ANALYSIS: Sentiment is starting to give way to sense on retail

Transaction volumes are down dramatically across Europe this year but investor sentiment towards bricks-and-mortar retail is beginning to improve.

Two years into the retail property crisis, low sentiment about bricks-and-mortar retail has finally filtered through to the transactional market and is expected to result in the poorest investment figure this year since the global financial crisis.

According to research by CBRE, Continental European retail investment plunged by as much as 40% in the first half of the year, and is expected to remain well below the five-year average for the whole of 2019. Nevertheless, there is some cheering news, says Chris Gardener, head of EMEA retail capital markets at agent CBRE. ‘There has definitely been a shift in some investors’ attitude towards retail,’ says Gardener.

‘A year ago investors wouldn’t even look at this segment, while today they are prepared to engage with certain types of retail, so all in all the mood is more positive. I wouldn’t say there is huge appetite for retail yet, but investors have become more tolerant towards the sector than they were 12 months ago. They are willing to engage in sensible conversations, with sensible owners at sensible pricing.’

Top deal list
PropertyEU Research’s top 15 retail deals of the year so far reveals that capital is being drawn to assets that are seen as more resilient to the impact from e-commerce. Geographically, this has resulted in a stronger appetite for properties in  Central and Eastern Europe, where e-commerce is still in its infancy and retail sales are forecast to expand strongly in the near future.

As such, Poland ranks high in the top deal list of 2019, with four transactions out of a total of 15. ‘Central and Eastern Europe is arguably one phase behind most Western European countries in terms of retail market evolution, and the chances of rental growth appear to be higher,’ Gardener says. ‘This makes the region more attractive for investment.’

Against this background, German commercial real estate owner and operator ECE splashed €300 mln on the acquisition of two Polish shopping centres from Central and Eastern Europe-focused retail specialist Atrium European Real Estate. Acquired for the ECE European Prime Shopping Centre Fund II, the deal includes Atrium Koszalin, located in Koszalin, and Atrium Felicity in Lublin. According to Atrium, the sale represents a surprising premium of around 3% to book value at a time when most deals are being closed at a bargain.

Similarly, Johannesburg-listed EPP bought another four Polish M1-branded shopping centres for €224 mln while Cromwell Property Group took over seven shopping centres in Poland for around €600 mln. ‘The reason for making the purchase now is that the firm believes the long-term forecast for Poland is good,’ Cromwell Property Group said in a statement. ‘It has been Europe’s fastest growing economy for the past five years and the country has one of the highest expected growths in disposable income, consumer spending and retail sales globally.’

Interestingly, traditional malls have virtually disappeared from this year’s top deal list and have been replaced by portfolios of neighbourhood grocery stores as well as convenience-led retail assets, designer outlets and supermarkets. This includes Generali’s acquisition of a portfolio of Monoprix assets in France for €600 mln, the third-largest retail transaction so far this year, as well as the purchase by Realty Income Corporation of a portfolio of 12 superstores from British Land for €495 mln and the acquisition by Apollo Global Management of 32 hypermarkets and supermarkets outside Paris. ‘Essentially, properties that figure high on the investor list have tenants that are especially resilient to e-commerce and who are growing. This applies above all to food concepts, textile discounters and drugstores,’ comments Jan Linsin, head of research at CBRE Germany.

Gardener points to four key elements for a successful shopping centre in today’s climate.  ‘A retail asset must be relevant to its catchment area, dominant, have an element of convenience, and boast performance showing resilience and growth. The main factor is how relevant the asset is to the consumer today, because there needs to be another reason than just buying a shirt to go there.’

Market repricing
Shopping centres in this year’s top deal list include Italie Deux, the second-largest mall in Paris and a dominant retail and leisure destination in the 13th arrondissement on the left bank, with 130 units across 61,000 m2 of space, plus a 4,500 m2, 1,000-seat theatre. The asset was sold earlier this year at a 4.1% net initial yield representing an 8.5% discount to the December 2018 book value.

The deal exemplifies the ongoing repricing taking place in the retail property arena, where even prime, dominant assets are trading below market values. And this is expected to continue over the next months, according to Gardener. ‘Valuations always tend to lag market sentiment,’ he says. ‘Whereas an investor mindset is forward looking and focused on acquisitions, it certainly isn’t matching vendor valuations. We will see a continuation of this discounting however, it will remain less pronounced for quality assets.’

While the re-pricing has been marginal in the case of direct retail asset deals, it has been unforgiving with retail-focused platforms which are trading at massive discounts to net asset value. Such a significant markdown has prompted a wave of M&A activity in the sector of late. This includes Orion Property Partners which this summer doubled its stake in Intu, taking advantage of the UK REIT’s 80% discount to NAV, but also Tel Aviv-listed Gazit Globe’s aborted bid for CEE shopping centre specialist Atrium and the purchase by Johannesburg-listed real estate investment trust Growthpoint Properties of a 51.2% stake in UK shopping centre investor Capital & Regional. At 33 pence a share, the offer for Capital & Regional represents a premium of around 100% to the closing price of the company’s shares on the day prior to the announcement. Yet, it still reflects a massive 50% discount to the company’s NAV per share per end-June 2019.

Year-end forecast 
Although the year is not expected to end with a flurry of transactions, it is forecast to get a boost from a couple of major deals pending in Spain and Portugal. In Portugal, local shopping centre specialist Sonae Sierra is believed to be on the verge of closing the disposal of three assets - 8ª Avenida which encompasses 20,000 m2 in S. João da Madeira, the 39,000 m2 Loure Shopping and the 44,500 m2 Riosul shopping in Seixal. Meanwhile, CBRE GI is closing the sale of Forum Aveiro in the Portuguese northern coastal city of Aveiro to Portuguese shopping centre specialist Mundicenter, according to sources. The mall - a dominant shopping destination favourably located in the city centre – is expected to trade for some €90 mln.

In Spain, troubled UK retail specialist Intu is selling two of its flagship malls – Intu Asturias and Intu Puerto Venecia - for a total of over €400 mln. According to well-informed market sources, Intu is in advanced talks with ECE on Intu Asturias, while finalising negotiations with Generali’s newly launched Shopping Centre Fund on the Puerto Venecia asset. Both properties are owned on a 50-50 basis together with Canadian pension fund CPPIB, which has no intention to exercise its right of first refusal on the assets. Intu’s stakes in Puerto Venecia and Parque Principado were last valued at €268 mln and €161 mln respectively. They were bought for €225 mln and €80.5 mln back in 2014 and 2013. 

Intu is also talking to its joint venture partner, TH Real Estate’s European Cities fund, with regard to a potential sale of its stake in the Xanadú centre in Madrid. The asset was bought in 2017 from Canadian mall investor Ivanhoé Cambridge for €530 mln, or an initial yield of 4.3%.  Meanwhile,  CBRE Global Investors is understood to be selling the Parc Central shopping centre in Tarragona, to the south-west of Barcelona. The scheme encompasses 110 shops over 32,000 m2 of retail space and includes a multiplex, an Eroski hypermarket as well as 1,000 parking spaces. It is likely to fetch around €150-160 mln.

The deals are expected to breathe some life into Spanish shopping centre investment which amounted to as little as €500 mln in the first nine months of the year, down dramatically on last year’s figure of €1.5 bn. ‘Transactions completed so far point to a steep repricing for secondary assets,’ says Luis Espadas, head of retail Spain at Savills Aguirre Newman. Castellana Properties, a €1 bn Spanish REIT focused on retail and one of only a few active buyers these days, acquired Puerta Europa in Algeciras in August for a yield of 7%, the same yield as for the Ballonti shopping centre in Bilbao which was sold by Deka in the largest Spanish shopping centre sale of the year. The asking price for this asset had been below 6% 18 months earlier.

Similarly, Sonae Sierra sold Dos Mares in San Javier to Tomás Olivo, the owner of  the Spanish REIT General de Galerías Comerciales, for a yield above 8%. ‘We are talking about a big correction - 100-150 basis points - and this is mostly a result of investors’ concerns about the sector and the evolution of the market,’ Espadas notes. ‘Because if we look at fundamentals in Spain, performance is still good, rents are stable, the sales are there, we are not foreseeing any adjustment.’

Eventually, sense will win over sentiment, Gardener adds. ‘The hope is that people look into retail with a rational mindset again,’ he comments. ‘So that if you show the key performance metrics for an asset and demonstrate that the property has continued to grow with tenants trading well, then the client keeps an open mind towards that product and doesn't just turn their back on it because we are talking about retail.’

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