Analysis: Shopping centre investors turn attention to European expansion

The vital starting point for any new retail project or extension is financing - and since the onset of the financial crisis in 2008 it has been in short supply all around Europe.

At the time of the crash, bank lending dominated shopping centre funding, but major pension institutions such as Standard Life Investments - one of many to have substantial holdings in malls - believe Europe is about halfway through realignment, and a greater diversity of finance options is coming in to replace the banks.

That matters because if retailers want modern spaces to trade from they need companies willing to finance their creation and maintenance, especially in emerging or immature markets.

The good news is that retail property investment markets around Europe, the Middle East and Africa (EMEA) have been getting noticeably busier this year, with €16.3bn (£13.7bn) traded in the opening six months, up 31% on the first half of 2012.

That said, according to Michael Rodda, head of EMEA retail investment at Cushman & Wakefield, while the retail market is experiencing more demand, finding the right quality and location of property is a major challenge.

As a result, some buyers are starting to look further afield while others are contemplating taking on more risk — usually via development — or pushing up their acquisition bids to encourage vendors to come forward.

There is also more cross-border buying, as some of the larger global funds increasingly look at retail as they diversify from capital city office markets. Rodda says: “We are anticipating an increased flow of cross-border money into the retail sector and, in particular, more interest from Asian funds following the successful purchase by Allianz of Silesia City Center in Katowice, Poland, for €412m (£348m) on behalf of a consortium that included Asian partners.”

There is also plenty of Australian, US and Canadian money keen to get into or increase its stake in Europe. For example, AustralianSuper has appointed Henderson to invest in European retail, the Canadian Pension Plan Investment Board (CPPIB) has bought into more prime schemes, Blackstone is eying European debt opportunities and Simon Property Group has entered the European designer outlet market, building on its continental presence through its stake in French shopping centre company Klépierre.

There are also a growing number of examples of cross-border investment, mostly through partnering with local players and specialists.

Feeling bullish about Spain

Some markets which have been overlooked of late have also started to rally. Interest was actually up in the first half of the year in the crisis-hit countries of Greece, Ireland, Italy and Portugal. More deals are expected in the short term in Spain, as attractive pricing draws in investors. Intu Properties and CPPIB recently entered into a joint partnership agreement to acquire Parque Principado Shopping Centre, Oviedo, an 808,000 sq ft prime regional retail destination in Asturias, northern Spain for €162m (£136.8m).

David Fischel, chief executive of Intu, echoes the ongoing bullishness about Spain among many retail property professionals. “The opportunity to acquire Parque Principado, a top 10 centre in Spain, firmly establishes our presence on the ground in a country where we see considerable growth opportunities in the regional shopping centre industry,” he says.

However, investment and development in the south of Europe will be highly selective and while there are development plans for a massive mixed-use scheme in Valencia (developed by the same team which opened Puerto Venecia in Zaragoza last year), and plans still afoot for Westfield’s Milan project, new space in these markets is very subdued for the obvious reasons.

There have also been some notable transactions in Central and Eastern Europe - for example, Atrium’s acquisition of Galeria Dominikanska in Poland. Recently Spanish designer outlet specialist Neinver and European real estate investment firm Meyer Bergman opened the €240m (£202.7m) Galeria Katowicka mall in Poland. The mixed-use development is part of a major regeneration programme of the transport infrastructure led by PKP (Polish State Railways).

With direct connection to the rail and bus stations, the shopping mall is set over five levels and 570,500 sq ft of leasable space, accommodating 250 shops. Anchored by a Peek & Cloppenburg department store, it will be home to international brands including Zara, Pull & Bear, Bershka, Levi’s, Nike, Adidas and Sephora. Additional fashion labels to pre-let space include Benetton, Mango and Massimo Dutti.

News from the North

Multinational real estate firm Gazit-Globe is carrying out a range of projects in northern Europe and the Baltics through its subsidiary company Citycon, either as the sole manager or through joint-venture partnerships. These include an expansion of the Iso Omena shopping centre in Espoo, Finland; the refurbishment of the IsoKristiina centre in Lappeenranta, also in Finland; and the signing of new tenants Debenhams and H&M to the Rocca al Mare centre in Tallinn, Estonia.

Marcel Kokkeel, chief executive of Citycon, believes that only through establishing platforms in key cities can retailers fully exploit the strong consumer opportunities in the northern Europe.

“Stockholm and Helsinki are enjoying extraordinary levels of urban expansion, which will continue for the next few years,” he says.

“However, in order to benefit from consumer confidence and the urbanisation process, the region should be thought of as one market.

“This is why we have invested in Stockholm and Copenhagen, why we have a strong base in Helsinki and why we would also urge retailers to consider Tallinn as part of this wider market.”

Overall, CBRE executive director John Welham, who heads the retail investment group in the EMEA region, says there are signs of returning investor confidence but prime assets are still taking the lion’s share. “Investment demand for prime is very strong at the moment. Yields on prime shopping centres are at, or very close to, their cyclical low,” he says.

In some parts of Europe the recovery is clear, in others the picture is more mixed. Germany, Poland, Sweden and to a lesser extent France have maintained the strongest tenant demand during the downturn. Markets such as the UK, Benelux, the Czech Republic and some of the smaller Eastern countries will hope to join them, relative to their market size and significance.

“In France, Germany, Switzerland, Austria and Norway, yields are at the bottom of where they have been going back 10 years, and they should start coming back in southern Europe pretty soon as well,” says Welham. “There will be winners and losers in this, but the winners will emerge stronger than before.”