SIGNA takes full control of Galeria Karstadt Kaufhof from Hudson Bay Co. for $1.5bn

Austria’s Signa Group has taken control of German department store chain Galeria Karstadt Kaufhof from Canada’s Hudson Bay Company’s (HBC) by acquiring its 49.99% stake in the recently merged chain for $1.5b, HBC announced this month.

‘This is good news for our company,’ said Dr. Stephan Fanderl, managing director of SIGNA Retail and CEO of Galeria Karstadt Kaufhof. ‘Almost seven months after the merger of the two department store chains, we can continue the restructuring and integration process – which is demanding and challenging for all employees – with a high degree of reliability on the owners' side. The decision paths are shorter, simplified – and that is important and as it should be.’

Under the terms of the agreement, the Belgian department store operator Galeria Inno will be wholly owned by SIGNA and Hudson's Bay Netherlands will full revert to HBC. As part of the agreement, SIGNA will also acquire all shares of the jointly owned European real estate portfolio from HBC. Up until now, each company had owned 50% of the portfolio.

However, SIGNA’s takeover came more quickly than many in the market expected: ‘I didn’t expect it to happen so fast, although I thought it would happen in the future,’ Sandra Ludwig, head of retail investment Germany at JLL, told REFIRE. ‘Merging Karstadt and Kaufhof was a good move because the synergies can be used to enhance the business model. In the future, in smaller cities with two department stores, we will potentially see the refurbishment of weaker locations into mixed-used properties with various usages, such as inner-city last mile logistics.’

Helena Foulkes, HBC’s CEO described the deal as ‘an exciting milestone for HBC as it will deliver important financial and strategic benefits’: ‘Financially, it provides us with the best opportunity to capitalize on our German real estate and allows us to further strengthen our balance sheet. Strategically, we will be able to fully focus our resources on HBC’s North American operations, including our best growth opportunities - Saks Fifth Avenue and Hudson’s Bay,’ she added.

The relevant contracts between HBC and SIGNA have already been signed.The transaction is expected to close by the autumn. The closing of the transaction is subject to merger control approval and customary closing conditions.

So why has HBC given up its stake in Galeria Karstadt Kaufhof? According to one analyst, who asked not to be identified, the Canadian group may have decided that the merged German retail chain ‘is too granular for them’: ‘Maybe they were facing time pressure from their investors who wanted to see quick results,’ he said. ‘However, I think they’re still experimenting with different concepts to find the one that works best and that takes time. It makes sense, though, for Karsdtadt and Kaufhof to be managed under one roof. In secondary cities, there is often not room for two competing department stores,’ he added. HBC could not be reached for comment.

A portion of the transaction’s net proceeds will be used to fortify HBC’s balance sheet by fully repaying its outstanding $436m term loan. Upon close, HBC will completely exit its German operations.

Since the merger in October last year, the management team led by Stephan Fanderl has initiated a comprehensive integration process.The goal is to make the department stores future-proof and to create one of the leading omnichannel providers in the digital age.

Signa Holding held a 50.01% stake in the combined retail company, with HBC holding the rest. The group had 243 stores in Germany, Belgium and the Netherlands and employed around 32,000 people. Hudson’s Bay Co. owned Kaufhof and Signa Holding held rival Karstadt. The joint venture last year also included the entire retail business of HBC Europe, including Saks OFF 5TH, Galeria Inno in Belgium and Hudson’s Bay in the Netherlands. It also bundled in Karstadt Sports and the entire food and catering departments of both companies, including Galeria Gourmet and Le Buffet. 

Hudson’s Bay Co. is a diversified global retailer focused on driving the performance of high quality stores and their omnichannel offerings and unlocking the value of real estate holdings. Its formats range from luxury to premium department stores to discount fashion, with more than 480 stores globally.

The Canadian group bought Kaufhof in 2015 for €2.8b from listed German retail group Metro, effectively financing the deal by leveraging Kaufhof’s own real estate in a joint venture. It also has several investments in property joint ventures, including its partnership with US-based Simon Property Group Inc. in the HBS Global Properties Joint Venture, which owns properties in the US and Germany. In Canada, it has partnered with REIT RioCan.

Signa Group is a privately-held real estate and retail holding company founded by entrepreneur René Benko in 1999. It has €14b of real estate AUM and an additional development pipeline of around €8.5b. 

Retail market is ‘challenging but promising’

There were €2b of retail deals in the first quarter, the majority of which were single asset deals, according to C&W. In April, Italian asset management companyAntirion SGR acquired the Königsbau Passagen in Stuttgart for €280m through a joint venture with Poste Vita – an Italian insurance company, which is part of the Poste Vita Insurance group, entirely controlled by Poste Italiane. The property comprises 9 floors above ground and three subterranean levels, including parking, totalling 44,000 sqm. Global electronic retailer Saturn is the main tenant and occupies 60% of the retail space.

Prime high street yields remained static in the first quarter, according to C&W, at 3.1% in Berlin, 3.4% in Frankfurt and 3.5% in Stuttgart. Shopping centre yields increased by 10 bps, whereas yields for prime food anchored retail parks tightened by 15 to 30 bps.

For Iris Schöberl, managing director Germany and head of institutional clients at REIT BMO Real Estate Partners Deutschland, the German retail environment is ‘challenging but promising’: ‘Not all of today’s retailers will be tomorrow’s winners but there will be some strong players who benefit from upheaval, but trends have to be analysed correctly,’ she said.

‘We still consider high street retail in strong cities the most interesting investment opportunity,’she told REFIRE.‘Strong cities are characterised by high purchase power and a high centrality rating; they are not dominated by shopping centres. The aesthetics and the urbanity of the inner-city area are essential. We believe that people will continue to shop in attractive and lively areas. Even for digital natives, it is boring to only shop online. We are opportunity driven but we would like to find enough opportunities to invest at least €150m in retail this year.’

However, the retail market is very divided, according to Ludwig: ‘We see retail sub asset classes that aren’t very popular and then others that are investors’ darling, such as retail parks and neighbourhood shops with food anchors and in city locations with a resi element above them,’ she said. 

For Bernhard Schoofs, CEO of real estate developer and asset manager Momentum Real Estate, ‘the demand for franchise restaurants and fast food as well as convenience food in supermarkets and other food stores has soared’: ‘This is extremely positive for retail landlords who have to compensate for lower demand and rent levels from traditionally crucial tenants - such as textile retailers - due to the trend towards e-commerce,’ he said. ‘The second big advantage posed by food and restaurants is the associated increase in a property’s pull-factors and the average time spent there by consumers.’ 

Momentum Real Estate is currently developing around 45.000m² of a mixed-use, retail-heavy scheme in Leverkusen. ‘It is important to integrate different price and quality segment supermarkets and fresh convenience food as well as different fast food options to appeal to a maximum amount of people,’ Schoofs said. ‘Besides franchises such as McDonald’s and Starbucks, we are also looking at more up-scale concepts like L’Osteria.’

Operators like Aldi and Lidl have also started developing their own properties with residential units on the upper floors, which are proving popular with investors. ‘Top high street locations are still seen as very stable investment opportunities,’ Ludwig said. ‘Secondary shopping centre yields have seen a yield shift above 6%. This year we haven’t seen any core shopping centre deals so far. Rents are very variable – depending on the current market level we see falling rents for over-rented shops but also increasing rents for under-rented units,’ Ludwig added.

And while food-anchored retail is still growing, ultimately bricks and mortars retailers are having to depend more on omnichannel strategies, according to Dirk Hoenig-Ohnsorg, managing director and head of retail investment Germany at Colliers. ‘High street retail is still doing well in bigger cities and in the south of the country,’ he said. ‘Cities such as Berlin, Hamburg and Freiburg are performing well, although high street rents are still under pressure. We’re seeing more demand, though, for food-anchored retail and discounters, who are assuming a more important role.’

Colliers is in the process of selling a retail portfolio on behalf of Patrizia Immobilien, which comprises 68 outlets across around 120,000 sqm across Germany, including Rewe and Edeka stores. ‘It’s pure proximity retail in cities such as Essen and Dortmund,’ Hoenig-Ohnsorg said. ‘We’ve had a lot of interest and are now in advanced talks. The deal could close this summer.’ He declined to comment on the sale price. Colliers has also been mandated to sell another portfolio of five Edeka stores and two Rewe properties in North Rhein Westpahlia with a WAULT of 12.5 years.

New lease levels falling

The German retail letting market remained broadly on the same course as last year with a take-up volume of 118,300 sqm and 263 new leases in the first quarter of 2019, albeit just below the same period last year, according to JLL. And while there is no lack of new retail space thanks to city centre project developments across Germany, it now takes longer to let available space in full.

However, in Germany’s ten biggest cities, the volume of new leases in falling. In the first quarter, the big ten cities accounted for 39% of new take-up, or 53,600 sqm, down from 44% in the same period last year, according to JLL. In Cologne and Leipzig, there was a lack of large scale lettings and an even greater slowdown in demand in the two least active cities, Düsseldorf and Stuttgart. In Düsseldorf, this is largely due to the lack of availability of suitable space.

The leading performers were, once again, Berlin (17,500 sqm), Frankfurt (13,300 sqm) and Hamburg (6,000 sqm), according to JLL. Berlin continues to benefit from its status as the market entry point for international retailers, where sportswear retailer Ron Dorff opened its first shop in Germany. Frankfurt also experienced new market entries over the first quarter thanks to the repositioning of the MyZeil shopping centre.

Structural changes underway

Retail is undergoing ‘a deep structural transformation which alters the shopping landscape and consumer behaviour’, according to Schöberl: ‘As a result, retailers reduce their store spaces when rents are no longer on a sustainable level. From an investment and asset management perspective, this means that the re-lettability of a property, its location and especially the retailer’s concept are becoming more important for securing a steady and sustainable income. Going forward, the retail market will be concentrated on fewer, but more concentrated players.’ (ssk)