Where is best to invest?

BY ALICE BREHENY

With several market indicators showing a small increase in consumer confidence, coupled with more positive economic outlooks for many European countries, the retail sector has increasingly been on investors’ radars. Traditionally a sector that has shown relative resilience to market turmoil and lower volatility compared to offices, our research shows that European retail has also outperformed in a historical context. This has been a result of stronger growth as the sector continues to mature and less yield movement, both negative and positive, which has made it a better target for long-term investment than cyclical office markets, in which performance relies heavily on the timing of entry and exit. Additionally, investment in European retail property offers the added benefit of diversification that can be gained through geography, sub-sector, and risk profile, due to the diversity on offer across the region.

So where is best to invest? I would argue that an investor must employ a ground-up analysis. Retail real estate performance is highly dependent on local market fundamentals, and therefore country specific research must be undertaken. A successful strategy will acknowledge the significant differences in prospects and performance characteristics by country and sub-sector, capitalizing on both of these factors to maximize performance and minimize risk.

Opportunities in Spain and Italy

In terms of sub-sectors, the shopping center market in the more mature European economies is predicted to outperform the European property market average over the coming five years. Well-anchored shopping centers, specifically, are expected to achieve high levels of rental growth and will offer a more stable yield profile. Yields in “super prime” regional centers currently stand at around 4.5%.

Looking to the regional shopping center market, the Nordic region is expected to be the strongest short-to-medium-term performer, according to our research. Strong performance is anticipated as markets are driven by steady rental value growth in the medium-term, following the sound economic fundamentals of the region. “Super prime” shopping centers in Spain and Italy may still be available at marginally better prices than other more core markets, though this margin is quickly being eroded as investor appetite for these countries is on the up. Essentially, shopping centers really should be considered on an asset-by-asset basis, with excellent schemes available in all European markets.

High streets with low returns

The most expensive sub-sector of the European retail markets is the high-profile, prime high street. Units in these locations are rarely traded and largely sit within private ownership. Retailers will always seek representation on historic high streets located in gateway cities where tourist traffic is high. Investors pay well for these units as part of their wealth preservation strategies. While the risk profile is low, so are returns, with deals commanding yields sub-3% in some locations. This area might be interesting for institutions, where a block of shops can be acquired and there are opportunities for repositioning through tenant engineering.

While these two sub-sectors are particular high profile, the European retail hierarchy comprises many sub-sectors, including smaller or secondary shopping centers, high street retail, retail warehouses, and designer outlet malls. These sub-sectors can all produce compelling investment opportunities and can often be purchased at more attractive prices compared to prime shopping centers. However, the supply of good quality “interesting” stock often remains tight. It is therefore important that any investment strategy is elastic enough to ensure it has the greatest chance of meeting its investment objectives.