Revitalisation new driver in shopping centre segment

If investment in German shopping centres isn’t the highest priority for domestic or international investors right now, with many steering deliberately well clear of the sector, it’s certainly a boom period for those whose job is the revitalization of Germany’s numerous ageing centres who need more than just a lick of paint to attract back paying consumers.

According to the latest study from the Ludwigsburg-based market research group GMA Gesellschaft für Markt- und Absatzforschung, refurbishing and revitalizing shopping centres has become one of the key drivers in the investment market, with more than €7.1bn having been pumped into revitalisation of German centres since 2010.

The study analysed 665 centres throughout Germany in terms of their refurbishment and modernization needs, with the results released at the recent Expo REAL in Munich.

Dirk Riedel, from the GMA office in Cologne and author of the study, said that in most cases it was the larger centres that underwent revitalization, whereas shopping centres with less than 20,000 sqm of lettable space had largely been unable to catch up on their refurbishment backlogs. The majority of re-works were internal restructurings, with 14% being complete re-positionings with added extended building works.

Against a background of falling demand for shopping centres, the GMA researchers estimate that about 50% of those centres that either opened since 2010 or have been refurbished since then, will need further major revitalization work done by 2020. Another 30% will have to give major strategic consideration to their very existence and market positioning, given the consumer preference for and strength of the Fachmarktzentren, or specialist shopping centres.

The GMA study claims that only one in seven shopping centres will have either ‘good’ or ‘very good’ prospects by 2020 in terms of its market, location and specific property advantages. Four of five shopping centres, which are currently – in 2018 - in serious need of major revitalization, are nonetheless unlikely to have undertaken any improvements by 2020. If they are going to survive and to tap in to potential demand in their catchment areas by offering an attractive mix of product range and tenant mix, they will have to act swiftly – the favourable conditions of the last few years and their catchment areas are shrinking in the case of more than a third of shopping centres.

The GMA researchers say that for one in ten shopping centres, any help will come too late and they are destined to die out, either to be torn down or otherwise converted into other use, such as offices or residential.

With the ongoing trend to shorter leases, the GMA researchers see ever-shortening refurbishment cycles in shopping centres, with the number of centres that undergo complete relaunches increasing yearly. Raimund Ellrott, head of the Hamburg office of GMA, says “We’re expecting over the next decade about 270 to 320 shopping centres that will have to be re-structured or completely modernized.” In view of increased building costs, says Ellrott, this is likely to be a cumulative investment volume of between €10bn and €14bn.

Overall lettable retail space turnover has been sinking in Germany for the last four years, says Dirk Wichner, head of retail leasing at property adviser CBRE, with many tenant groups such as clothing stores hesitant to commit to taking larger space. Peak retail rents in German cities with less than 500,000 inhabitants have been falling, while they are stagnant in the Top 7 cities. Pressure from online commerce is certainly taking its toll. Hence banks are looking increasingly skeptically at financing certain types of retail deals.

According to Jan Peter Annecke, head of commercial property financing at Münchner Hyp, banks, the biggest problem is the lack of alternative uses for many forms of retail property. If a major anchor tenant such as a department store, clothing store or an electronic retailer has to close down, it can require a lot of creativity to find alternatives. “The sustainability of producing a consistent yield in a high street property, like a department store, is something we view critically and tend to want to avoid financing it”, he said.

This year’s transaction volume for investment in German shopping centres is at an all-time low, at about €470m. But, according to property advisers JLL, there are about €1.5bn of potential deals being currently marketed. According to Sandra Ludwig, head of retail investment at JLL Germany, the whole due diligence process is now often taking half a year or longer. “The rental market is being scrutinized much more carefully by potential buyers than was the case two or three years ago. Transaction processes are taking a lot longer, and buyers and sellers are drifting further away from each other in their estimate of realistic prices.”

Fachmarktzentren, or retail parks, are much less susceptible to being undermined by online commerce as they are much more focused on products for daily consumption, such as groceries. This gives them a competitive advantage vis-à-vis the classical shopping centres.

A JLL survey recently found out that two-thirds of shopping centre visitors do not know if their shopping centre has an app – and even if they do know and could use it, only 12% actually do so. Anke Kaukars, head of Shopping Center Management Services at JLL, say that many more would use the app if it offered more comprehensive information about products available in its stores, and the ability to order them and pick them up. In other words, position themselves better as innovative omnichannel sources.

Overall, the German retail market got a big boost in the third quarter with the merger of department stores Karstadt and Kaufhof, which according to Jan Schönherr, co-head of retail investment at CBRE Germany, has helped to increase transaction numbers across the retail asset category.

“Investors continue to focus on the food market segment in particular as this is where most of the properties available in the market are to be found. As a result, the volume invested in retail parks was only exceeded by the major Kaufhof/Karstadt deal. In addition, we recorded a number of transactions involving shopping centers in the third quarter, a trend that is likely to hold steady in the final quarter as well,” said Schönherr.

Despite the weakness in the shopping centre segment, CBRE said it is anticipating a robust final quarter to 2018, with transaction volume reaching between €10 billion and €12 billion. Although this would fall short of the previous year’s outstanding €13.7 billion result, it would still be above Germany’s 10-year average volume levels.