European retail is becoming cheaper and attracting opportunistic investor interest, says Savills, but the share of retail investment is narrowing.
In H1 this year retail investment in Europe fell by -39% YoY to €11.2 billion and the share of retail dropped to 15% of the total real estate investment, compared to a five-year average of 19%. This is a continuation of a trend seen over the last few years, as retail investment as a proportion of total volume has trended downwards.
The majority of retail investments took place in Germany (29%) and the UK (27%), followed by the Nordics (Norway 13%, Denmark 7%, Sweden 3%, Finland 3%). Against the general trend, activity was up in Norway (177% YoY), Denmark (83%) and the UK (47%).
The UK has seen a rise in opportunistic interest in the sector in the last quarter, supported by significant yield correction. These recent developments in the UK tend to forecast real estate developments in the Continent, says Savills, predicting therefore that the European retail sector will become more attractive to opportunistic investors.
“We expect that in the coming quarters there may be a rise of opportunistic interest in the European retail segments that show significant repricing”, said Eri Mitsostergiou, director, Savills European research. “Given the market context, understanding and selecting the ‘right’ retail stock is fundamental. Currently the factors that drive prices down are structural, which may allow some assets to adapt to new consumer habits, while others may need to change use altogether”.
In a world where high yields are increasingly hard to find, whether in real estate or other sectors, good UK shopping centres where there is a credible story around tenant demand and consumer need are starting to look attractive again. Prime achievable yields for shopping centres in Q2 were at 6.75%, according to the international real estate advisor.
In the short term a strong recovery in consumer spending may support some optimism for retailer performance and lead to further polarisation between prime and secondary pricing, said Mitsostergiou. “In the long term we don’t expect the recovery of retail yields to be as strong as in the previous cycle”, she said.
Against the general trend of falling investment in retail, investors are showing confidence in the food and convenience segments, which for the second year in a row attracted 40% of retail investment.
“Assets related to the food sector, such as discounters, supermarket anchored retail schemes and, to a lesser extent, hypermarkets have been attracting multiple bids and yields are moving in”, said Jörg Krechky, Chairman European Retail Investment Board, Savills. “The stability and length of income streams make this segment desirable, especially for investors with long-term liabilities. The sector was traditionally capturing 5-6 per cent of total retail investment, but this year soared to 23%”.