Fachmarktzentren seen as ray of light on retail property landscape

Retail real estate yields in Germany look set for a further period of coming under pressure, with retail parks (Fachmarktzentren) providing the only glimmer of optimism, according to the latest study produced by EY Real Estate and the German Council of Shopping Centers (GCSC).

Still, of the 113 asset management companies and retailers surveyed, 89% said they expect stable or rising yields, while 62% said they want to invest in retail parks. Notable is the different expectations for the different segments of the market, whether big stores, shopping centres or indeed retail parks.

Yield expectations in the retail park sector are still holding up, although they've now sunk under 5%, low but still ahead of high street stores and the problem child, shopping centres.

For high street stores, one in seven respondents expect stable or rising yields and 50% expect to invest in the segment. But, as Dietmar Fischer, a partner at EY Real Estate and the author of the survey says, "The yield expectations differ widely depending on the type of retail property". This is largely because of rent corrections – up or down – with 75% of those surveyed expecting lower rents over the coming two years, even in downtown locations.

The number rises to 100% when the views of tenants and property users are analysed, with particularly downtown tenants expecting rent reductions. Inherent tensions exist between tenants, who want maximum flexibility in terms of surface area and contract duration, while owners and investors prefer a "long-term plannable income situation", says Fischer.

With asset managers' compensation directly affected by any softening in rental contract conditions, 50% of respondents recognised the different motivations of the parties. "Effects on initial yields will also be priced in where there's a perception of higher risk through more flexible tenants", says Fischer in the report. Tension in the retail real estate sector seems to be programmed in for the coming years, it looks like.