BulwienGesa report highlights rise of Fachmarktzentrum to favoured retail asset class

Over the past several months we have featured a number of articles in REFIRE about the very specific market category of "Fachmarktzentren", or specialist neighbourhood shopping malls that are such a familiar sight on the German retail landscape. A new study by real estate market research group BulwienGesa addresses this special asset category, against a background where many traditional investors are struggling to meet their yield expectations in an overall retail market of rising prices and falling yields.

Too often the kind of shopping centres in premium urban locations meeting these investors' hitherto investment criteria have simply become over-priced trophy assets; hence many are looking to get a foothold in the asset class "Fachmarktzentrum". The researchers at BulwienGesa have scrutinised 1000 such German centres to build a clearer picture of the advantages and disadvantages of investing in the asset class. We look here at a number of their conclusions.

Investors looking for returns in German retail have long since started looking around beyond A- and B-locations to encompass older properties and those with short remaining lease durations. Overall returns in classical retail have fallen below 6%, and hence the new-found attraction of the less-glamorous segment made of neighborhood malls, convenience stores, and discount groceries.

Last year the "Fachmarktzentrum" had a share of €3.7bn out of a total of €9.3bn in transaction volume for the whole German retail sector. In the first half of this year alone the Fachmarktzentrum share topped €2bn, and saw it overtaking shopping centres in investor popularity within the retail sector.

BulwienGesa lists 10 reasons why investment in Fachmarktzentren as a category is worth considering.

1. Good yield perspectives, a robust and simple-to-manage business model
2. A restrictive policy on issuing new building permits increases barriers to entry and boosts the value of existing assets
3. Tenant structure with relatively high share leased by blue-chip food retailers means preference for long-term lease of 15 years with option to extend
4. Committed tenants, which means opportunities to raise rents, particularly by making improvements. Rents generally average under €10.00 per sqm per month
5. After a period of consolidation on German retail landscape, most surviving retailers have a strong market position to defend and an interest in their local market power, hence they are more likely to renew their leases early
6. By offering good accessibility by car and free parking, Fachmarktzentren are well-positioned to offer online shopping adherents good Click-and-Collect facilities. They are frequently located on car drivers's routes, and are viewed as efficient, hassle-free shopping centres
7. They are very price-orientated, in contrast to the 'experience' being offered in more sophisticated shopping environments. This is unlikely to change much in the future
8. Retail chain stores such as C&A, Deichmann and Depot are increasingly looking to have a presence in good-quality Fachmarktzentren to reach out to more of their potential client base. Many Fachmarktzentren are being upgraded to the level that classical retailers are considering taking a presence
9. More active asset management of Fachmarktzentren than in the past means that centres are renovated and modernised more frequently, preventing them getting stale.  This adds value and can improve cash-flow
10. Fachmarktzentren can adapt to retailers' changing needs, such as the demand by drugstores or DIY centres for more space, while department stores or electronic retailers need to downsize in line with online shopping realities. This can open up opportunities for new types of retailers, making the centre more attractive, while productivity per sqm can be improved, leading to higher rents.

BulwienGesa also point to a number of potential downsides to an investment in the sector, including:

1. The widespread practice in Germany of restricting the use of certain buildings to one type of retail use only, e.g. if a DIY chain goes bust (viz. the Praktiker chain over the last two years), it may be difficult to allow a non-DIY retailer to come in as a successor

1. The clear distinction between what was considered a Fachmarktzentrum 'concept' and a downtown shopping centre concept is becoming more blurred. Hence the emergence of traditional Fachmarktzentrum concepts such as IKEA or Decathlon now moving into city centre locations with new retail presences.

1. Unclear how the growth in online retail will affect the size of retail units in future Fachmarktzentren

BulwienGesa conclude by highlighting visible and evident changes in Germany's retail landscape. The traditional Fachmarktzentrum was a plain, standalone, functional shopping centre on the edge of the town which offered quick and uncomplicated shopping for the commuter or car driver. However, competititon from online retailing is clearly leading to heightened consumer demand for a positive 'experience' when shopping in the bricks-and-mortar world. Many Fachmarktzentren as a result are now upgrading their offering, becoming more attractive but at the same time more similar to their downtown cousins, the shopping streets and shopping centres. The consequence: yields are starting to fall below 6%.

The sustainable difference between the categories will lie in imaginative centre management including a lively tenant mix, timely upgrades and renovations to improve the consumer experience, and an exploitation of the locational advantages offered by a good Fachmarktzentrum.