REFIRE and Targa Communications February Roundtable - RETAIL
The February Roundtable was very well attended by an audience keen to hear the views of our panellists, all experienced veterans of the German retail market, from shopping centres to the high street to the most resilient segment of the market during the COVID pandemic - the ‘essentials’ and grocery-anchored retail market.
Dr. Thomas Beyerle, Head of Research at Catella, set the scene and reminded the audience that COVID-19 was not responsible for the decline in the European retail real estate market. The investment peak had been reached in 2015, and markets have been grappling with the disruptive forces impacting the industry since then.
“Investors aren’t saying goodbye to retail, but the sector is definitely under pressure. The age of the shopping centre as we’ve known it is coming to an end, a phenomenon increasingly visible across Europe as markets become more synchronized. As go rents, so too do transaction volumes, in the same direction.
Susanne Klaussner, the managing partner at DIR Deutsche Investment Retail, has years of experience as the ex-managing director of food retail investor GRR, and has learned to appreciate the sector’s stable and sustainable cashflow. She discussed the ever-present changes in the ‘daily needs’ supply chain and how she expects to see new tenant structures in shopping centres. Investors are focusing more on smaller cities and on the peripheries of the Big 7 – but she reminded us that in total, no net new retail properties are needed, even with the rise in delivery services. Developments of whole new quarters is critical.
Jörg Krechky, Head of Retail Investment Service Germany at Savills, chose as his Zoom backdrop an apocalyptic vision of an abandoned and desolate shopping centre – as brought to you by those YouTube guided tours of an abandoned Detroit or the numerous ghost malls that dot the American suburban landscape… He foresees a further decline in rents and rising yields in shopping centres, but his vision for the future was by no means as gloomy as his backdrop, seeing centres of the future being more mixed use, housing a lot more of the facilities we avail of in our daily lives, such as medical centres and other services, as well as retail. In his view, yields in the food retail sector will continue to go down until they’re on a par with logistics assets, 3.5-5.0%.
Adam Pearce, managing partner of Kintyre Investments in Frankfurt, spoke for most of the panellists when he said that retail is “a multi-headed animal – so it’s difficult to categorise bluntly between winners and losers.” Realistically, however, many shopping centres are in a downward spiral, and although there is pressure from investors not to sell assets below book value, in many instances they’ll have to accept that they have to free themselves from an orientation around prices paid in the past. The future will determine the price.
While investors view the pricing of shopping centres as a function of the yield of shopping centres, they need to start viewing the yield as closer to the yield of a project development. This means vertical integration, a rebasing of the risk shared between landlord and tenant, and a rational appraisal of underperforming tenants.
The resilience of the German grocery sector is what attracted the Canadian group Slate Asset Management to Europe and Germany in 2016, and the group has since bought more than 250 grocery-anchored stores and those selling ‘essential’ daily items. Briain Morris, Head of Investments Europe at Slate, highlighted how the margins of German retailers are so much narrow than in other countries. COVID didn’t damage the grocery sector – if anything, our needs are being more than ever being fulfilled by the supermarkets and the discounters. While yields remain low, the supermarket sector remains very resilient from a cashflow perspective. In his view, the future of online delivery in Germany is still very uncertain, although he’s more optimistic about Click & Collect.
Johnnie Wilkinson, the CEO of Greenman Investments who have now got more than €1bn of assets under management in the German grocery-anchored retail segment, also sees a growing willingness of consumers to embrace Click & Collect, and expects major advances over the next 18 months. The challenge will be to also get Click & Collect customers to go into the store to buy addition products.Greenman invest big resources in learning more and more about the behaviour of the visitors to their Fachmarktzentren against a background of rapid changes across the whole supply chain. They work as close as possible with their tenants, but getting accurate data is always difficult. Technological advances, such as drone delivery in which Greenman has itself invested, will further enhance the services provided by tenants.