Southern Europe has the lowest online sales penetration of the entire continent, but this hasn’t dented its appeal for global retail property investors, writes Virna Asara.
At a time of profound structural changes for the retail industry, shopping centre-focused investors are adopting a defensive stance by targeting Europe’s less mature markets in the hope the impact from e-commerce will be less intense. As such, the Southern European region has emerged as this year’s main investment arena, accounting for six out of PropertyEU Research’s top 10 largest shopping centre transactions of 2018.
The Iberian peninsula in particular is the clear winner as it boasts the two largest shopping centre sales processes of 2018 (either concluded or still in process). In the largest transaction closed so far, South African investor Vukile purchased a portfolio of four malls from Unibail-Rodamco-Westfield (URW) for €460 mln, or a blended yield of 5.9%. The properties include the 43,423 m2 El Faro shopping centre in Badajoz, the 24,789 m2 Bahia Sur mall in Cadiz, the 17,906 m2 Los Arcos shopping centre in Seville, and the 35,220 m2 Vallsure shopping centre in Valladolid.
Similarly, Slovak developer J&T Real Estate is poised for its first foray in the Spanish market with the purchase of a portfolio of three shopping centres for some €500 mln, or a yield of around 5.45%. J&T, with operations covering a number of sectors across CEE, is expected to close the purchase from CBRE GI and Sonae Sierra in the next few weeks after having outbid rival ECE Projektmanagement which offered around €450 mln earlier this year.
When completed, the deal will represent Europe’s largest shopping centre transaction of the year.
Sector remains stable
Despite the threat of e-commerce to shopping centres, Europe’s bricks-and-mortar retail has not yet seen much major disruption in terms of investment volumes or operating fundamentals. From an operational point of view, the sector is still showing rental growth albeit at a slightly reduced pace, while tenant sales across Europe are either stable or on the rise. In terms of transactional activity, volumes have remained steady particularly in Continental Europe (see tables), says Chris Gardener, head of European retail investment at agent CBRE. ‘In the UK the numbers are a bit more erratic but they still show some stability. Volumes are in any case well ahead of the 10-year average for the sector across Europe.’
Numbers, however, only tell half the story, Gardener adds. A number of key decision-makers are based in the US and the UK markets where the retail industry is going through a profound restructuring, and their opinions are having an impact on how retail is perceived in Continental Europe. ‘The problem is therefore one of market sentiment which is always a very difficult opponent to reason with,’ he notes. ‘What we are seeing now is investors being far more selective around the retail assets they wish to pursue. This is starting to have an impact on liquidity and pricing as shown by a number of ongoing transactions.’
Against this background, it’s no surprise that global players have tended to focus on the European countries where the e-commerce penetration is less pronounced. Spain in particular – with one of the lowest retail densities in Europe, strong tenant sales and only about 4.8% of online purchases – still ticks all the boxes for investors. The market also offers the highest level of returns currently available in Europe, with IRRs of around 6%, according to market experts. As such, retail properties still represent the largest asset class in the country’s commercial property investment pie and are headed for the second-best result ever this year, says Luis Espadas, head of capital markets at broker Savills in Spain. ‘The ingredients in the Spanish retail property market are different from the rest of Europe. The market still hasn’t recovered the level of pre-crisis rents and there is to gain from playing a core-plus/value-add angle on the forecast rental growth.’ Retail property transactions amounted to €3.5 bn last year, setting a new record. For 2018, Savills expects them to be just above €3 bn.
Portugal’s 2018 bull run
Neighbouring Portugal has also had a record run so far and there are no signs of the market slowing down, with a string of sales due to close before year-end. Landlord Sonae Sierra is currently seeking over €300 mln for three Portuguese shopping centres in a move aimed at taking advantage of the strong trading momentum in the country. The Portuguese shopping centre owner is said to be selling GaiaShopping and ArrabidaShopping, both in Porto, through broker JLL for a price in the region of €250 mln. Sonae is also looking for a new owner for a smaller retail asset on the island of Madeira. The 27,000 m2 shopping centre opened in March 2001 and provides 98 stores. Also on Madeira, local private equity firm ECS Capital is seeking bids for its La Vie Funchal shopping centre. The 16,000 m2 property is expected to fetch around €60 mln in a sale process run by CBRE.
Brokers estimate that shopping centre investment in Portugal will break a new record this year. ‘The level of investment has surpassed all our expectations and reflects the preservation of a high global liquidity and the prospect of a significant increase in rental values in Portugal,’ comments Cristina Arouca, research director at CBRE Portugal.
So far this year, the two largest shopping centre deals in the country both feature Blackstone on the sell side. The US asset management giant first divested three assets - Forum Sintra, Forum Montijo and Sintra retail park – for about €450 mln to Immochan, French retail giant Auchan's property arm.
In a separate transaction, Blackstone also sold its crown jewel – Almada Forum in Lisbon – to Spanish REIT Merlin Properties in a deal valued at €407 mln.
The disposals – which leave Blackstone with only two retail parks in the country, Santarém and Alverca - are part of a larger sales process by the New York-based private equity firm in Southern Europe. In Spain the group currently owns only one asset, Espacio León, which was bought in 2015. Although the 36,600 m2 asset isn’t currently in any open-market sales processes, it is believed to have been presented to investors on an off-market basis.
Blackstone is also seeking to cash in on its retail assets in Italy to take advantage of favourable conditions in the sector (online sales in Italy are 3.4% of the total retail market and are expected to be short of 7% in 2022). Here, the US group has hired broker JLL and financial advisory group Rothschild to divest its retail outlet portfolio valued at over €800 mln after having sold the bulk of its Italian shopping centre assets to Partners Group earlier this year. The platform, one of the largest in Italy, comprises five upmarket factory outlet centres throughout the country, located in the regions of Lombardy, Tuscany, the Venice region and Puglia for a total of 150,000 m2 over 650 shops, with an occupancy rate of 95%.
Although commercial real estate investment in Italy as a whole has dropped by a quarter so far this year, the retail sector has bucked the trend with a 22% increase in investment volumes in the first nine months of the year. Long-term investors and particularly retail specialists remain confident and are also taking some development or letting risk, says Silvia Gandellini, head of retail investment at CBRE Italy. ‘New projects such as those of Westfield and Lend Lease in Milan are clearly an example, but also the recent acquisition of the 8 Gallery in Turin, where AXA and Pradera spent over €100 mln and assumed the letting risk on the expansion phase,’ she notes.
Southern Italy – traditionally a no-go area for foreign investors – has surprisingly shown a strong performance, buoyed by the almost non-existent e-commerce penetration in the region. In February, CBRE GI gave it a €135 mln vote of confidence by acquiring Gran Shopping Mongolfiera in Bari while Luxembourg-based group GWM and its partners spent €145 mln on Centro Sicilia – the largest mall on the Sicilian island. Meanwhile, Blackstone’s Multi retail platform is currently marketing Forum Palermo through JLL with a price tag of €200 mln. One of the largest malls in the Sicilian city, the asset provides more than 48,000 m2 of gross lettable area over 124 shops and 2,500 parking spaces.
Where is the retail supply coming from?
Despite concerns over e-commerce, most of the retail portfolios launched for sale this year is currently under offer, including a €600 mln portfolio of Polish retail assets put up for sale by Cromwell in March. According to market sources, CPI Property Group has won the race to acquire the Cromwell Polish Retail Fund and its eight shopping centres and hypermarkets in the country.
However, some evidence of weakening appetite or ongoing price corrections in the sector is beginning to emerge. In Germany, where online retail penetration is one of the highest in Europe, investment in shopping centres collapsed to a new historic low of €467 mln in the first half of this year, or a 63% decline year-on-year, according to research from broker JLL.
Also, URW’s putative sale of a portfolio of three shopping centres in the country to an entity backed by Italian insurer Generali fell through at the end of October for reasons yet to be revealed. Sources say that URW will break up the portfolio and market the assets separately due to the weak appetite for shopping centre portfolio deals in the country. The assets - Palais Vest in Recklinghausen, Minto in M?nchengladbach and Gera Arcade in Gera - provide around 124,000 m2 of retail space and were expected to fetch some €300 mln.