The troubles in the retail real estate business in Germany have been well documented and are widely recognized, as is the relative strength of the grocery-anchored retail segment. The top brains in the sector are applying themselves to possible solutions to the dilemma of the sector, made all the more acute by the onset of COVID-19 and the seemingly unstoppable march of ecommerce.
All the more timely, then, for a recent online press conference with several heavyweights of the industry to discuss the obligatory transformation and modernization of high-street retail, shopping centres and department stores if they are going to survive – and hopefully thrive – into the future. There are considerable challenges ahead if this is to become reality. An existing bright light in the sector is the grocery-anchored retail sector and mixed use real estate with a food focus, where demand will continue to grow, as the panellists confirmed.
The conference was hosted by Martin Mörl, managing director at Girlan Immobilien and an industry veteran with years of experience at Prelios and Pirelli Real Estate. Panellists were Stefan Koof, Head of Expansion and Real Estate at REWE Handel Deutschland; Jens Nagelsmeier, Head of Transaction Management Retail at Warburg-HIH Invest; and Karsten Jungk, MD and Partner at analysts and researchers Wüest Partner Deutschland.
Jüngk summarized the current situation on the retail market in stark terms. “The onset of the coronavirus pandemic has necessitated a radically differentiated assessment, more so than for any other asset class. On the one hand, retail revenues registered a one-year growth by 8.2[% in October, according to the Federal Statistics Office, with sales of furnishings, household appliances and building materials growing by 14.2%. On the other hand, the apparel industry alone suffered revenue losses of 29% during the first six months 2020 compared to the second half-year of 2019.”
“Interest among investors is very rapidly drying up. As a result, there is scant market evidence of transactions. What we are seeing as appraisers is that operators and investors are pulling pre-prepared concepts for reusing or restructuring their assets out of the drawer. Off-high-street locations tend to be at a disadvantage. Conversely, properties in performing locations with well-functioning concepts will survive the coronavirus crisis and the structural change. Prime high-street pitches remain an attractive investment.”
Martin Mörl made no bones about the growing pressure within the industry to act to avoid disaster. “We assume that a large number of larger-scale high-street retail properties in Germany are under enormous transformation and conversion pressure. In the years to come, we will therefore see numerous retail venues now obsolete switch to alternative or new uses – a process that holds a promise of huge opportunities, too. The floor space potentially vacated, for instance in department stores and commercial buildings or shopping centres could give new, small-scale and popular use types and product ranges a chance to return to inner cities. Formats that come to mind include housing, micro-logistics, healthcare, services, offices and public uses, but also innovative retail and gastronomic concepts. Retailing will remain a fundamental component of inner cities.”
He added: “On the whole, retail real estate as asset class will become more demanding and complex, a fact that is reflected in the considerably increased requirements that investors, owners, tenants and municipalities bring to the table when discussing property and use concepts.”
The one shining light in the retail sector is food retail sales, where Fachmarktzentren and other grocery outlets have actually benefited from the COVID-19 situation, not just in Germany but elsewhere. In Germany, grocery sales increased boy 12% year-on-year over the first nine months of 2020.
Stephan Koof, Head of Expansion and Real Estate at retail giant REWE Handel Deutschland, said: “Sales during the first nine months of the ongoing year were driven by above-average growth in our REWE and Penny supermarkets. Unlike other players, we will therefore push forward with our expansion strategy exactly as planned. We have a high degree of flexibility when it comes to architectonic and use-based peculiarities, and are very much open to the idea of mixed-use properties. The same is true for the footprints we require: From the intra-urban REWE convenience stores of 500 square metres to the Penny discounters, and from the larger REWE supermarkets all the way to the REWE Center markets of more than 5,000 square metres, we will work with any floor-space requirements a given site might have.”
Giving the investors’s perspective, Jens Nagelsmeier, Head of Transaction Management Retail at Warburg-HIH Invest, added: “Demand for grocery retailers will keep growing because they offer a high covenant strength and stable long-term cash flows. Selling prices will also keep going up, even if their growth won’t be able to match the dynamic of other asset classes. But since the supply in available real estate remains limited, mixed-use properties are increasingly moving into focus. All types of use that complement groceries qualify as sensible additions, including doctors’ offices or apartments, for instance. Moreover, the subject of sustainability will further gain in significance next year. Operators with EV charging stations, photovoltaics, etc. are already well-positioned in this context. In the medium term, carbon-neutral green buildings will become standard.”
Putting its money where its mouth is, Warburg-HIH is Invest is currently going through the investment period with its open-ended special AIF “Warburg-HIH Perspektive Einzelhandel: Fokus Nahversorgung.” The investment fund has 17 properties in its portfolio. It focuses on retail warehouse parks and neighbourhood retail centres, anchored by food retailers in economically stable locations in Germany and with ten to 40 million euros in terms of total sum invested. The minimum subscription amount is €5 million. The annual dividend yield will be somewhere between 4.5% and 5.5%.
