CB Richard Ellis
Jan Dirk Poppinga - CBRE
‘The decline in the retail transaction volume in the German market calls for a more discerning look,’ said Jan Dirk Poppinga, co-head of retail investment at CBRE Germany.
Last year was good – but this year investment volumes in German retail real estate are set to surpass last year’s and should hit between €10bn and €12bn by the end of the year, REFIRE learned in a small round-table discussion in Frankfurt recently.
Demand is exceeding supply by some margin, according to Jan Dirk Poppinga, head of retail investment in Germany at advisory group CBRE. Importantly, the retail segment is now outperforming in dynamism the general market for German commercial real estate, which CBRE predicts will rise to €45bn this year from €40bn in 2014.
Oliver Herrmann, the CEO of the Hamburg-based specialist retail investor Redos Immobilien, sees retail yields in the best locations at down around 4%, about the same level as for the office segment. “Fachmarktzentren”, or specialist retail markets, are offering attractive yields as new building permits for competing neighbourhood stores are often in very short supply. However, he warned that many of these rather Spartan shopping centres are storing up big maintenance or renovation backlogs, and are overdue for revitalising. This can be advantageous, he said, since this often offers opportunities for new lease agreements and higher rents.
The sector has seen the return of foreign investors with a vengeance, agreed both Poppinga and Herrmann, with foreigners now making up a clear 50% of transaction volume in the asset class, a near-doubling on 2013, and set to rise even further in 2015. Despite the surge in demand, volumes were still below their record year of 2007, when volumes hit €18.1bn before the onset of the financial crisis.
Nonetheless, reports reaching REFIRE from all the big broker groups confirm that the retail sector is very hot. Colliers, for example, reports a total of €3.6bn investment in the first quarter, an increase of 40% year on year. This can partly be explained by the takeover of Dutch group Corio by French competitor Klépierre, which handed the French group big shopping malls in Berlin, Dresden, Duisburg and Hildesheim, valued at more than €1bn.
Andreas Trumpp, head of research at Colliers, describes the yield compression due to the heavy demand. “The high demand, particularly for retail centers and specialist shop portfolios, can, on the one hand, be attributed to the large number of investors who are already invested in retail properties and willing to add to their existing investment, and, on the other, to new investors who are interested in building extensive portfolios within a short amount of time in the scope of large-volume purchases. The scant number of projects in the pipeline also has a limiting effect. In Q1, the new-build segment only accounted for 13%, or €466 million, of total transaction volume.”
This high demand leads to ongoing yield compression. Gross initial yield for new builds and fully leased retail centres with a balanced tenant mix in prime locations was recorded at 6.00% at the end of Q1. Some specialist shops also recorded gross initial yields of 6.00%. In general, however, they posted prime yields of between 6.30% and 7.00%. The majority of new, modern shopping malls posted between 5.00% and 5.50% regardless of location. Prime yield at premium locations in Germany’s top real estate hubs for downtown retail properties and buildings featuring an office-retail mix was recorded at an average of 4.14%, down 13 basis points year on year, and down 2 basis points from the previous quarter.
According to Trumpp, the demand bottleneck for quality retail assets isn’t disappearing anytime soon. “The number of retail centers in Germany with a minimum retail space of 10,000 sqm lies well beyond 300. This inventory stock, however, is a far cry from being able to meet current demand. We do not expect this bottleneck situation to change in the near future, due to communities’ restrictive policies in granting permits for large retail projects. Projects to restructure and update existing retail centres can only partially alleviate this situation.”
“This will also have an effect on yields. We expect prime yield in some locations to drop below the 6% mark within the coming months. This primarily applies to the retail center market segment, which is currently experiencing particularly high demand, with an investment volume of between €15 and €50 million. We expect to see a volume on the retail investment market of up to €10 billion given current market conditions.”
