cushion to deal with that,” says Nick Axford, head of EMEA research & consulting at CBRE. “Retail real estate has attractive income characteristics, there is a shortage of quality investment projects and investors are keen on long term investment.”
All this contributes to retail real estate being a healthy investment, but location is of vital importance, underlines Axford. “CBRE research shows that in the UK you need just 77 trading locations to reach a market share for which you needed 200 stores in 1971. This underlines the need for prime locations, larger stores and better warehousing. In the CEE market, where yields have been going down, there are lower levels of shopping centre density when compared to western European markets. The CEE markets have shown a strong economic performance and consumer-spending power has been growing strongly. But still there is a risk premium for the CEE region.”
Long-term investments
Looking at consumer spending per square-metre of shopping centre floor space (Figure 4), Axford points out that investing in shopping centres in Poland, the Czech Republic or Slovakia is a long-term investment indeed. “The CEE average is already over the EU15 average, but consumer spending in the Czech Republic, Slovakia and Poland is lower,” he says. “This means that a significant increase in consumer spending is needed to support the increase in shopping centre floor space in these markets. Calculating current growth rates of EU15 and CEE countries, it would take until the year 2038(!) before the gap between available square-metre of floor space and consumer spending levels is closed.”
The crucial question is, whether the rewards are worth the risk. Axford balances pro’s and con’s: “CEE are much more volatile markets with roads and other infrastructure being built which may further stimulate economic growth. Especially in the Czech Republic, Slovakia and Poland which are in the EU. On the other hand, buildings become obsolete earlier and governments can enact strict planning controls. In the short term, the pattern of shopping centre ‘out-performance’ is likely to continue and investment demand will remain strong. Rental growth of prime locations will continue to outperform secondary locations. This is important because an expected sluggish economic development hinders rental growth prospects. Furthermore, retailers continue to face new pricing challenges and pressure on margins, which affects profitability. These variables in local market conditions therefore mean that selection of quality locations remains vital to a successful investment.”
Recent shopping centre deals
* Carrefour sells shopping centre in Milan (Dec.27, 2005)
French real estate company Klepierre purchased a shopping centre in Milan, Italy from Carrefour for €152 million (US$186.4 million). Assago has an area of 24,600 square meters, and is adjacent to an existing centre that has a Carrefour store of 25,000 square meters, nine medium-sized stores and 87 boutiques.
* Ahold sale in Poland/Czech Republic (Dec.6, 2005)
Taking a cue from major Dutch retailers who raised their liquid assets by disposing prime real estate, Ahold and German retailer Metro have announced real estate disposals. Ahold sold three shopping centres to Dutch bank ING, while Metro said it sold 53 Practiker locations to Ixis AEW Europe. The Ahold deal, worth €108 million, covers two shopping centres in Poland and one in the Czech Republic. Ahold has previously disposed its Polish hypermarkets as part of its plans to trim operations. Last week the Dutch retail group Vendex sold its stores in the Netherlands to a US firm in a bid to benefit from high real estate prices and concentrate on core retail activities.
* Coop Norden sells Swedish property (21 December 2005)
ING Real Estate has announced the acquisition of a portfolio of 129 properties in Sweden from Coop Norden for around SEK4.2 billion (USD551.9 million). The portfolio comprises various supermarkets, hypermarkets and four logistic centres. The transaction is a sale-and-leaseback deal to Coop Norden which will lease back the properties for average periods of more than 12 years.
.jpg){kind=small}
.jpg){kind=small}
.jpg)
