German retail becomes increasingly polarised

German retail becomes increasingly polarised

Germany's retail market is becoming increasingly polarized as the investment gap between retail parks and their less popular shopping centre cousins intensifies.

In the first three quarters of this year, around €7.2bn was invested in German retail, a drop of 10%, driven by the limited availability of attractive retail warehouses and parks, coupled with investor reticence to invest due to the challenges posed by e-commerce, according to Jan Schönherr, co-head of retail investment at CBRE Germany.

Or as his colleague, Dr. Jan Linsin, head of research at CBRE Germany, puts it: ‘Essentially, properties that figure high on the investor list have tenants that are especially resilient to e-commerce and who are growing,’ he said. ‘This applies above all to food concepts, textile discounters and drugstores.’

Berlin accounted for €630m of retail deals in the first half of the year, a y-on-y increase of 91% and 69% above the long-term average of the preceding decade. In the same period, there were also year-on-year upswings in Düsseldorf (€170m), Frankfurt (€160m) and Cologne (€90m), although transaction volumes fell in Munich (€220m), Stuttgart (€100m) and Hamburg (€90m), according to JLL.

Retail warehouses take first place again, ahead of high street properties

While Signa’s takeover of Kaufhof for $1.5bn in June was the dominant retail transaction in the first half of the year, warehouses and retail parks topped the list again of the retail properties most often sold by the end of the third quarter, with more than €2.7bn (38%) invested in retail warehouses, according to CBRE. High street properties followed with just under €2.6bn, representing a share of 35%.

Interestingly, international investors have dominated, with five of the seven biggest deals this year involving foreign buyers, including Benson Elliot’s acquisition of a 100,600 sqm portfolio of three German convenience retail assets from Brack Capital Properties for €175m in July.  Brack Capital has retained a minority stake in the portfolio, which comprises properties outside the cities of Dortmund, Hanover and Rostock, and are anchored by German grocery and DIY stores. Hamburg-based investor and asset manager Modulus Real Estate will manage the three assets, which also comprise more than 3,500 parking spaces.

Also, earlier this year, Greenman, a German specialist food retail real estate investment fund manager, agreed to acquire 33 Edeka MIHA-anchored retail properties for its Greenman OPEN fund in two separate deals with a combined value of €143m.

Retail parks are expected to account for the lion’s share of retail transactions overall this year, according to Sandra Ludwig, head of retail investment in Germany at JLL:‘We’re forecasting around €10bn in retail deals in Germany this year, of which between 40% and 45% will be retail parks products, so slightly stronger than last year,’ she told REFIRE. ‘The German Spezialfonds have been the most active buyers of retail parks this year. For core retail parks, yields are around 4.3% but they are under pressure and could tighten to 4% to 4.2%.’

For many investors, the ideal retail deal in Germany costs around €20m plus, is food anchored with as little fashion as possible and with medium to long term WALTS, according to Dirk Hoenig-Ohnsorg, head of retail investment Germany at Colliers: ‘That’s the perfect deal,’ he said. ‘We’re also seeing more interest from value-add investors looking for ways into the urban retail market and who want to convert vertical retail into mixed use. They’ll also consider cash and carry and DIY retail.’

One large deal, if it goes through, will be ECE and Morgan Stanley’s acquisition of the Real supermarket stores and the underlying operating business from Metro Group, according to those who track the market. Metro Group announced last year that it was mulling the sale of Real stores and is now believed to be in exclusive talks with ECE and Morgan Stanley.

‘We could have had a record year for retail parks if the situation with Real had been resolved, Hoenig-Ohnsorg said. ‘Buyers are understandably uncertain as to what situation they should underwrite. There’s very strong interest from domestic core investors in German retail parks.’

Indeed, retail is the only asset class with an adequate risk-return profile, according to Hans Werner Stockart, managing director of REInvest Asset Management, ‘particularly big retail parks and inner-city shopping centres’.

For Schönherr, Brexit is helping to lure UK investors into the German retail space: ‘Due to Brexit, among other reasons, [UK] investors have shown greater interest in German retail properties, particularly those with value-add potential,’ he said. ‘Despite Germany’s economic slowdown, the country’s still stable economic and political situation makes it still particularly attractive to these potential buyers at this point in time.’

High street and shopping centres have lost their mojo

Over on the high street, many retailers, particularly apparel companies, continue to struggle, which has put a dampener on investor interest. ‘There’s uncertainty among investors about investing in retail that’s not food-anchored,’ Hoenig-Ohnsorg said. ‘We’re seeing a slowdown on the high street in general, especially when it comes to mass market retailers, including clothing. If you look at Königstraße in Stuttgart, where there are a lot of fashion retailers, the location has been affected and there is downward pressure on rents. In other cities with a distinctive luxury retail pitch, such as Maximillianstraße in Munich, those locations are less affected, with gross initial yields of around 2.75%. Away from prime locations, the high street story changes entirely – there’s latent vacancy and downward pressure on rents. Fashion retailers are giving up space. Some owners haven’t lived through a downswing for a long time and they are still in denial and don’t want to reduce rents.’

Shopping centres have also lost their mojo: ‘The German shopping center market is currently in a difficult phase,’ Nicole Römer, head of retail capital markets Germany at Cushman & Wakefield, told REFIRE. ‘We have seen only a few successful shopping center transactions in the past 12 months. But we have also noticed that a number of investors are interested in shopping centers in top locations where a conversion of the upper floors into office space would make sense due to the rise in office rents.’

Some lenders are also giving retail a wide berth: ‘We’re less willing, for example, to finance shopping centres or department stores at the moment,’ said Michael Windoffer, head of real estate cross border lending at Hamburg Commercial Bank. 'We will reduce our retail portfolio in total. And in order to avoid risks that might result in an economic slump, we will set the hurdles for project developments higher than in the past.’

Retail sales in Germany are expected to reach €537bn by the end of the year, with a major contribution coming from online sales, according to C&W. Retailers facing the keenest competition from e-commerce – such as apparel retailers - are less likely to expand overall, whereas grocery and drugstore operators continue to expand, according to C&W.

Discounters turn back to densely populated areas

Aldi, Lidl, Kaufland and Rewe are buying and developing stores to grow their market share, including acquiring stores from their competitors, rather than taking the sale-and-leaseback route, according to Ludwig.

‘There’s also a trend towards discounters such as Penny and Netto opening stores of just 500 sqm in very densely populated areas, which is back to the roots,’ Ludwig said. ‘It doesn’t matter if the shops are small as long as there are enough people in the direct surrounding area who will use them. Out of town or in smaller cities, we are still seeing discounters open bigger stores of between 1,000 sqm and 2,000 sqm.’

Yields remain flat

While the yields for prime shopping centers increased in the first half of the year, they stagnated in the third quarter at around 4%, largely due to the lack of transactions, according to Anne Gimpel, team leader valuation advisory services, at CBRE. By contrast, the prime yield for shopping centers in B locations increased by 15 basis points to 5% in the third quarter, or up 50 bps, y-on-y. Retail parks yields are hovering at around 4.15%, marking a y-o-y decline of 35 bps, according to Gimpel. For shopping centres in secondary locations, yields are closer to 6.5% but debt is a challenge, according to Ludwig.