Outletcity Metzingen
Outletcity Metzingen, one of the factory outlet centres in Germany
For the first time since 2009, the German retail market ended the second quarter with a transaction volume below €1 billion, as investors continue to be spooked by large-scale deals, according to JLL.
There were €925 million of retail deals between April and June, taking the year’s total to €2.6 billion, a drop y-o-y of 24%, or down 39% compared to JLL’s own five-year average. Investors are continuing to shy away from large scale deals: there have only been three deals in excess of €100 million so far this year, compared to seven in the same period last year.
‘The retail sector is unable to completely escape the very subdued overall investment market in the second quarter but the declines are much milder than in other asset classes, which is partly due to the fact that the pricing debate started much earlier - namely during the pandemic,’ said Sarah Hoffmann, head of retail investment JLL Germany. ‘Accordingly, the retail real estate market is more resilient in this challenging market situation. The market continues to be agile, but in smaller size classes.’ For example, the number of transactions increased from 42 to 53 from the first to the second quarter, but at the same time the average volume decreased from €40 to €18 million. Overall, this brings the market to 95 transactions at the half-year point, down from 163 a year earlier.
Department stores accounted for the lion’s share of retail investment at the half-year mark, at 43%, which was largely due to the KaDeWe investment and Signa's stake in eight Galeria stores. Shopping centres accounted for 21% of the total and specialty stores for a combined share of 29%. ‘After specialist store products were the darling of investors in recent years, it is becoming increasingly apparent that shopping centres are also back on the buying lists, including most recently the Tibarg Center in Hamburg,’ Hoffmann added.
Predictably, investors are focusing on security and quality: Core products accounted for around 42% of the total transaction volume, and core plus for another 49%. Value-add and opportunistic products are being left on the sidelines, accounting for just 4% and 5% respectively. Foreign players are also more muted, taking just 35% of the total.
Insolvencies in German economy soar by 20%
However, it is an exceptionally challenging time for both retailers and investors. In the first quarter alone, 27 fashion and shoe retailers filed for insolvency, including fashion chain Peek & Cloppenburg, shoe retailer Reno and the Galeria department store group. The number of insolvencies in the economy overall also rose by 20%. The fashion industry has been under pressure for years, losing sales to online retailers, struggling with deeper losses during the pandemic and now inflation and higher costs are exacerbating the problem.
Nonetheless, insolvency doesn’t have to mark the end of a retailer and there can be a competitive advantage for companies who reposition themselves during insolvency proceedings. Take Bonita: the former subsidiary of fashion retailer Tom Tailor had to file for bankruptcy three years ago, which got rid of the company's debts and made it easier for it to reposition itself strategically. Today, Bonita is profitable and growing at a significant double-digit rate.
How consumers shop since the pandemic has also changed and to be successful, retailers will need to tap into that. Consumers increasingly like to shop close to home and not necessarily in the city centre, according to a recent study by the Ifo Institute. The Munich-based research team looked at Berlin, Munich, Hamburg, Stuttgart and Dresden and found that private spending in the city centres in March 2023 was still 5% below the level of 2019. ‘At the same time, residential areas and suburbs are seeing strong sales gains,’ said Prof. Oliver Falck, director of Industrial Organization and New Technologies at the Ifo Institute. In particular, where work could be done from the home office, private consumer spending increased by up to 30%, according to the study. This shift in consumption occurs primarily on weekdays. For the study, they used anonymized data on retail sales from Mastercard, among others. Stefan Hertel, spokesman for the German Retail Association (HDE) agrees, noting that the pandemic ‘certainly reinforced the trend for people to shop more in their own neighbourhoods again’, which is continuing to hurt retailers in the city centre.
9,000 stores expected to close in Germany this year
Worryingly, the HDE expects around 9,000 stores to close this year in Germany, most of which are small stores with one-to-three branches: ‘The discussion about the future of our city centres is in full swing in many places,’ said Dirk Wichner, head of retail leasing at JLL Germany. ‘Currently, retailers are focusing primarily on the prime locations in the major cities, because they expect the corresponding frequencies and also sales here.’
Even the former investor darling, grocery-anchored retail, is struggling: ‘The half-year figures for grocery-anchored local shopping centre properties are below expectations, even though there is basically active investor demand for this segment,’ said Ulf Buhlemann, head of retail investment Germany at Colliers. ‘Similar to other asset classes, the price expectations between owners and buyers are currently too far apart.’ Under high demand pressure, yield compression started comparatively late and strongly from 2019, but the prices achieved into 2022 can no longer be afforded given the current financing conditions. ‘Numerous portfolios with creditworthy tenants and long contract terms are currently being marketed, the conclusion of which largely depends on agreement on the purchase price,’ he added.
Prime high street yields are also very mixed at present. While the top markets of Munich and Berlin each rose by 20 basis points to 3.20% and 3.30%, Hamburg (3.40%), Frankfurt (3.50%) and Düsseldorf (3.60%) each saw an increase of just ten basis points. Cologne and Stuttgart, for their part, remained unchanged at 3.70% each.
Shopping centre yields also remain stagnant at 5%, 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%: ‘Following the subdued second quarter, we expect the market to regain momentum in the second half of the year,’ Hoffmann said. ‘Various marketing activities have already been initiated, but the processes - as in all other asset classes - are currently also taking a little longer.’
German factory outlets most in demand
And as households struggle more financially, factory outlets are also becoming more popular. According to an analysis by Savills, factory outlet centres have become more attractive in Europe in recent years as many consumers cut back on spending on non-basic consumer goods. A recent survey conducted by the consulting firm ecostra asked international brand manufacturers which European countries offer the greatest expansion potential for such outlets: Germany is the country most in demand among industry representatives - at 46%, almost one in two companies said they planned to expand there within the next three years. This is followed by France (35%), Spain (29%), the UK (19%) and Italy (19%).
‘Outlet centres are not only extremely popular in Germany, they also attract customers from further afield, and the conscious decision to take a longer journey is usually accompanied by a specific desire to treat oneself and spend money,’ said Daniel Kroppmanns, director and head of Retail Agency Germany at Savills. ‘This often leads to an increased conversion rate, which makes retailers happy. Reduced prices for branded goods, especially in the luxury segment, are particularly attractive to customers.’
According to Savills, Germany's top position in the survey is mainly due to its high GDP per capita (€46,149) and the low density of outlet space per inhabitant compared to other European countries: Germany has just 4 m² of FOC space per 1,000 inhabitants compared with 11 m² in the UK and 12 m² in Italy.
McArthurGlen is the largest operator of factory outlet centres in Europe and operates 25 locations in nine countries. It already operates three locations in Germany, including the "Designer Outlet Neumünster". Construction of a fourth site in Remscheid is currently underway and is expected to open in 2024/2025. Neinver ranks second with 19 managed outlet centres, including 'The Style Outlets' in neighbouring Roppenheim, France, which is located close to the French-German border. This strategic location allows the outlet to benefit from an extended catchment area, attracting customers from both countries. Neinver is the only industry player in Europe to have obtained sustainability certification for all the outlet centres it operates.
