The unstoppable drive to grab some German retail real estate

German and foreign investors just cannot get enough of German retail. More retail properties have already been sold in the first six months of this year than in all of 2014. We’re back at levels last seen in 2007.

A recent report by London-based Capital Economics takes a very bullish view of rental growth in prime retail properties across the eurozone over the next two years, with a regional aggregate rise of 5.2% for 2015 and further 2.8% next year. Foremost among those set to ride the rental wave is Germany.

Historically low development and keen competition for top retail sites have been keeping rents bubbly, and are likely to ensure that rises surpass those in the office and logistics sectors. Capital Economics says we haven’t seen the full effect on consumer spending yet of the fall in oil prices, and the benefits of a weaker euro in lifting export income. That’s on its way, say the researchers.

If all that is yet to come, it might explain why international investors have been piling into Germany at an unprecedented rate, said by BNP Paribas Real Estate to be, at €6bn, three times more than last year for the corresponding first half.

The figures are somewhat distorted by the Klépierre-Corio takeover and the snapping–up of Kaufhof by Canada’s Hudson’s Bay Company, but more than 35% of the deals are for individual properties, rather than portfolios. That speaks of hunger for the sector, right across the board.

Part of the attraction is the weak euro for US and UK investors, who find that prices in London have risen even more than in Germany. There’s also the depth of the marketplace, with numerous Band C-cities serving prosperous hinterlands, with a huge and ready mix of retailers. This has helped Germany displace Paris as Europe’s second-favoured location – not least among French investors themselves, who are also scrambling to get into the German market.

It’s not for either Germany’s dodgy demographics or its rising consumer spending, as Germany remains one of

a handful of European countries with falling sales in physical stores. Sliding numbers of shoppers and the rise of e-commerce as a threat to bricks and mortar sales is still being underplayed, given the overall returns available compared to the risk-free rate. But yields are still mostly north of 3.5%, compared to 2%-plus in the UK and less than 1% on government bonds.

The trend to shopping centres is helping to speed the demise of the great German department store, many of whose most famous post-war names have been consigned to the dustbin. It remains to be seen what fate awaits the last two big names, Kaufhof and Karstadt, as their respective new owners dream up new futures for their prized assets. But things are looking up.

Thailand’s Central Retail Corporation is now a partner with Vienna’s Signa in owning Karstadt Premium, including KaDeWe in Berlin, the Alsterhaus in Hamburg and Oberpollinger in Munich. The partnership plans a major injection of funds through Central Retail’s Italian luxury chain La Rinascente, and plans to position the group as European market leader.

All eyes have also been on Hudson’s Bay Company as it swooped to buy Kaufhof from listed parent Metro Group. The deal will certainly see a shake-up in Kaufhof’s retail strategy, but the price paid of €2.4bn plus debt is less than the value of the company’s property assets. The buyers are getting the retail business effectively for free.

Observers in Canada and the US, who know Hudson’s Bay boss Richard Baker well, don’t doubt his retail enthusiasm, but view him far more as a landlord, driven to turn his stores into exciting, happening shopping malls peopled by a broad mix of independent retail fashion brands.

He has a reputation for putting really top retail managers in place to run the retail side, and listening to what they want to do. Here in Frankfurt, close observers of the retail scene say he has strong faith in Kaufhof’s existing management, in contrast to what he saw when his own company NRDC bought the 345-year old Hudson’s Bay in 2008, and in other key acquisitions the combined group has made since then.

He’s already bringing new ideas to the retail empire he plans to build in Germany, such as bringing Hudson’s Bay and Saks Fifth Avenue branded products into the stores and collaborating with names such as Topshop to spice up his stores’ offerings. Or malls within stores, as they’re likely to become.

Fortunately he seems well aware of the pitfalls suffered by numerous predecessors who’ve stumbled into a watery grave in German retail, and is unfazed by the challenge. But it’s his handson, close-up experience of the changing shape of department stores across North America over the past twenty years – when many hallowed names too seemed resistant to change – that gives this venture new perspectives.

If Baker’s nose for a real-estate deal – with a huge retail business thrown in for free - proves misplaced this time, then there is little hope for any of the myriad investors piling into the sector. A lot is riding on his group’s success, and that involves creating a new German platform for a raft of retail innovations - both in-store and in the online world. Exciting times ahead.