New retail construction flagging, poor outlook for prime retail rents

A new report from property advisers Cushman & Wakefield (C&W) shows that 36,000 sqm of new shopping centre space will be completed in Germany this year, with another 67,700 sqm to be added in 2018. Nonetheless, German retail rents are expected to continue to stagnate over the coming years, as a report from Capital Economics suggests.

Demand for new shopping centres has been flagging across Europe recently, according to the "European Shopping Center Development Report" from advisers C&W, as investors and operators switch their attention to increasing customer frequency and willingness to spend. "The key focus of investors has increasingly shifted to the development of new concepts", says Justin Taylor, the head of EMEA Retail at C&W, with gastronomy and other forms of entertainment high on the list.

France led the field in new shopping centre development last year, and still has the most active pipeline in western Europe, with more than 931,000 sqm of new lettable space coming on to the market in 2017 and 2018, according to C&W. Of this, 56% will be in Paris, Marseille, Lille and Lyon alone. The corresponding figure for the UK is 438,000 sqm.

The low German figure of 36,000 sqm this year and 67,700 for 2018 are a testament to the slowdown on the European market. Last year (2016) the transaction volume in Germany was €4.1bn, down 28% on the previous year, but it was still the leading market in Europe. The volume in the UK, the second-largest market was €3.5bn, down 42% year-on-year.

For 2017 and 2018, major German projects include the "Dorotheen-Quartier" in Stuttgart, as well as "Loom Bielefeld", "East-Side Mall" and "Schultheiss-Quartier" in Berlin. Throughout Europe, an estimated 4.5m sqm of shopping centre space is expected to come onto the market in 2017, with a further 2.3m sqm to follow next year.

A recent report from consultancy Capital Economics written by Hamish Smith addresses the question of the stagnation in prime German retail rents, in spite of healthy rates of consumer spending. The upward propulsion of rents has been partly driven in the past by tourism in the form of wealthy foreign visitors, whose numbers (of overnight stays) have seen a slowdown in growth.

Domestic retailers have experienced rent rises of between 35% and 50% since 2007 in Berlin, Frankfurt, Hamburg and Munich, pushing them to record highs. These are now often at the limit of affordability for German retailers, while still well below the levels in London, Paris, Zurich and Milan, which means international retailers are less scared off.

Of more importance, however, is a shift of focus away from German cities by international retailers. The latest survey by CBRE, "How Global is the Business of Retail?" shows none of the four main Geman cities making it into the top 15 target markets for new retail entrants in either of the last two years. This compares with all four cities bien in the top 15 in 2012 and three of the four making the list in 2013.

The Capital Economics study concludes that the lack of occupier demand, particularly from international brands, and the relative pain being felt by German retailers is the probable cause of prime retail rents reaching their apparent recent plateau. Looking ahead, says the study, with no obvious catalyst for the previous relationships between rental growth and a number of economic variable to re-establish themselves, it is difficult to see why rents would suddenly jump in the absence of a much strong occupier deman or a supply squeeze.

Rents in Berlin, Frankfurt, Hamburg and Munich are therefore likel to see marginal growth of no more tha 0.5% to 2.5% per annum over the next few years, the study predicts.