Thanks to an upturn in retail sales both in shops and online, as well as successfully adapting strategies, the sector is well prepared for increasing digitisation in trade and changing trends in society.
On the one hand, consumer confidence in Germany is very high, with private consumer spending on the up. Not only have online sales climbed by almost 7%, sales in physical stores also rose by around 2.5% in the last twelve months. As a result of this surge in sales, especially in local amenities, the forecast is for increasing sales per square metre. On the other hand, challenges are mounting for the sector.
There is little new construction going on, lease terms are decreasing, rent prices are trending sideways, modernisation cycles are getting shorter and the move towards digitisation is sparking an upheaval in retail that not all retailers and shopping centres are prepared for. Rising pressure from competition is also affecting properties in peripheral and city locations in particular.
Financing the change
Peter Axmann, Head of Real Estate Clients at HSH Nordbank, explained what is especially important to financers: “Nowadays, we pay very close attention to the sustainability of retail properties. Alongside a flexible property structure so that it can be successfully adapted for use by third parties, an attractive quality of stay is also key. We also look very closely at the operator’s concept and a balanced mix of tenants with strong anchor tenants. We are significantly more selective than we were a few years ago, we adhere to conservative credit standards and have a sufficient buffer for falling market values.”
According to HSH Nordbank, well-positioned commercial properties remain a sustainable asset class and the value of properties in prime locations is stable and interesting to investors. Nonetheless, Axmann highlights various developments and prospects in individual property types: “The most sought-after properties in Germany are still prime location commercial buildings and specialist store centres in growing cities. The market value for decentralised shopping centres, department stores and commercial buildings, on the other hand, is likely to decline in the medium-term. Even today, weak or decentralised locations cannot offset the pressure of online retail.”
Opportunities through repositioning and value-added
“Overall, brick and mortar retail in Germany is better positioned and more robust than is often said”, added Martin Mörl, Managing Director of Prelios Immobilien Management. “Today, there are appropriate strategies and concepts for almost all retail properties and locations”.
If the fundamental data is correct, repositioning and partial conversion – for example in office and co-working spaces, sports areas or converting less frequented upper floors for residential use – is a good starting point for commercial properties with a poor rental situation. Very well positioned properties can be further improved by, for example, selectively targeting subsequent lettings and making continued enhancements. Complete conversions, such as for residential or office use, are conceivable for properties that are no longer marketable.
“The key issues today are therefore value-added, positioning and repositioning of retail properties. Starting points for operators, landlords and managers are the diversity and individuality of the mix of products and tenants, gastronomy and leisure, quality of stay and service, linking online and off-line trade, direct communication with customers and the integration of related uses such as residential and office space. We see multipurpose and open areas as a fundamental and sustainable trend”, said Mörl. “The real need to modernise and make changes to retail properties presents great opportunities for owners, operators, cities and consumers.”
Discount shops: older properties often too small
The food retail segment is seen by many investors as the last bastion in the struggle between brick and mortar stores and online retailing. Online shopping accounted for 2.0% of trade in the food sector in 2017. As a comparison, the figures for the “fashion & accessories” and “consumer electronics” segments were over 25%. Nonetheless, even food retailing is constantly changing. One key trend is that discount shops are adjusting their size more and more quickly.
René Westerheider, Head of Transactions at Trei Real Estate, commented, “Discount shops in Germany are increasingly expanding their array of products. This means they need more space too – often up to 30% more. Older discount shops tend to have shop floors of between 700 and 800 sq m but they generally need an additional 200 to 400 sq m. This larger floor space requires substantial structural adjustments.”
At the same time, new or additional services are being offered. Westerheider went on to say, “This has an impact on the area around the tills. Increasing numbers of discount shops have their deposit bottle returns there, or a bakery or a florist’s. This calls for building alterations. In turn, for example, employee break rooms are often moved into the back.” In addition, many discount shops are introducing bread ovens.
This also entails significant changes for the building. For fire safety reasons, some new walls have to be built and the sprinkler system has to be reoriented. “This also involves a lot of construction work”, said Westerheider.