Retail's shopping list for success

As Europe’s major retail landlords face up to 2020 in the wake of another challenging year, many of the sector’s structural problems – with e-commerce trends pressuring retailers and asset values – show no signs of abating. According to BNP Paribas data, retail property investment volumes in Europe slumped 25 percent year-on-year in Q3 2019, despite the sector remaining CRE’s biggest asset class after offices.  Yet precisely because it is still such a significant slice of the CRE landscape, a select group of investors are reassessing the sector with a pragmatic gaze and a plan for profitability.

“We believe that the structural changes in the retail market will actually play to the strength of certain assets,” says Volker Kraft, managing director of ECE Real Estate Partners, which launched its first ever open-ended pan European shopping centre last summer after securing equity commitments of more than €700 million. “However, there is clear evidence of a strong market polarisation. The situation will be challenging for smaller, non-dominant schemes in secondary and tertiary cities, where we believe yields will move out further with a widening spread to prime yields,” Kraft adds. Meanwhile, Florencio Beccar, CEO and co-founder of Axis Retail Partners, suggests that ongoing fears may actually provoke deal flows. “We think that given the current market situation – the kinds of assets that normally don’t trade, will trade,” says Beccar, who launched a new retail-focused fund backed by Italian insurance giant Generali Group in 2019 with an initial commitment of €500 million.

We believe that the structural changes in the retail market will actually play to the strength of certain assets.

Exploring investment opportunities

“The sector has been discounted generally - that produces a very nice window of opportunity.” Despite these strategic views, it is clear that investors must steer carefully in a landscape also characterised by toxic assets and ongoing retailer woes. Add in Europe’s late-cycle dynamics and the trade war between the US and China – plus a Millennial generation shift towards prizing experiences over ‘things’ – and the sector’s stakeholders are being hit from all sides.

Against this backdrop, the world’s largest retail landlord, Unibail-Rodamco-Westfield, unveiled plans in 2019 to sell off some €6 billion of assets, with retail-focused REITs in the UK including Hammerson and Intu also announcing major disposal strategies, as key anchors like Debenhams and House of Fraser failed. Department store closures have rocked the continent too, with the high-profile collapse of Hudson’s Bay and the merger of Kaufhof with Karstadt changing the retail landscape in Germany and the Netherlands. The UK, with e-commerce penetration at 17 percent, according to JP Morgan, is probably Europe’s most vulnerable market, although recent data for the Dutch and German retail scenes suggest that the negative effects of rising e-commerce rates is proving contagious.

Repositioning assets

In this scenario, Mark Garmon-Jones, Savills’ head of retail investment and repurposing, suggests that up to 40 percent of retail assets in the UK may need to be significantly repositioned in order to transition to success. There is a brighter outlook for “regional experiential centres, and retail assets that offer convenience and community”, he suggests.

The science of redevelopment in recent years has often focused on the twin pillars of food and beverage (F&B) and leisure elements. ECE finds that 40 percent of consumers chose a retail destination based on the F&B options and has been radically updating the offer in its centres in response, such as the new Foodtopia area at MyZeil in Frankfurt, which also includes a premium cinema experience, the Astor Film Lounge.  The ongoing leisure revolution means that even art galleries and public libraries are now finding homes in a range of schemes, while Hines’ flagship Cherrywood project in Dublin plans to draw the crowds with day-to-night event spaces. Meanwhile, Nuveen and Allianz’s Kamppi Centre in Helsinki hosts a nightclub and a yoga studio on its upper floors.

Optimisation by mixed-use and tenant mix

Where redressing a centre’s tenant mix doesn’t go far enough, asset transformation into mixed-used schemes is another option. The search for other complimentary elements has also renewed faith in hotel anchors, with this asset class independently proving risk averse in times of economic uncertainty (see also the article on page 44). Hammerson has recently submitted plans for a new 205-bed hotel adjacent to its retail and leisure destination Victoria Gate in Leeds. Co-working, another significant commercial property trend, is increasingly finding its way into the world of retail.

Unibail-Rodamco-Westfield has been a pioneer in this trend in its US malls, with co-working also now planned for select sites in its European portfolio. Real estate’s current obsession with beds, plus changing demographics in the Western world, are also impacting the drive to find pragmatic solutions for aging populations. While long-term solutions might even see the upper floors of shopping centre used for senior housing, the immediate effect includes the growth of medical centres, dentists and other health specialists as shopping centre tenants, reinforcing the daily-use and service-oriented trend.

Puerto Venecia is the only shopping resort of regional importance in Spain.

Spezialisation as success model

Other investors are finding success through specialising in specific asset types, with designer outlet centres, for example, outperforming many other models. “We thought they would be defensive when we started out in 2004 although we didn’t yet have the proof, but they proved resilient during the global financial crisis of 2008 when the market was collapsing around us. Now, when physical retail is contracting, they’re still performing well,” says Sebastien Gorrec, who is responsible for Nuveen’s European outlet mall strategy.

In Germany, retail parks, especially those buoyed by major food anchors, have proved resilient too. ‘This year we are seeing the yields for food-anchored retail parks coming down to levels previously seen for core shopping centres,’ says Dirk Hoenig-Ohnsorg, head of retail investment, Germany at Colliers International. “Investors are looking for certainty and long leases anchored by grocery tenants,” he adds.

Meanwhile, parts of Southern Europe may yet offer some respite due to a combination of unique characteristics. “Great weather, stunning historical towns and ancient monuments make the physical Italian shopping experience truly unique,” says Giuseppe Amitrano, CEO of Italian high street retail specialists GVA Redilco.  “Another key aspect is luxury shopping, which has still maintained a strong ‘in person’ appeal.”

Retail has switched from being an offer-based model to a demand-based industry.

Key investors are returning to Spain for similar reasons, with Union Investment and the property arm of Italian insurer Generali recently acquiring the Puerto Venecia shopping resort in Zaragoza for €475 million in a 50:50 joint venture. It represents one of the top five shopping destinations in Spain and one of the country’s top three busiest malls.

Henrike Waldburg, Head of Investment Management Retail at Union Investment, stresses: "The deal fits perfectly into our investment strategy, because Puerto Venecia is the only shopping resort of regional importance in Spain. The average length of stay is exceptional three hours." “Beyond all that, retail specialists that seek success will have to align with the industry’s more customer-centric mood,” says Eric Decouvelaere, head of retail EMEA CBRE Global Investors, even picking up tips from the hotel industry. ‘Retail has switched from being an offer-based model to a demand-based industry,’ Decouvelaere suggests. “We’re all in hospitality now.”

By Isobel Lee