In discussion with REFIRE: Joachim Stumpf, IPH Handelsimmobilien
At this year’s wet and windy MIPIM in Cannes, REFIRE caught up with Joachim Stumpf, managing director of BBE Handelsberatung GmbH and IPH Handelsimmobilien GmbH, a veteran provider of advisory services on all aspects of retail real estate throughout Germany. With head offices in Munich, IPH has branch offices in Hamburg, Cologne and Leipzig, and also provides hands-on centre and property management services.
REFIRE: From your meetings and discussions at the MIPIM, what impressions did you take away from investors in German retail real estate?
Joachim Stumpf: We can categorically say that the demand for German retail real estate remains extremely high, much stronger than two years ago. You could almost say there is a special kind of demand for German real estate, with a hearty appetite for retail assets – something like a separate economy within the real estate world – because of the lack of attractive alternatives. While office real estate in Germany is relatively stable, retail real estate has a certain definite appeal for foreigners.
Are we talking about the usual group of investors here?
The big US and UK investors have remained fairly active throughout the crisis. But we’re seeing the return of investors that had all but abandoned their activities in the German market after the crisis, such as the French pension funds and Scandinavian groups.
The Danes were very big buyers previously, even during the crisis they bought a lot of retail assets, but many of those turned out to be problematic. They’re not back in full force yet, but the Swedes are prominent, along of course with traditional German buyers. Germany is still regarded as the safest haven by the vast majority of real estate investors, although of course there hasn't been a repeat of the wild buying at any price that we had seen around 2006. Investors now look much more closely at any asset and take much more care with their due diligence.
Where are they primarily looking?
The highest demand is still for top retail properties in Germany’s Top 7 cities, but prices there are now exorbitantly high. I wouldn’t say we’re looking at a bubble, but the prices for shopping centres or high street retail assets in the biggest cities are definitely frothy for investors with a long-term focus. Foreign investors are now starting to look where the Germans have been looking for the past two years, in the so-called B-cities, with 100,000 inhabitants upwards but below the biggest group.
Do they know exactly what they are looking for?
Frequently yes, although we’d say they sometimes don’t cast their net wide enough to identify the really attractive towns and cities. We think it’s important not to be fixated on the usual simple selection criteria such as the size of the population and the ‘centrality rating’, which might overlook a city like Rosenheim, for example, with a mere 60,000 inhabitants but several other factors which can help it to box above its weight in retail terms.
We always look deeper to ask what contributes to the ‘centrality rating’ of a location. For example, does it all depend on one shopping centre or a major furniture store which pushes its ‘centrality rating’ upwards? You need to establish how attractive the central business district is, whether it has the clothing retailers it needs to make it so, how far away competitor towns and cities are located, how big is the influence of the major retailer groups in the area, and more besides. This is where we can add another dimension to the traditional publicly-available ‘rankings’, by identifying other factors that could produce otherwise undiscovered Hidden Champions.
What effect is e-commerce having on German retail real estate?
This year the role of e-commerce was a real talking-point at MIPIM for the first time. It was a part of every discussion we had, and we could still detect great uncertainty about assessing the impact e-commerce will have on store-based retailing.
The major demand is still, of course, for prime high street and shopping centre sites. Despite the encroachment of e-commerce and buying on the internet, the premiums paid for top central retail locations in the biggest cities with a high centrality ranking are still justifiable, since many new players are trying to muscle in on those locations. Amazon, for example, or eBay, or others who in the future will want a physical presence to increase their visibility, are focused on those prime spots. They have to be there where there are high footfalls, they’re not interested in being in some backstreet location.
The Online goes Offline phenomenon?
There are really two big trends at work here. Firstly, companies such as Nespresso or Apple value the advertising effect of being physically present. It’s part of their overall marketing plan. Others see it as an essential part of their brand development. Ritter Sport and their Bunte Schokowelt for chocolate in Berlin is a good example, or Milka (also chocolate) and Porsche Design (sunglasses) in downtown Munich – giving their brands high visibility where pedestrian frequency is at its highest.
The other sees producers becoming retailers, perhaps because they have poor options through traditional outlets, such as clothing manufacturers. For example, Marco Polo or Boss used to have the big department stores or the big clothing stores as outlets, but a lot of these have disappeared. The German department stores used to have about 15% market share on the high street, but this has dropped to 2.8%. The big clothing stores such as SinnLeffers or Wehmeyer used to carry the full range of clothing brands, and they too have gone. So the manufacturer becomes the retailer with its own shop, mainly on the high street but also in the best shopping centres.
What about growth rates for the sector?
Remember, overall retail turnover has been more or less stagnant for twenty years, yet net absorption has been very stable – even throughout the financial crisis. Here in Germany we have a steady ratio of 1.4 sqm of retail space per inhabitant - which is high compared to other countries. However, since it’s not growing, good concepts have to replace poorer concepts, and squeeze them out in an ongoing process.
There’s been a lot of German household names disappearing from the market in the last couple of years…
The drugstore chain Schlecker is just one example, which closed hundreds of stores when it went bust last year. However, rival drugstore chain Rossmann has taken over many of the now-defunct Schlecker stores in downtown locations, particularly in train stations. They’ve improved productivity by up to 35% over the old Schlecker stores run under the Ihr Platz bran, through an improved concept.
A propos concepts - Primark seems to have set the cat among the pigeons at the lower end of the market…?
Primark has indeed set new standards for low prices in Germany since its arrival on the market, and other low-price competitors such as H&M and C&A are definitely feeling the price pressure. This has led to a certain division in Germany, between local authorities or centre operators who are clamouring for a Primark to increase their shopping footfall, and others – Munich is an example – who are resisting the arrival of a Primark, which they believe would drag the prevailing price level downwards. The desirability of a Primark very much depends on how the centre has positioned itself to date.
How well-informed are foreign retail real estate investors about all these critical factors?
The big professional players such as Henderson and others are very well clued in, they know the market well. Since we have a retail consultancy arm (IPH) with offices around the country in addition to our location analysis business, we have plenty of practical experience in running shopping centres, sorting out client leases, etc., so we see things that make a hidden champion that other investors might miss. With more than 100 consultants, we’re frequently brought in to advise local authorities on the integration of retail into their own planning, which gives us a head-start on advising retailers what’s coming down the line where they’re likely to be a tenant.
At BBE Handelsberatung, we have 30 people who do nothing but analyse specific German locations for retail suitability. We’re frequently called in for a second opinion by retailers considering a certain location, who’ve probably done their own exhaustive studies.