7th Deutscher Fachmarkt-Immobilienkongress 2015

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REFIRE recently attended the 7th Deutscher Fachmarkt-Immobilienkongress 2015 in Essen, a two-day event organised by Heuer Dialog.

The conference attracted over 200 delegates, a superb turnout for an analysis of developments in an asset class that has surged in popularity in the past two years, as profitable investment alternatives in German retail real estate become scarcer.

As REFIRE has come to expect from Heuer Dialog events, the planning and execution, the moderation and quality of the speakers and attendees, along with the overall organisation, were all excellent.

On both days the range and variety of the presentations and discussions were compact and relevant, and delegates were given ample opportunity to hear from representatives of new retail concepts fighting to expand in the crowded German marketplace in the Fachmarktzentrum space.

We heard from sports stores, variety stores, discount grocers, drinks stores, optical retailers, budget hotels and food court operators as to what works – and doesn't work – in Germany's Fachmarktzentrum. We learned a lot about planning and regulatory issues that affect the profitability or attractiveness of one centre versus another.

We learned how the lines are blurring between some Fachmarkt concepts and classical shopping centre retail, and how top retailers are looking for ways to strengthen their brand and their closeness to the consumer while being cognisant of the threat to some existing retail models by the appeal of online commerce.

Setting the tone for the day's discussions was Jörg Ritter, board member at JLL Deutschland, on the subject of "Sinking yields as a result of above average demand". Ritter highlighted how the Fachmarktzentrum as an asset class had attracted the attention of a new category of investor, and that well-established and modernised centres with high visitor numbers had now become accepted as an alternative 'core' product to their hitherto select choice of top city-centre retail outlets or full-service shopping centres.

Ritter showed that, for the first three quarters of this year, the amount invested in such specialist centres, retail parks, supermarkets and discounters was €3.6bn – up 12% on the same period last year. The total for all of last year was nearly €4bn (out of a total of €14bn for ALL retail investment). The result is that top yields are likely to hit 5.0% by the first quarter of 2016, although they are still somewhat above that now.

With core retail products remaining scarce and demand for Fachmarktzentren so high, the expected new volumes of transaction in the sector will only be reached by investors being prepared to take on more risk – a phenomenon that JLL says it has been observing since 2010.

Jochen Friedrich, managing director of Frankfurt-based GPEP – a specialist in unearthing under-researched Fachmarktzentren – said the best opportunities for investors were to find and buy centres that the banks still have on their books since the financial crisis, and would be prepared to dispose of.

Previous criticism of the category – that alone the building quality was not on a par with a classical shopping centre, just for starters – was being obviated by the evidence of strong and measurable customer traffic, with consumers expressing their acceptance of the Fachmarktzentrum by voting with their feet.

And with their emphasis on providing products for consumers' daily lives, the Fachmarktzentren are proving more resistant to the attractions of online e-commerce, which is adding pressure to many traditional tenants of downtown shopping centres.

Outdated planning laws

The confusion and obstacles caused by Germany's partly outdated planning laws was highlighted by veteran lawyer Johannes Grooterhorst of Grooterhorst & Partner, who has been a regular speaker at this event over the past years. Mr. Grooterhorst stated baldly that much existing legislation is hostile to the development of Fachmarktzentren, based as it is on laws enacted in the 1980s and 1990s, where such centres are treated as out-of-town big box furniture or DIY-style warehouse outlets, such as IKEA or Hornbach.

The whole planning landscape has changed since then, he emphasised, and the laws need to reflect the reality of consumer demand for large retail outlets being integrated into accepted urban and community shopping centres.

At the hear of the problem is an outdated notion of what category of product or retailer is deemed 'Centre-relevant', said Grooterhorst. He urged investors with retail concepts that might run foul of local council planning committees to engage early with the local planning office, as generational change-overs which have not considered new categories of retail could prove impossible to alter at a later stage.

Additionally, tensions frequently arise when the law at federal state level stands in conflict with planning decisions taking at the municipal level, he warned.

A prime example of this was given by Ludger Niemann, the head of business development at French sporting goods retailer Decathlon, whose 24 stores in Germany normally cover 4,000 square metres.

Decathlon has a history of planning trouble in Germany, because its retail concept – of offering a full range of sporting articles from heavy and bulky fitness equipment (requiring a car for transport) to a full range of sporting clothing and footwear. – effectively demand that it locate itself at edge-of-town Fachmarktzentren.

Niemann pointed out that only in Germany is the concept of "Centre-relevance" so all-important in determining the permissibility or otherwise of a store such as Decathlon openng up in a Fachmarktzentrum. He cited the absurd example of Decathlon stores being permitted to sell cloth textiles but not diving suits in Fachmarketzentren where the local council would accept the presence of a Decathlon, but not the federal state.

This sort of nonsense has seriously hindered Decathlon's expansion in Germany, said Niemann, since it first entered the market in 1986. (By contrast, in Spain, where Decathlon entered the market in 1992, it has 130 stores, he said).

Christoph Hölters, responsible for planning for the city of Neuss, near Düsseldorf, agreed that the German planning process was often sluggish and capricious, and he would welcome a more uniform approach to dealing with cases such as Decathlon. However, he warned, the French, Spanish and Italian authorities have often neglected their duties to protect the downtown retail stores, with the result that many towns have been hollowed out and are little more than museums, with all the retail action taking place far from the centre.

Neuss, for example, initiated a major revamp of its downtown core to make it more attractive to shoppers before giving approval to to big retail developments on the outskitrs of the town in 2011 and 2014, he said.

Dr. Gerd Hager, director for planning at the Regionalverband Mittlerer Oberrhein (the region adjoining the Rhine in Baden-Württemberg which includes Baden-Baden, Rastatt, Bruchsal and Karlsruhe), countered the Decathlon argument by saying companies' approach to planning was often slipshod and unprofessional.

He referred to the celebrated case of IKEA, which spent ten years trying to get planning permission for a greenfield site in Rastatt, before accepting a court decision just this year to allow them to build in nearby Karlsruhe.

Dr. Angelus Bernreuther, head of locational research at Munich-based BBE Handelsberatung, agreed that retail and planning laws were often fundamentally opposed, and there has been a long history of disagreement between the two. Planning law invariably lags new developments in retail, he said.

He cited the example of Munich, where the sale of lamps was deemed "Centre-relevant" to outlying Fachmarktzentren, but not to downtown. Result: 26 lamp and lighting shops on the outskirts, but none assessed as 'relevant' for a city-centre location. In short, frequently the list of "Centre-relevant" or "non-relevant" categories needed to be completely overhauled, he said.