Flagship centres such as the Hamburger Meile are reportedly up for sale
As financing conditions tighten, more and more investors are putting shopping centres up for sale, despite the risk of deep losses, offering would-be investors a good opportunity to snap up flagship centres at levels significantly below what they sold for a decade ago.
Flagship centres such as the Hamburger Meile, with its distinctive 680 metre shopping promenade, and the Gropius-Passagen in Berlin are reportedly up for sale, with financing for both centres due to expire in 2024 and 2026. The Schönhauser Allee Arcaden in Berlin and the Westfield Centro Oberhausen owned by CPP Investments may also be put up for sale, according to those who track the market.
Real I.S.-majority owned Hamburger Meile is likely to sell for between €140 million and €150 million, market sources say. However, this would represent a significant drop in value, given that ECE and Unternehmensgruppe Bruhns sold the centre in 2011 for around €250 million. The fund owns 85% of the property, while ECE investors hold 15%. The operating agreement with ECE runs until 2036.
The Hamburger Meile was restructured from 2008 to 2010 and has stabilised somewhat since COVID, with tenants such as C&A and H&M extending their leases. However, last year, footfall was still 24% below 2019s level and down 16% in terms of turnover. In follow-up leases between 2019 and 2021, ECE had to slash rents on average by 20%.
So why would investors want to buy it? Quite simply, it offers good value: with just under 63,000 sqm, that gives it a price per sqm of €2,225 which, in view of the current interest rate level and construction costs, makes it an opportune time to invest, market sources say.
Gropius-Passagen is one of Berlin’s largest shopping centres at 90,000 sqm. It is reportedly being sold by CBRE and Ambas Real Estate with a target sale price of around €280m, also representing a marked drop from the €341m Wealthcap sold it for in 2012. The €230m financing provided by Allianz Real Estate in 2018 through its Luxembourg loan fund will expire in 2026.
Shopping centre specialist and architect Carl-Christoph Pieper, managing director of Modulus Real Estate, thinks that some centres are ripe for restructuring: ‘The building DNA has to be right, especially the depth and lighting of the area as well as its development are essential criteria,’ he said. ‘At the moment, the pressure on the seller's side does not seem to be great enough. Significant write-downs will be necessary to carry out meaningful restructuring.’
Operators shaking up rental contracts
Some operators are now attempting to shake up the sector. Perhaps in a bid to regain its throne, ECE has announced plans to streamline its rental contracts and is testing a digital lease for new contracts in some of its centres. As the company says: ‘We are currently still in the pilot phase, a broad roll-out is planned for next year. The new tenancy agreement, unlike the previous one, builds very strongly on the applicable legal regulations and the case law developed from them and avoids - also unlike the previous one - explicitly repeating applicable law again in many passages for clarification or assigning all possible constellations or cases with a contractual regulation from the outset.’ The aim of the new contract model is a lease contract that is ‘as simple and transparent as possible’, which would mark a broad shift from typical, overly long retail contracts.
For Omar Tello, CEO of data company Sensalytic, turnover-linked rents would make far more sense: ‘If I want the good from retail, i.e. the high rents, then I also have to take the bad, i.e. declining sales,’ he said, pointing out that investors who still want to invest in shops have to share in the economic risk of brick-and-mortar retail.
Citti is market leader in terms of operating performance
So which are the best performing centres according to their tenants? According to the latest operator rating of the Shopping Centre Performance Report (SCPR), Citti is the market leader, scoring 1.88, with 1 being very good and 5 being poor. Interestingly, there is a good half a mark difference between Citti and the operator in second place, Jagdfeld Real Estate. And while ECE is the undisputed market leader in centre management in Germany in terms of the number of mandates, with 95 centres, it has slipped to number 8 in the rankings from the top spot prior to 2016, when Citti overtook it.
The comparison between Citti and ECE is interesting. While both companies were rated similarly by tenants in 2015 and 2016, there is now a whole grade between Kiel and Hamburg. According to the SCPR, compared to the best score of 2013 - 2.01 - ECE has significantly deteriorated. Languishing at the bottom is the Frankfurt-based investor and real estate manager, Kintyre, with 3.58.
As REFIRE reported earlier this year, 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 PwC's study "Retail in transition - Are shopping centres still fit for the future?". 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.
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, according to CBRE. 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.
Pret A Manger boosts German expansion
One retailer banking on the German market, both in shopping centres and on the high street is Pret A Manger, which will open two new shops in Berlin next month, one in the Sony Center and one on Friedrichstrasse with its franchise partner PM Nord. These will be followed by openings in Leipziger Platz, The Playce at Potsdamer Platzand Steglitzer Schloßstraße. Pret already operates shops at Berlin’s transport hubs and also has stores in Frankfurt and Düsseldorf. PM Nord has already acquired a number of CARAS stores which will be converted into new Pret shops.
‘Following the success of our shops in German transport hubs, launching the Pret brand in downtown Berlin is a major milestone in our European expansion,’ said Stephane Klein, managing director, Pret Europe.
Pret is planning to double the size of its business by 2026 as it continues to expand into new countries and regions both in Europe and across the world. It has opened new shops in Italy, Luxembourg and Ireland in the last year, and will soon be entering the Portuguese and Spanish markets.
At the beginning of this year, there were 509 shopping centres in Germany of at least 10,000 sqm, up 16 y-o-y, according to the EHI Retail Institute. However, the EHI has changed its definition. Previously, the footfall drivers always had to be grocery shops, drugstores, large fashion retailers or electronics stores. This is now no longer a mandatory requirement, as a result of which some centres have been newly included. Other centres are no longer included due to demolition or downsizing. Four new openings were added in 2022: Agnes (Göppingen), Dreiländergalerie (Weil am Rhein), Perlach Plaza (Munich) and Tegel-Quartier (Berlin).
Shopping centre yields remained stagnant at 5% in the first half of the year, retail parks gained 35 basis points to 4.4% but the biggest shift was individual specialty stores, which have risen 40 basis points to 5.5%, according to JLL.
Have we turned a corner in the retail space? For now, the jury is out. The difficulty with reinventing shopping centre sites is that it takes time and a lot of capital, neither of which landlords may be able to obtain from lenders already frustrated by the sector’s plummeting values. For now, the sector is still very much in the recovery process. However, for more opportunistic investors looking to snap up well-located and well-established centres at knockdown prices, there may never have been a better time to invest.