There is a new topic of conversation in European commercial real estate: will high quality, dominant, prime shopping centres come up for sale? And, if so, will they be priced by owners at market-clearing levels?

It is a debate that has not really received airtime yet because investors are only just beginning to tune into the situation, and it is too early to talk about examples.
However, some of the most experienced specialist shopping centre investors and asset managers are convinced of the opportunity. Exactly when that will arise remains open to conjecture, but if they are correct, in two to three years’ time everyone will be talking about this as a feature of the European real estate landscape.

Florencio Beccar, the former fund manager of CBRE Global Investors’ European Shopping Centre Fund, is among those who strongly believe current factors will lead to high quality prime centres becoming available. Beccar is CEO of Axis Retail Partners backed by Italy’s Generali Group to the tune of €500 mln to buy prime malls (see page X). He says: ‘We think that given the current market situation, the kinds of assets that normally don’t trade, will trade.’

In his opinion, many of the best shopping centres in Europe have been kept under the same ownership for a long time in portfolios which owners do not usually like to exit. In some instances, owners have held them for 10 or even 20 years. However, this is a time when owners could feel compelled to reduce their exposure to retail assets – the most under-pressure sector in the market – because they feel the need to prove the value of their assets as their share prices continue to trade at large discounts to NAV. ‘We don’t think there will be big discounts at the top of the market, but interestingly, we do think we’ll be able to get our hands on those assets,’ says Beccar. ‘The conditions and bargaining power even for those is better at the moment and we think they will provide a lot of opportunity in the coming 24-36 months.’

Negative sentiment
At the heart of this conviction is the continued negative broad-brush sentiment towards retail in general, stoked by worrying problems for bricks and mortar retailers as e-commerce continues its advance. This has been exemplified most recently in the UK by department store chain Debenhams which at press time was in urgent need of a financial lifeline. Debenhams has stores located across British high streets and anchors plenty of malls as well. Arcadia, which owns six fashion brands, is also on the precipice of entering into a Company Voluntary Arrangement in the UK, following in the footsteps of unfortunate peers.

On the Continent, too, many retailers and store chains are under pressure and struggling to survive. In the Netherlands, a string of bankruptcies followed the demise of department store chain V&D in 2016, many of whose stores were taken over by Canadian newcomer Hudson’s Bay Company.

The combined effects of costs and changing consumer habits are taking their toll. Within this context, there are strong rumours of some funds seeking to liquidate assets. Some of these funds are coming towards maturity. In other instances, the owners are listed and could do with freeing up liquidity, proving their NAVs and decreasing their retail property exposure at the same time. People aware of these funds see assets being marketed for sale surreptitiously as ‘testing the market’. One person who did not wish to be quoted says: ‘I think in 6 or 12 months there will be much more proof of this because at that stage everyone's testing the market. Right now, the market feels very dry, very flat.’

UK investment slump
It is the UK where anti-retail sentiment has been felt most sharply in Europe. Shopping centre investment volumes have slumped around three quarters in a row. Usually, an average year would yield £4 bn (€4.67 bn) of deals, but there were only £1.25 bn of shopping centre transactions in 2018. This year it could be less.

John Griffin, head of the investment team at UK advisor Lunson Mitchenall, believes that once all the retailer CVAs have been worked through the system, there is more Brexit clarity and Sterling currency risk declines, investors could reach a level at which they are comfortable with occupier stability. At that point, investment appetite for UK shopping centres could resume.

Property investors are pulling money out of UK real estate funds even quicker than in the immediate aftermath of the 2016 Brexit vote, according to Calastone’s Fund Flow Index, and it is UK property institutions and REITs that still own a number of the better-quality shopping centres. Hammerson is a REIT which owns Brent Cross shopping centre in London and the Bullring in Birmingham. It plans more than £900 mln of sales in 2019 and is being pressured by US hedge fund shareholder activist, Elliott Advisors. Intu, another UK REIT which owns the UK’s largest network of 20 shopping centres, has announced a £1.4 bn valuation write-down. Intu is reportedly in talks to sell a 50% stake in its mall in Derby to Cale Street, whose main investor is Kuwaiti. Meanwhile, the head of retail at another UK REIT, Landsec, has departed.

‘I think you will see more transactions over the next 12 – 24 months, and I do see some of the better-quality assets being traded,’ says Griffin.

Lunson Mitchenall was advisor to the buyers in one of the few big deals last year. It advised M&G Real Estate which in turn was fronting an Asian investor to buy a 50% stake in Highcross shopping centre in Leicester for around £236 mln. Looking back over big-ticket deals, it is new overseas buyers that have been particularly active. Perhaps the investment criteria of such players have different drivers than those of others. Korean investors, for example, are looking for cash-on-cash returns. Such owners are not necessarily as wedded to holding assets for as long as their predecessors, so should they end up as buyers, further trades in the years to come are possible further reversing the trend of top shopping centres rarely trading.

Market polarisation
In Continental Europe, similar factors are at play, though in the UK the effects have become evident more quickly. Intu has said it is looking at sales in Spain as wells as the UK, and European investment market professionals believe Intu would never have considered such sales unless pushed into it.

Liad Barzilai, CEO of Atrium European Real Estate which owns 34 food and fashion-anchored centres in Central & Eastern Europe, says there has been a ‘polarisation’ in the market, though the out-of-fashion sentiment towards retail has been exaggerated in his view.

When his company looks at centres in cities with strong fundamentals, good catchments and strong demographics, they are performing well and will continue to do so, Barzilai says. Nevertheless, he too, smells opportunity.

‘Companies are feeling the pressure in the capital markets especially. I believe there will be opportunities. In addition, you have to take into account those funds that invested maybe 5 or 7 years ago will need to sell up. I think we may see more strong assets on the market, which could potentially prove an opportunity for buyers, but in reality, I'm not sure that the owners will move a lot on pricing.’ He emphasises, ‘There might be more opportunities to get your hands on assets that weren’t available 12 months ago, but on the good assets, I don't expect to see big shifts in pricing.’

This might explain why shopping centres and retail assets more generally that are on the market haven’t traded fast. The rumoured sale of the Ballonti Centre in Bilbao by Germany’s Deka has taken a year. Meanwhile, the line-up of buyers for retail assets is thinner than in the past.

High street retail
For prime high street retail, investor sentiment seems to mirror that for shopping centres. High street retail investor Trophaeum, which owns assets in Albemarle Street in London’s Mayfair, is currently rapidly buying up Milan luxury retail assets. ‘There are a few prime properties that I’ve heard of coming available from the big property funds,’ says managing director Matt Farrell. ‘As those funds are looking to liquidate quickly – which is probably not the right thing to do long term – they’re divesting the assets that are the most liquid, i.e. those in city centre top locations, such as prime streets in London. But the assets are always top prices, reflecting those exceptional locations – we’re not seeing discounts at all.’

Rik Eertink, fund manager of retail EMEA at CBRE Global Investors, feels all asset classes within retail property seem to have been tarred with the same brush. He agrees the volume of retail investment across Europe is relatively low, but his firm senses there is a high number of potential assets on the market.

His strong warning and advice are: ‘There is a risk of mispricing. For every equity play, you have to keep timing on your side and ensure the asset is as dominant locally as it can be.’

Interestingly, his conviction is the amount of successful retails spots in Europe will diminish over time. The right asset management approach is to ensure a shopping centre becomes even more locally dominant, and that might require investment in other asset classes. ‘A shopping centre over time in an urban context is much more than retail only,’ he explains. ‘It is not a co-incidence that Unibail-Rodamco-Westfield is striking up partnerships for example in the residential sector, as we saw last month. We also know Ikea, together with Cushman & Wakefield, is allocating billions of euros of their equity into the inner cities.’

Jon Lurie, managing partner of Realty Corporation, agrees there could be opportunities to pick up assets. But even if investors are able to get their hands on assets it will not be enough for new owners to just hold them without action. He warns: ‘Additional capital and significant creative expertise need to be applied to transform centres to meet evolving customer tastes and preferences. Weak tenants need to be managed out, and new concepts need to be tested.’