Resi and retail: the latest match made in heaven?

Supermarkets are enjoying something of a renaissance - with a twist. Savvy developers and retailers are adding resi and hotels into the mix, in a bid to create an asset class that is not as vulnerable to fluctuating market conditions as a pure retail play.

‘Germany has a very dense network of supermarkets,’ Jennifer Güleryüz, senior research consultant at Savills, told REFIRE. ‘Food-anchored retail with something else on top is still quite new but I think mixed-use retail like this is going to be THE retail of the future. Many investors like it in a way that they don’t like traditional retail. It’s a win-win for everyone.’

And whereas supermarkets are not always granted planning permission for premises in the city centre, local municipalities are more likely to give their approval to supermarkets with a residential component due to the housing shortage in many big cities – and to expedite the process - according to Güleryüz.

One investor who has been snapping up such assets is Aberdeen Standard Investments. In the last few years, it has acquired 17 mixed-use residential projects at a value of around €870m, with supermarkets and drugstores in a large majority of the properties for various funds and mandates, according to its head of portfolio management and transactions, Continental Europe, Bernd Bechheim: ‘We’re buying quite a few assets with a supermarket and resi component,’ he said. ‘Typically, we buy new resi developments via forward purchasing. In residential areas, you need infrastructure like supermarkets, also in secondary and tertiary cities. Our strategy has been to target resi and if it comes with a supermarket, drugstore or kindergarten that works very well for us as they have long leases. We’re also interested in supermarkets with a hotel on top. In total, eight of our funds can invest in mixed-use assets like these.’

Last year, the group completed its project at Rigaer Straße 38 in Berlin, which comprises 132 apartments and a supermarket, on behalf of one of its German institutional funds for an undisclosed sum.

Aberdeen also has a mixed-use scheme in its portfolio, Neue Mitte, which it acquired around three years ago in a forward funding deal in Kelkheim, outside Frankfurt, in the Hochtaunuskreis for around €57m. It has a Rewe and a Müller on the ground floor, a public library and senior living on the first floor. Connected via a bridge, there is also an intensive care senior living facility.

‘We’re convinced that we’ll see more supermarket developments with mixed-use resi going forward, whereby you have some apartments, senior living facilities and even a hotel component,’ Bechheim said. ‘I think it’s the future as an urban asset class that can serve various user groups. It can even be across several, interlinked buildings. It’s a bit more complicated for the asset manager but we’re definitely interested in acquiring schemes like this, not just in Germany but also in other larger cities across Europe.’

This week (27 January), Instone Real Estate sold part of a mixed-use scheme comprising 104 apartments, children’s day care facilities and commercial space in Düsseldorf to LEG for an undisclosed sum. Overall, the project, ‘Wohnen im Hochfeld’, will comprise 360 apartments across the 55,000 sqm site in addition to the commercial space. Building permit applications have been submitted to the authorities for the initial development sites.

‘We are delighted that this partial acquisition of the 'Wohnen im Hochfeld' project will see us continuing our state-wide new-build offensive in the direct vicinity of Unterbacher See in Düsseldorf,’ said Axel Felke, CEO LEG Solution. ‘The proportion of subsidised and reasonably priced apartments in the package demonstrates our commitment to social responsibility and the fact that we will be able to offer inexpensive apartments even in rental markets under strain.’

Another investor taking this approach is Trei Real Estate. The group currently has around 3.750 residential units under development or in the planning stages in Germany, the Czech Republic, Poland and the United States: 1.600 units each in Germany and Poland, 970 in the United States and around 80 in the Czech Republic.

‘We’ve always been interested in supermarkets and decided that adding residential space was the best way to go because we had lots of supermarkets in good locations where the land was being underutilized,’ Trei Real Estate’s CEO, Pepijn Morshuis, told REFIRE. ‘Our portfolio used to be 100% retail but we’d like to grow it to 40% residential, up from 12% today, by the end of 2023.’

In Berlin, Trei Real Estate is currently developing four residential projects comprising commercial spaces and apartments. It is investing around €250m in the city to develop around 750 rental apartments and 8,000 sqm of retail units. The new buildings will have commercial spaces, including supermarkets on the ground floor, with apartments built above. Further residential and commercial buildings in Berlin will be built on Fürstenberger Street and Köpenicker Street. In the latter location, Trei Real Estate is including a new first: youth-assisted living, providing shared flats.  It also has projects in the pipeline in cities such as Cologne, Munich and Mainz.

While the developments in Poland and the Czech Republic will deliver condominiums to be sold, the apartments constructed in Germany are earmarked for Trei’s proprietary portfolio. The residential developments in the United States are to be sold in the form of block deals. The total value of Trei’s proprietary portfolio is around €1.1 bn, with a development volume of around €850m.  Of that, 40% is already under construction, half of which is in Germany.

However, there are challenges associated with building such schemes. ‘You get a complicated building - supermarkets tend to get their deliveries at 6 a.m., so you have to ensure that the lorries can actually drive into the buildings to minimize the noise,’ Morshuis said. ‘Also, if you’re building resi on top, the building needs to be more load-bearing. We have pillars inside that are a metre wide!’

 ‘Future-proof’ assets

For investors, mixed-use retail is a no-brainer: ‘Investors like it because it’s a safe asset,’ Güleryüz said. ‘Resi really is future-proof and food-anchored retail is one of the few retail assets that is not really subject to market fluctuations.’

Discounters such as Aldi and Lidl have been very active in this space.  Lidl is building a supermarket in Hamburg with a hotel on top. Elsewhere in the city, Lidl is building another supermarket with student housing above. Aldi announced in 2018 that it intended to build 2,000 rental apartments above its stores in Berlin in at least 30 locations across the city, including Neukölln and Lichtenberg. Kaufland has also got in on the act: in Munich Moosach, it has a store with a hotel component operated by Austrian hotel group Harry’s Home, targeting business travellers in the week and tourists at the weekend.

‘There’s not much demand for retail space on the upper floors,’ said Dirk Hoenig-Ohnsorg, head of retail investment at Colliers in Germany. ‘Combined with the pressure to increase buildability in urban centres, if you want to keep retail, you logically need mixed-use in certain locations,’ he said. ‘There are also synergies between retail and student housing. You get better buildability, too, because you don’t need as many parking spaces as students don’t necessarily have cars.’

Investors have been clamouring to invest in such hybrid schemes, including New York-based real estate group Madison International Realty, which acquired Berlin’s Sony Center in partnership with Canada’s Oxford Properties for €1.1b in 2017. Ron Dickerman, president and founder of Madison told REFIRE that his firm would be very interested in acquiring such assets.

However, such projects aren’t for everyone, according to Hoenig-Ohnsorg: ‘Not all investors like these mixed schemes because of their existing allocation strategies,’ he said. ‘They can be hard for pure retail funds who might need to split the assets, which makes it artificially complex. Equally, resi investors might not be willing or able to take on the retail component. However, for some investors, these mixed-use schemes are like buying a bond which allows investors to diversify.’

There are still good investment opportunities for investors seeking food-anchored retail without a resi component. Earlier this month, fund manager Patrizia sold a 68-asset retail portfolio across Germany totaling around 122,000 sqm of rental space to a fund managed by GPEP, a management platform specialised in supermarkets and retail parks across Germany for an undisclosed sum.

The assets, in established retail locations, are anchored by food retailers such as Edeka, Lidl, Netto, Penny and Rewe. ‘We are pleased that growing numbers of German and international institutions see grocery assets as a key element in their investment.’

Patrizia manages more than €7bn in the retail sector throughout Europe with the majority invested in the German food retail sector. Patrizia was advised by Colliers International and K+L Gates Berlin.