- Transaction volume remains high at €6.5bn, primarily thanks to record start to year
- Strategic portfolio disposals initiated pre-pandemic counteract negative impact of lockdown in Q2
- Risk-adjusted price reductions in high street and shopping center segment expected as year continues; retail warehouses benefit from crisis with performance stable
Munich, 7 July 2020 - According to Colliers International, retail assets changed hands for €6.5bn in H1 2020. This constitutes the second-highest result seen in the past 10 years following 2015’s all-time high and reflects a yoy increase of 35%. Retail assets claimed a 23% market share, 3 bps above the level recorded at the end of June 2019. This further solidifies retail’s undisputed 2nd place ranking among the other established asset classes with retail behind office at 42% and ahead of logistics at 11%.
Dirk Hoenig-Ohnsorg, Head of Retail Investment at Colliers International, comments, “This strong result can primarily be attributed to the record high of €4.2bn recorded in Q1 2020. Even so, investment activity refused to come to a standstill even from April through June in what was the peak phase of the pandemic restrictions for retail and for sectors relevant to footfall such as restaurants and tourism.” Although Q2’s transaction volume of €2.3bn fell 19% short of the previous year’s above-average €2.8bn, a result that was in part fueled by a share investment in a Kaufhof portfolio comprising 57 assets, Q2’s result can be considered quite good based on the long-term average.
Strategic portfolio disposals under months of negotiations counteract negative impact of lockdown in Q2
As already evident in Q1 and even more noticeable in retail than on the investment market as a whole, strategic portfolio disposals initiated prior to the pandemic were able to considerably compensate for the lack of new deals. Package deals generated roughly €5bn in the first half of 2020, reflecting a 76% market share compared to 47% across all asset classes. The two highest-volume deals in Q1, the retail share of the TLG portfolio acquired by Aroundtown and a portfolio comprising 80 Real assets that was sold to the SCP Group by Metro AG, exceeded the €500m mark. These were joined in Q2 by two additional portfolios of similar size: RFR Holding’s sale of a Kaufhof portfolio to an opportunity fund managed by US investor Apollo and TLG’s disposal of 120 food-anchored retail assets.
Matthias Leube, CEO of Colliers International Deutschland, comments, “Because of their long-term strategic scope, these disposals should be interpreted less as a short-term reaction to current market developments and instead as a response to the advanced peak phase in the real estate cycle, which took an unexpected turn with the pandemic. TLG’s disposal of its retail assets served to streamline and realign the company’s portfolio toward a more office-based focus going forward.” High-volume single-asset deals in the 9-figure range made themselves scarce in Q2.
Food-anchored retail warehouses and retail parks continue to expand dominant position
An assessment of the types of retail assets being bought and sold again reflects the importance of food-anchored retail warehouses and retail parks, which have been gaining momentum for years now. These retail concepts were able to increase their market share from 50% to 53% in Q2 and posted a transaction volume of €3.4bn at mid-year. The share of deals recorded in this segment even rose from 52% to 67% during this period, primarily due to the sale of smaller supermarket portfolios. According to Dirk Hoenig-Ohnsorg, “Since the start of the crisis, investors have been viewing local amenities providers more than ever as the main beneficiaries of the disruptive structural change driven by digitalization. This trend will continue to impact the market as a result and is likely to become a market staple as deal activity again picks up momentum following the end of the lockdown in late May.”
Buildings featuring an office-retail mix and retail assets in prime locations held onto their 2nd place ranking with €2.3bn or, 35%. This category also includes downtown department stores. Shopping centers trailed behind the other retail concepts at some distance with a market share of 12% and a transaction volume of roughly €780m, a result that reflects little change compared to Q1. “Many retail assets can only be sold after detailed review, a process that has become even more detailed and lengthy in the current environment, combined with extensive repositioning,” explains Dirk Hoenig-Ohnsorg.
Depending on the retail concept and location of portfolio assets, retail deals now more than ever tend to revolve around locations outside Germany’s 7 top cities. These secondary markets claimed €5.6bn and an 85% market share.
There was little quarter-over-quarter change in the ranking of investor sectors that shape the market due to the major deals discussed above. In terms of buy-side activity, opportunity funds and private equity funds such as the SPC Group and Apollo took pole position with around €1.7bn and a 25% market share, just ahead of listed property companies such as Aroundtown with €1.5bn, or 25%. Asset and fund managers followed in the ranks with €1.2bn, or 18%. Listed property companies (especially TLG) remain the unchallenged leaders sell-side with 53%, or €3.4bn.
Yield increase in high street and shopping center segment to accelerate towards end of year
Matthias Leube, CEO of Colliers International Deutschland, comments, “The fact that the sales processes involved in the retail sector are particularly lengthy and have come to a temporary standstill also means that it will be some time before we see the growing investor risk awareness reflected in price adjustments based on property and location qualities. As deal activity picks up speed, we will see the yield increases in the high street and shopping center segment, which were already tangible prior to the start of the crisis, continuing at a more rapid pace than previously.”
Dirk Hoenig-Ohnsorg adds, “With numerous retailers having run into massive payment difficulties or already filing for bankruptcy, we will inevitably see a drop in demand for space in downtown locations and at shopping centers. The German department store chain Galeria Kaufhof Karstadt and its sports department stores, fashion chains such as Bonita and Laurel and owner-run stores with a long history in downtown city locations are prominent examples of this trend and of the structural shift that has been accelerated by the pandemic. With the expiration of the rent moratorium, we will see even more vacancies even in high footfall locations. Assets and clusters that already have a diversified tenant mix in place will have the best chances, also outside the retail sector.”
Prime yields for assets in the top locations of Germany’s 7 investment hubs currently range in a narrow corridor between 2.75% in Munich and 3.40% in Cologne and Düsseldorf. In contrast, we can expect prime yields for daily amenity retail warehouses, which are currently experiencing an exceptional boom due to the pandemic, to consolidate at around 5% and in some cases even under.
Outlook: Structural environment remains challenging, economic conditions looking up
Dirk Hoenig-Ohnsorg comments, “In contrast to other asset classes, which entered the crisis in a fundamentally healthy state, the conditions on the retail asset market remain challenging, at least for some types of retail concepts. However, a structural shift accelerated by the pandemic may also be very helpful in getting retailers as well as property owners to tackle overdue re-positioning projects. Those brick-and-mortar retailers that are still in business will benefit short-term from the German government’s economic stimulus, particularly the reduction in VAT. Even as early as June, the latest GfK consumer climate findings indicate tangible economic recovery and improved consumer income expectations combined with an increased propensity to buy, a trend that will also benefit the durable consumer goods segment. There are also reports of growing numbers of shoppers in downtown high footfall areas and at shopping centers and retail warehouses, numbers that are beginning to approach pre-pandemic levels. All of these are signs of hope for the industry.”