German retail demand continues undimmed – retail parks favoured

Investor willingness to commit more resources to German retail is at its highest level in six years, despite the intervening rise in prices and emerging signs of overheating in the market, according to the latest issue of the very useful Hahn Retail Real Estate Report. Retail parks, or Fachmarktzentren, remain the favoured asset category.

The Hahn Group, based in Bergisch-Gladbach near Cologne, has been around for more than thirty years as a retail asset and property manager and funds manager for diverse retail funds. The company has nearly 4,000 private clients invested in 175 different retail funds, and manages 1.57 million sqm and €2.45bn of retail assets, generating €166m in annual rental income.

The Hahn Group publishes the annual Retail Real Estate Report in conjunction with property advisers CBRE and GfK GeoMarketing. The latest report is the 11th annual issue.

Retail parks, or Fachmarktzentren, are favoured for the premium they command over shopping centres, with 77% of respondents saying they want more exposure to the category, up from 68% last year. At end-June peak yields for retail parks were 5.25% as against 4.1% for classical shopping centres.

The report suggests that retail parks in mid-sized cities have above-average potential, although the choice of location is decisive, according to Hahn board member Thomas Kuhlmann. “Rent rises are easier to push through in the right retail parks than in shopping centres, where rents are at historically high levels.

For the first time since 2011 the total lettable sales space in German retail rose slightly by 0.4%, with a 0.6% increase expected for the coming year. Retail categories pushing to expand their sales space are drugstores, restaurants, health and beauty stores and furniture outlets, while those now looking for less space are those being most affected by online competition such as consumer electronics and clothing stores.

A clear reason for the preference for retail parks, shows the report, is that investors see less need for fundamental adaptation of the asset to meet market shifts in coming years, compared to shopping centres and department stores which are viewed as having losts of reconstruction work ahead.

However, nervousness about the wider economic environment is evident from the survey responses. The majority of respondents would welcome a return to higher interest rates, even though this would lead to higher refinancing costs. 32% of respondents want to see the European Central Bank cut back on its generous QE programme in the next two years, with a further 30% fearful of current stability and wanting a rise in interest rates this year. Only 28% said they were comfortable with the current ECB strategy.

The report can be accessed at www.hahnag.de/handelsimmobilie

A new note from independent inner-city retail brokerage and consultant COMFORT Group entitled “The Party is Over” suggests that non-food retail rents are now really beginning to feel the effect of online commerce, albeit with strong local and regional variations.

According to COMFORT’s head of research Olaf Petersen, the pressure is emanating from the clothing sector, which has been seeing tumbling margins and falling sales volume for years. Big names like Gerry Weber and Tom Tailor have been closing stores and trying to renegotiate rents on existing outlets, and this is just the most visible effect, says Petersen.

After a decade of rising rents, COMFORT sees a trend change with overall rents on the high street actually falling in the 146 cities it analyses. Peak rents are rising in only 8 cities while falling in 45 cities – but in three-quarters of these by up to 5%. The remainder were holding stable, say the researchers.

Still, says COMFORT, Germany remains the most attractive retail market for global retail brands’ international expansion. New or imminent market entrants include Clas Ohlson, White Stuff, Saks Fifth Off, Under Armour, Koton, Topshop, Uniqlo, American Vintage, Vilebrequin, Le Creuset, Sennheiser, Bodum and New Balance.