Shopping centres accounted for far higher share of deals last year
By Sara Seddon Kilbinger, Senior Reporter, REFIRE
Many shopping centres are still recovering from the COVID crisis but recent studies show that as consumer behaviour continues to shift, shopping centres might be moving out of the shadows.
According to PwC's latest study "Retail in transition - Are shopping centres still fit for the future?", shopping centres are attempting to meet changing demand, fuelled by a drop in consumer consumption and in a bid to compete with online shopping. According to 60% of operators surveyed, shopping centres only offering retail are no longer sustainable, particularly in peripheral locations, meaning that shopping centres need to start offering a much broader range of services to stay competitive.
‘This fits with the finding that grocery stores, drugstores and bakeries/delicatessens are most frequently visited during a shopping centre visit, ultimately areas that are not necessarily "typical" for classic shopping centres,’ said Rita Marie Roland, a partner in Real Estate at PwC Germany. The study also shows that 61% of respondents go to shopping centres without necessarily buying anything due to rising inflation and consumer prices and against a backdrop of economic uncertainty: ‘Therefore, new concepts have to be designed that take into account changing needs, link online and in-store shopping experiences, and properly serve demand,’ Roland warned.
Nonetheless, despite the inherent difficulties, shopping centres appear to be making a comeback, according to CBRE. Retail warehouses and parks, including DIY and food stores, accounted for 48% of the retail transaction volume last year, followed by shopping centres with 29%, up from just 10% during the previous two years. This was largely attributable to Oaktree Capital and Cura Vermögensverwaltung taking a stake in Deutsche Euroshop in the third quarter. Conversely, the share of high street retail properties in city centres fell to 15%, down from 27% in 202, according to CBRE.
Food markets are ‘everybody’s darling’
‘Food markets remained everybody’s darling in 2022,’ said Jan Schönherr, head of retail investment at CBRE Germany. ‘They almost always go hand in hand with long-term leases and tenants with good credit ratings. Investors are particularly appreciative of these characteristics in times of crisis.’
Investors clearly agree. Last month, VIB Vermögen announced that it will launch an open-ended special real estate fund VIB Retail Balance I with a target size of €350 million and an investment focus on food retail properties and specialist retail centres. To that end, it has sold seven commercial properties from VIB's existing portfolio to the fund with a combined value of around €119 million. A further 24 commercial properties worth around €189 million will be sold to the fund from the existing portfolio of its subsidiary, BBI Bürgerliches Brauhaus Immobilien Aktiengesellschaft (BBI).
The fund's total equity amounts to €202 million, with 49% of it initially provided by VIB itself. The fund will be managed by IntReal Real Estate. The fund is expected to have a term of 10 years, with a target distribution yield of 4.9% p.a.. The real estate portfolio, which VIB will sell to the fund together with BBI, consists of local shopping centers, supermarkets and specialist stores in nine federal states.
For his part, Schönherr expects the transaction activity to remain muted for now but says that it will pick up momentum during the year: ‘From an investor standpoint, we are seeing interest in all sub-asset classes, particularly in DIY centres that hold the promise of better yields, compared with retail warehouses and food markets,’ he said. ‘The market is still “in wait” mode only as far as department stores are concerned, which is mainly due to developments on the occupier market rather than interest rate uncertainties or pricing difficulties. Of decisive importance here will be which ones will be retained as department stores and which will be closed. Investors will be primarily interested in properties in good locations that, having been closed, permit promising repurposing in the direction of mixed-use properties.’
Nonetheless, there is much work to be done. Experts estimate that around one in three shopping centers is not fit for the future, with customers often saying when surveyed that they want fewer apparel retailers and more restaurants and leisure facilities. The pressure on shopping centers isn’t going to let up any time soon: first online retailing stole their thunder, then the pandemic followed by people tightening their belts only deepened the crisis.
Retail investment in 2022 down just 4% on 2021
Germany’s retail real estate market recorded an investment volume of around €9.4 billion in 2022, which was only 4% below the previous year, according to CBRE. At €2.5 billion, the final quarter was just €100 million short of the previous year’s quarter. Both the portfolio share (up 6% to 45%) and the proportion of international investors (down 1% to 32%), as well as the share of the Top 7 markets (stable at 25%) in the transaction volume saw no significant change in a y-o-y comparison.
‘Despite the economic challenges and the multiple exogenous shocks, such as the war in Ukraine, the rise in energy prices and therefore in the cost of living, and ultimately the global interest rate turnaround, the German retail real estate market proved to be robust in 2022 in contrast to most other real estate asset classes. However, the retail real estate market also saw a decline in the number of active market participants,’ Schönherr added.
When should operators act to save flagging centres?
So when should operators look to revamp their centres? According to the PwC study, countermeasures should be initiated when there is a vacancy or a decline in footfall of 15% to 20%, if not before. A decline in tenant turnover and increased tenant fluctuation are also the first warning signs that shopping centres are failing. According to the survey, new leases are currently seeing a reduction in the price per square metre by an average of 16%. This is primarily due to persistent inflation and supply chain issues, which are putting retail tenants under severe pressure. The profitability of a centre is then quickly on the line, which makes an economically viable and sustainable centre concept and active tenant management all the more important.
Ultimately, the failure to take local requirements into account in the tenant mix is a major reason for the failure of shopping centres, according to the study. Mixed-use concepts that offer consumers flexibility and a wide range of offerings are widely considered to make shopping centres more attractive. According to the study, inner-city shopping centres appear to be better equipped to meet the new challenges than their suburban counterparts, but they, too, need to reposition themselves with new customer experience models and expanded gastronomic facilities: ‘When developing new concepts, a transparent and realistic business plan should always serve as a basis, above all to convince investors and financiers of the implementation,’ Roland warned.
However, retail repositioning is a notoriously tricky beast and getting the balance right between retail and other services is incredibly difficult in a market that is constantly under pressure. Turning around a shopping centre that is already struggling is even harder, even when a lot of capital is pumped into it. Take My Zeil in Frankfurt: ECE converted the top sales level into a gastronomy zone at a cost of almost €100 million. However, according to Ecostra’s Shopping Center Performance Report (SCPR), the rating by tenants has worsened since 2019. Other shopping centres of a similar type – including the Liliencarrée in Wiesbaden, the Skyline Plaza in Frankfurt and the Mall of Berlin – face similar challenges because whilst architecturally interesting, they’re not really designed for people’s everyday lives.
Subsequently, transforming existing centres into something more fit for purpose, offering a broad range of services, including medical services, in addition to retail space, will be the biggest challenge in the sector going forward. Getting the balance right will be crucial but figuring out what that balance should be – and adapting quickly enough when the market changes - is going to be the hardest part of all.
