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ACROSS RETAIL TALK: INVESTORS’ VIEW ON THE PLACEMAKING INDUSTRY – “The window for opportunities is wide open”

“The money is there but is selective” – There are and will always be investments in retail real estate. Investing in retail real estate is particularly attractive since the industry has come through the crisis faster than other asset classes. In the latest ACROSS Retail Talk, “Euphoria, a new dawn, or more of the same?” sheds light on the investor’s perspective for 2024, a high-caliber panel concluded: There are more opportunities than ever, not only in the CEE-market, but also in so called struggling markets like Germany and Spain.

The moderator of the ACROSS Retail Talk is Klaus Striebich (RaRE Advise).

The discussants of this episode are:

  • Rüdiger Dany, CEO of NEPI Rockcastle
  • Steffen Hofmann, Managing Partner at ambas Real Estate GmbH
  • Dr. Volker Kraft, Managing Partner at ECE Real Estate Partners

The mood of the industry

Without a doubt the mood in the retail real estate industry is mixed. This year´s MIPIM, which took place a week ago, was a good barometer of sentiment.

Rüdiger Dany states that he came back from Cannes highly motivated. NEPI Rockcastle, based in Romania, sees more opportunities in the market than challenges. According to him, the European market is a little bit splitting apart, depending on the region in which you are doing business. While Western Europe is stagnating, Eastern Europe is outperforming Western Europe at the very moment. His company, Nepi Rockcastle, has seen double digit growth for the past two years, strong demand by retailers moving into these countries, as well as investors willing to invest in this region.

Volker Kraft agrees that there are opportunities: “I am cautiously optimistic.” Investors conclude that it is a good time to invest. There is a general consensus that it is an attractive time to buy retail in general. That means a window of opportunity for the next two to three years. However, there is a lack of equity. This creates huge opportunities for those that are willing to commit and those who have funds available. Yet, it will take some time until we see transaction material.

Steffen Hofmann and ambas see as many risks as opportunities. The big picture has changed for the better. Retail Real Estate has seen a price correction that other asset classes are experiencing at the moment. We have mastered the Covid-19 storm. KPIs for many assets show a resilient trend which is positive, and investors feel that they can price the risk and opportunity of retail again, which makes it interesting going forward.

Dealing with the challenges

Retail has reached the bottom, which is a good new starting point. Nevertheless, we face increasing prices, high interest rates, lack of equity and pressure on the rental income stream.

Dany: When looking at financing, it depends very much on which companies are looking for funding and what are the reasons for it. The bond markets have reopened. For Nepi Rockcastle, that is crucial because it is obviously a source of funding that is not encumbering their assets. If the ECB will go down further with interest rates, that opens additional funding resources for them. When looking into the equity markets, in general, there is market for real estate. It is just very selective. We all know cases where bonds and also the equity issuance were oversubscribed. But there is a trend that opens the doors for funding.

Kraft: Yes, the market is wide open. We don’t have restrictions on the debt financing side. The more significant challenge is equity with large shopping center rates. Many are still trading significantly below NAV, making it challenging to increase capital without being dilutive. When it comes to private investors, pension funds, sovereign wealth funds, etc., they’ve expanded their allocations to real estate, especially in Germany, over the past ten to 15 years to very high quarters close to the regulatory barriers. Therefore, it’s tough for them to take advantage of the market situation. Nordic and Anglo-Saxon capital is more readily available to take advantage of the situation. First the opportunistic buyers come, then the value add buyers follow, and core value comes last. Regarding operating factors, we actually saw a pretty healthy rebound of sales across ECE´s portfolio. Interestingly, consumers in difficult times hold back on consumption, but typically on large items like cars or a new kitchen. In return, they treat themselves to a nice little shopping trip. Therefore, the overall shopping mood is okay – all over Europe.

Hofmann: We should not cry over spilled milk when creating a future. We have to deal with what we are faced with. It’s a complex setting, but it’s one where, relative to other investment opportunities, the market says at the moment, I find retail interesting. Ambas is talking to large opportunistic or added value funds from the UK or the US and observes that some CEE countries might indeed have a more robust asset level performance than, e.g., some assets in Germany. The macro setting for Germany motivates foreign investors to look at this country though. The cap rates have moved to a level they’ve never been to, but people find that interesting because they think the Germans will handle it. At the moment, there are many things that get overlooked where the underlying fundamentals for retail real estate are not really bad. Another example from Western Europe is Spain. The Spanish economy holds up very well and there is investment activity in the Spanish market. Shopping centers do outperform, and there is growth in footfall in sales. The economy seems robust. The country is outperforming most other European countries, just like Central Eastern Europe. Following the global financial crisis 2008, Spain faced high unemployment rates and financial instability. We don´t see that at the moment. When we look at Western European retail, between 2017 and 2022, it was the most challenging time because all other asset classes were outperforming, and only retail was correcting. In 2022 we were all in one boat. Today, it looks as if retail is coming out of that crisis earlier than other asset classes.

Kraft: To add, the correction was pretty healthy. It was a bit fast, and that caused a lot of stress in the market. But actually, we do have positive spreads between financing and cap rates in the retail sector, which is not the case in some other sectors where there’s still more price correction to come, and we do have financing available as we discussed. With healthy spreads and financing available but no longer like financing for free it’s back to the days of the operators. To emphasize: This plays to the operators´ strengths that can actually work the assets. You earn money by improving the assets, growing NOI, by leasing it out, by leasing it up, by extending it, refurbishing it, etc. You can pull many levers with shopping centers, much more than with other segments in real estate. The market correction is healthy and it plays to the operators´ strenghts.

As a simple conclusion: There are more positive signs than negative ones. Big players are moving, countries are recovering and showing surprising changes. The outlook and predictions are more than positive. The good thing is that all retail real estate managers have always managed these kinds of challenges, which have been seen throughout the decades. The ACROSS Retail Talk was a lot more than this positive outlook. Learn more about what the discussants had to say about the operations side, investors´ and markets´ re-education, why transactions are important, the role of ESG, technology in general, ChatGPT and AI in particular.  

Take aways for the present and future:

Rüdiger Dany: “Create a good team around you and make sure the team stays together. Whether there are many or few opportunities, people will always make the difference, not machines.”

Steffen Hofmann: “Let’s not hide the retail patch in the market anymore. We can be proud of, um, what we’ve mastered. I think we should build up positive expectations that the market will move in our favor.”

Dr. Volker Kraft: “Don’t miss the opportunity! The window will be closed if we wait until everything has balanced out. The opportunity is to acquire quality assets at a decent price. Quality seems to be undervalued, whereas some deteriorating assets might still be overpriced.”

You can watch the uncut version of the latest ACROSS Retail Talks here:

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