Investors eye food retail

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Markets

Investors are turning their eye to food retail in Germany, due to constant increases in turnover, according to a new study by BulwienGesa.

The study, ‘Food Retail in Germany – Market Structure Data 2016’ was carried out on behalf of TLG Immobilien.

There are 123.7m sqm of retail space in Germany, which equates to 1.51m per person, thereby placing Germany fourth in Europe. Of this total, food retail accounts for 35.6m sqm.

Retail turnover has increased by around 13.1% since 2010, reaching €483b in 2016, with the share of online retail at 10.9%, according to the study. In food retail, at 16.6% the increase in turnover was even higher, whereas the share of online retail in the turnover of the food segment was significantly lower at just 1.5%. German households spent €215b on food, drink and tobacco in 2016, up 19.6% from €180b in 2015, according to the study.

One investor tapping into food retail is Hamburg-based real estate investment manager Warburg-HIH, which launched a new German retail fund this month, which it intends to grow to €450m, Alexander Eggert, managing director product, business and fund management at Warburg-HIH, told REFIRE earlier this month. The fund, Warburg-HIH Perspektive Einzelhandel: Fokus Nahversorgung, has already raised €100m and will focus on supply centres throughout Germany, according to Eggert, that are anchored by strong supermarket chains such as Edeka, Aldi and Rewe.

Investors are eyeing the sector due to strong rental growth, according to the study. Food retail rents have increased by 25.5% overall in western Germany and 24.9% in eastern Germany since 2000. However, due to strong investor interest in retail properties, returns have decreased in almost all locations in recent years. This effect has been strongest in Berlin, where returns declined from 6.4% to 5.1% between 2008 and 2016. At 6.7% in 2016, the highest returns were in C and D-rated cities in eastern Germany. Compared with other asset classes, retail properties remain attractive to investors who value them because of their stability and long-term security.

‘Based on the overall market environment and the attractive macro development for food retail, we expect a consolidation of the relevant investment market on a high level this year,’ Niclas Karoff, member of the management board of TLG IMMOBILIEN, told REFIRE. ‘There were around €5bn of deals between January and May 2017, of which €1.8 bn were commercial buildings, €1.2 bn shopping centres, €900m in special retail centres and €1.1 b others,’ he said.

Investors are also enticed by Germany's restrictive building laws, which protect existing retail spaces, especially in central supply areas, against new competitors. Rental agreements are normally very long-term and partially indexed, thereby providing landlords with a relatively high degree of security. The food retail segment in Germany is characterised by creditworthy anchor tenants and their willingness to enter into agreements with terms often in excess of 15 years. Moreover, rental terms of up to 10 years, including extension options, are often agreed with supplementary tenants such as health and beauty retailers, non-food discounters and textile stores. Overall, therefore, convenience shopping in good micro-locations offers secure, long-term rental income, according to the study.

However, going forward, food retailers – and investors – will have to be mindful of changing demographics. By 2060, 33.7% of the German population is expected to be over the age of 65, up from 21.4% today. Subsequently, retailers will have to focus increasingly closely on the requirements of older people, such as wider aisles, lower shelves, larger product labels and more seating. At the same time, regional differences will also intensify going forward. Whereas the population in densely populated areas is expected to remain stable, the population in many rural regions and in areas of eastern Germany is expected to decline considerably by 2060.

A good example of investment with a focus on food retailing is a recent deal completed by acquisitive Irish investment group Greenman Investments who partnered up with Quilvest Real Estate to buy an inner-city retail property in Bergisch-Gladbach, across the Rhine from Cologne in North Rhine-Westphalia, from MEAG, the asset manager of insurer Munich Re and Ergo.

The property, the "RheinBerg Passage" hybrid shopping centre, opened in 2007, and was bought by MEAG and Ergo's German SuperStores real estate Spezialfonds in 2008. Greenman and Quilvest Real Estate plan to redevelop the property and reposition its tenant structure so that it can meet the growing consumer trend for gastronomical experience and a demand for a wider variety of groceries and retail options, and are currently negotiating with large food retailers.

John Wilkinson, the ebullient CEO of Greenman Investments, was very enthusiastic about the new concept for the RheinBerg Passage with its primary focus on food retailing. With Bergisch-Gladbach's population of 110,000 and its proximity to the Rhine and Cologne, the city enjoys a purchasing power index of 116.9, giving it a higher spending ower than most other German cities.

“In RheinBerg Passage, we have acquired an attractive property in a superb high-street location that comes with a high value-add potential. We are firmly convinced that our strategic approach will help to enhance the quality of stay at the arcade and boost the appeal of the inner city in a sustainable way,” said Wilkinson.

Commenting on the investment, Marc Manasterski, Global Head of Quilvest Real Estate said: “The RheinBerg Passage fits our investment strategy as the asset possesses strong fundamentals, such as its high street location and strong catchment area, with Bergisch Gladbach residents demonstrating higher than average purchasing power. It also has great potential for development, by creating greater variety within the tenant structure and improving the internal layout.”

Hybrid shopping centres like RheinBerg Passage are smaller than retail warehouse parks and shopping centres. They cover the entire retail spectrum of food and non-food merchandise with a similar concept and tenant structure as a warehouse park. Their big attraction, however, is their location in the centre of towns and cities, usually covering two floors similar to shopping centres.