Robust market segment

German retail parks rarely win beauty contests. But investors love them. And this asset class promises stable earnings into the future – if investors pay attention to some of the particulars.

The name of the Rondo Steinheim retail park in Hanau, central Germany, is a bit mysterious until you see an aerial view: it’s circular inside. The building complex, developed by Schoofs Immobilien of Frankfurt in 2017, received the renowned “Fachmarkt Star” industry award in the same year, with the jury praising its “planning and implementation beyond the usual functional building.” Very few retail parks have as much architectural flair as the Rondo. But unspectacular properties of this type are also stars in their own way – because they’re extremely popular with investors. According to the real estate adviser CBRE, in 2017, retail parks, DIY stores, superstores, hypermarkets and other specialist retailers had a total transaction volume of €6.2 billion in Germany, 17 percent up on the previous year. In contrast, investment in conventional shopping centres was only €2.8 billion in 2017, down 28 percent on 2016.

Anchor food retailer is vital

The real estate market research group bulwiengesa describes the German retail park (Fachmarktzentrum) as a specialist neighbourhood shopping mall that is a standalone, functional shopping centre frequently located on car drivers’ routes and viewed as efficient and hassle-free. But what explains the popularity of retail parks at a time when the growth of e-commerce is putting pressure on brick-and-mortar shops? “Investors still see retail parks as a robust asset class,” responds Ralf-Peter Koschny, a retail expert and Chairman of bulwiengesa’s Board of Directors. Retail parks are impacted far less by e-commerce than shopping centres are, he says. “The main products available at retail parks are fast-moving, lower-priced goods that offer less of an incentive for online purchases,” explains Koschny. Typical tenants of retail parks include food retailers (hypermarkets, supermarkets and discount stores), “Drogeriemärkte” (retail stores that sell cosmetics, household products and health food), clothing and shoe retailers in the low to moderate price segment, and smaller shops and service providers such as bakeries and hairdressers. Food retailers play a particularly vital role. “Food retail will continue to be fairly resistant to online selling,” says Sandra Ludwig, Head of Retail Investment at JLL Germany. She points to the high density of supermarket and discount stores in Germany and to the customers’ need to personally inspect fruit and vegetables before they buy. Investors will also be encouraged by Ludwig’s confidence that both food retailers and Drogeriemärkte are set to continue their rapid expansion.

A number of advantages

Those are only some of the aspects that make retail parks attractive for investors. “Another advantage is that local authorities hardly ever approve new projects these days,” explains Lars Jähnichen, Managing Director of the retail property specialist IPH Handelsimmobilien. “Anyone who acquires a well-functioning retail park can be relatively certain that at least the competition won’t get any worse.” Jähnichen adds that this type of property is not very management-intensive because the number of tenants is much lower than in shopping centres.

Retail parks offer other advantages for property management. “Due to their investment volumes, retail parks are highly fungible,” says Jan Schönherr, Co-Head of Retail Investment at real estate adviser CBRE in Germany. A volume of about €15 million per property means that retail parks are of interest to a broad range of investors, particularly institutional funds and family offices. The potential group of investors is so large that it’s easier to find a buyer for a retail park than for a shopping centre, which can cost over €100 million, says Schönherr.

From the viewpoint of leasing, retail parks also make life easier for their owners than shopping centres, whose tenants often like to haggle about the length of leases. According to bulwiengesa’s Chairman Koschny, “the standard term of leases for retail parks is still ten years plus option.” The experts also unanimously agree that no national decrease in rents is to be expected. However, the level of rents for retail parks is highly opaque. Industry insiders estimate rents to be 8 to 12 euros per square metre, although they can be much higher for small spaces in properties located in high-demand regions.

Retail parks also offer an opportunity for investors who wish to use a “manage-to-core” strategy to turn properties that have seen better days back into first-class addresses. That is a good option for conservative investors, says CBRE expert Schönherr. “In addition to conventional portfolio modernisation, further development and upgrading to a hybrid centre is also possible.” By hybrid centre, experts mean a combination of a retail park and a shopping centre. “A successful manage-to-core strategy requires the relevant retail park to have the potential to develop into a top property in spite of any smaller vacancies or expiring leases or the need for modernisation work,” explains Torsten C. Wesch, Managing Director of redos Group of Hamburg. This primarily requires the right location. Precisely for this reason, adds Lars Jähnichen of IPH, “development into a hybrid centre doesn’t make sense in every case” – the site has to be suitable. The quality of the experience offered by retail parks is becoming increasingly important, as shown by the increasing number of food service concepts. Jähnichen has also observed that “in recent months more leisure-oriented providers such as gyms, trampoline parks and bowling alleys are interested in retail parks or their immediate vicinity.”

Challenges for investors

Does this mean investors in retail parks can’t go wrong? Of course not. As is the case for every property investment, various criteria are important, according to Torsten C. Wesch of redos Group: “When we prepare investment decisions, we always look beyond the general economic dynamics at demographic trends, the innovative capacity of local industries and companies, the labour market situation, traffic and transport, the housing market trend, and building laws at the site.” The redos Group has created two special funds that focus on specialist stores and retail parks, for which Union Investment has acquired the equity and acts as "Service-KVG" (service investment management company).

Wesch has good reason to mention German building laws. Most local authorities include precise requirements for authorised product lines and maximum sales space in the development plans for retail parks. Ultimately, they want to protect retailers in city centres, which is why the products sold there, such as clothing and shoes, are subject to limited availability in retail parks. There is disagreement in the retail property sector about whether these requirements are in accordance with European legislation, but the fact is they can put a significant damper on the further development of retail parks. “Local authorities ought to be more flexible in this area,” urges bulwiengesa’s Chairman Ralf-Peter Koschny.

There is another challenge, albeit one that affects nearly every type of property: hefty price increases. “We’ve even seen a multiplier of 21.5,” reports JLL specialist Sandra Ludwig. CBRE estimated the peak yields of retail parks during the second quarter of 2018 to be 4.5 percent, with the difference from shopping centres (3.8 percent) much less than in previous years.

It remains to be seen whether retail parks are as resistant to online shopping as most experts think. MEC METRO-ECE Centermanagement begs to differ in its report entitled “Retail parks in Germany.” According to the authors, it would be a mistake to assume that the digital transformation will leave retail parks unscathed. E-commerce will cause changes in every retail segment, they say, and investors must also get to grips with the consequences for retail parks. However, if they do this and take appropriate precautions, there is much to indicate that retail parks will continue to be stars in the property investment sky.

By Christian Hunziker

Union Investment/Urban Zintel

“Multi-pronged retail strategy”

Why are retail parks an important part of the portfolio of Union Investment funds? Henrike Waldburg, Head of Investment Management Retail at Union Investment, explains.

Ms Waldburg, how important do you think are retail parks for Union Investment’s portfolio?
They clearly represent a very important asset class for us, with a recognizable emphasis on Germany and Austria. Our institutional funds are particularly interested in retail parks.

Can you tell me why the institutional funds in particular?
Unlike our high-volume open-ended retail real estate funds, whose investments include shopping centres, institutional funds buy in smaller batches in order to diversify risk. Therefore, retail parks and commercial buildings are an ideal fit for this. Our retail strategy generally remains multi-pronged: we want to stay active in different segments and then progressively increase the percentage of retail in all funds.

What are the most important criteria for buying a retail park?
The quality of the catchment area and its population trend are decisive factors, along with the location of the retail park. The retail parks we’re looking at must also have a reasonable critical mass and an attractive mix of tenants with a strong anchor food retailer and complementary uses.

What makes you so confident that food retailers will continue to withstand e-commerce?
I’m really not a fan of the theory that the food retail sector will not be affected by online trading. However, I believe online sales will never replace conventional food retailing, and the growth rates are much lower than for other types of products. Fresh, refrigerated products are always a challenge for online retailers due to the difficulties of maintaining the logistics of a cold chain. And at the end of the day, customers still want to choose the types of strawberries and lettuce they put in their trolleys. I would say, things look different for standard consumer goods: especially convenience products can easily be delivered and are therefore less resistant to online shopping. Hypermarkets also sell a lot of non-food items, and they aren’t immune to e-commerce, which means food retailers will need a smart concept to link the offline business with online sales.

How do you rate yield levels?
The yields of core retail parks, which are currently under-allocated, are 60 to 80 basis points above those of shopping centres. I assume that yields will continue their downward trend. We are investing in a late-cycle property market environment, so we must bear in mind that the trend can also reverse itself. That makes it important for us to keep an eye on the upside potential for rents, because that is the only way to compensate for yield decompression and keep our values stable.

In light of that, does it make sense to invest in upgrading retail parks that have seen better days?
That question requires an individual answer for each property. Admittedly, the quality and appearance of many retail parks in Germany could be improved. Ultimately, however, our decisions are based on profitability, meaning the question of whether an investment will lead to sustainable rent increases.

What types of trends do you anticipate in the coming years?
I believe that the improvement and expansion of food and dining will also be an important area of business for retail parks. What I mean by this are high-quality solutions outside the fast food sector, which will improve the quality of customers’ experience and the length of time they stay. Furthermore, we also have to keep demographic change in mind. Retail park customers are people who like to take their cars to do a big shop. As the age structure in Germany shifts with a steadily growing aging part of the population, older people’s shopping needs will become a greater focus of planning and operating retail parks.

Interview by Christian Hunziker.

Title image: RATHKE Architekten BDA Wuppertal PartGmbB/Haesler

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