German retail market at a crossroads

International retailers coming back into the market as textile sector gains momentum

By Sara Seddon Kilbinger, Senior Reporter, REFIRE

Germany’s retail market is at a crossroads. With the market still reeling from Galeria Karstadt Kaufhof filing for insolvency for the second time in two years in November, some investors are pushing ahead with retail investment. But, for many in the industry, a change is afoot.

As we edge into 2023, there has been a noticeable shift in the brands making up the high street – and international companies, which have been less visible than local retailers in recent months, are leading the charge, propping up the letting market from which some German retailers have started to retreat. In the third quarter, there was 101,000 sqm of take-up. In the first three quarters, that figure comes to just under 320,000 sqm, according to JLL, or down around 4.4% y-on-y. In the same period, the number of lettings fell by around 9% to 673, of which 201 were between August and October.

‘Even if the consumer mood is currently significantly subdued, the German retail market has great potential, as the market entry of many international brands in recent months has shown,’ said Dirk Wichner, head of Retail Leasing JLL Germany. ‘For example, the Danish lifestyle brand Design Letters and the French outdoor jacket retailer Jott-Just over the Top have opened their first shops in Germany. In Düsseldorf. Belgian designer Christian Wijnants has chosen Berlin for this purpose. In total, nearly a dozen new brands have opened in Germany to offer fashion, furniture and hospitality, including Lids, Pepco, Fisker, EL&N London and Norrøna.’

VIB Vermögen launches new retail fund

One investor upping its exposure to retail is VIB Vermögen, which announced this week (20 December) that it will launch an open-ended special real estate fund VIB Retail Balance I

with a target size of €350 million and an investment focus on food retail properties and specialist retail centres. To that end, it has sold seven commercial properties from VIB's existing portfolio to the fund with a combined value of around €119 million. A further 24 commercial properties worth around €189 million will be sold to the fund from the existing portfolio of its subsidiary, BBI Bürgerliches Brauhaus Immobilien Aktiengesellschaft (BBI).

The fund's total equity amounts to €202 million, with 49% of it initially provided by VIB itself. The fund will be managed by IntReal Real Estate. The fund is expected to have a term of 10 years, with a target distribution yield of 4.9% p.a.. The real estate portfolio, which VIB will sell to the fund together with BBI, consists of local shopping centers, supermarkets and specialist stores in nine federal states.

Also this week, KINGSTONE Real Estate announced that it has acquired a mixed-use property at Kreillerstrasse 210 in Munich for an open-ended real estate special fund (AIF) with fixed investment conditions. The vendor is a Luxembourgish investment firm. The building, with a total rental area of 4,204 sqm, is currently fully let with a WALT of around 8 years. It includes an underground car park and ground-level parking spaces. Among the primary tenants are companies from the retail, fitness and office sectors, including, inter alia, a branch outlet of Postbank and the car rental firm, SIXT. ‘Resilience is more important than ever in the current market phase,’ said Dr. Tim Schomberg, managing Partner of KINGSTONE Real Estate. ‘The heterogeneous tenant structure of the property and its outstanding location ensure diversified cash flows for our investors. Altogether, we have secured an attractive investment for the fund.’

Textile sector leads the pack

One sub-sector that has succeeded in redefining itself in the increasingly challenging market conditions is the textile sector: ‘The textile trade is celebrating a comeback and, with 35% of new lettings, is once again clearly ahead of gastronomy/food, which comes to 26% for the first three quarters of 2022,’ said Wichner. One reason for the success is that the textile trade has used the pandemic to develop attractive multi-channel concepts, according to JLL.

Germany remains the largest consumer market in Europe - in terms of both population size and purchasing power. Top retail rents have remained at their previous level per sqm with Munich (€340) ahead of Berlin (€300) and Frankfurt (€280). ‘At the turn of the year, however, a slight downward adjustment of prime rents is to be expected in individual cities beyond the top three,’ Wichner warned.

Prime rents for new lets on the high street fall

However, overall, prime rents for new lets on major high streets decreased slightly in the third quarter of 2022, according to C&W. The prime rent for retail parks remained stable for the most part, whereas prime rents for shopping centres rose slightly. After increasing in the first half of the year, the prime yield for shopping centres rose again in the third quarter. The average yield gap between retail parks and shopping centres widened to 120bps by the end of the third quarter. Prime rents for new lets on major high streets also decreased slightly in the third quarter. In addition, the rising cost of living and higher energy costs are considerably dampening consumer sentiment and the propensity to buy has fallen to a new all-time low. There is no reversal of the trend in sight, according to C&W, so the next few months are likely to be characterised by consumer restraint.

On the investment side, some large deals gave the German retail investment market a more dynamic third quarter and, at €3.7 billion, generated a greater transaction volume than in the entire course of the previous year, according to JLL. In the first three quarters, there were around €7.1 billion in deals, an increase of almost 20% y-on-y. This is largely due to the number of large transactions in the three-digit million range growing from seven deals in 2021 to 12 transactions in the first nine months of 2022. On average, the deals have also become larger, although the number of transactions has fallen slightly from 191 to currently 187, according to JLL.

Specialist retail products are the most sought-after, accounting for 46% of the transaction volume. Specialist stores account for 13%, 25% was invested in retail parks and a further 8% in supermarkets, according to JLL. However, shopping centres also performed strongly in the year to date with a share of 29%. This is largely due to the takeover of Deutsche Euroshop (DES) by the German retail group and American investment firm Oaktree Capital and Cura Vermögensverwaltung. Together, they now hold more than 80% of DES. Commercial properties (14%) and department stores (11%) still achieve double-digit shares of the total turnover.