Shop is a four-letter word for some in the real estate community, its mere utterance eliciting feelings of uncertainty and dread. As more goods change hands online, brick-and-mortar retail carries less appeal. This leads to diminished returns, fewer transactions and, naturally, less investor interest.
However, Europe’s retail sector still showed signs of life this week with a flurry of institutionally backed acquisitions. Transactions included storefronts on Portuguese high streets, a renowned French eatery and a German grocery store. Though they vary by country, strategy and price, they stand as a testament to the opportunities present in real estate’s most embattled sector, at least for those who know where to look.
Institutional capital has largely moved away from Europe’s retail markets in recent years. During the first half of 2016, 651 deals closed on €5 million or more, according to Real Capital Analytics. Through the first half of this year, only 397 deals of a similar size were closed. Transaction volumes have also tumbled, from €36.9 billion in the first half of 2015 to €12.7 billion during the same period this year.
Similarly, fundraising around the space is on track for a six-year-low, according to PERE data. Firms raising capital for strategies that include European retail closed on $3.5 billion through the first half of the year. Comparable vehicles netted $9.6 billion through 2018 and $12.4 billion through 2017. This trajectory is likely to continue as the effects of retail digitization hit closer to home for institutional investors. Small shops and department stores bore the initial brunt of this shift, while investment-grade retail returns kept pace with the other core property types. That changed last year when, according to MSCI, European retail returns were 2.9 percent – well below the 7.8 percent across all real estate.
Taken together, these trends paint a grim picture of the retail landscape. But one should be careful not to use too broad a brush. Although parts of the sector are unquestionably in flux, retail as an asset class is far from obsolete. According to PERE’s Retail special report, more than €3 billion of retail sales take place in a physical location for every €500 million that is transacted online. Retail also is not a monolith. There are many types of retail property and many ways to access them, as demonstrated by this week’s deluge of deals.
AEW, a Boston-based manager, acquired eight high-street units in Portugal – four apiece in Lisbon and Porto – with its City Retail Fund, an open-ended core vehicle launched in 2015. BMO Real Estate Partners, the Canadian bank’s global asset management arm, purchased the Fontaine Gaillon restaurant in Paris’s second arrondisement using Best Value Europe, a core fund also launched in 2015. AXA Investment Managers – Real Assets used joint ventures to secure stakes in two prominent Parisian malls. In the final deal, German manager Patrizia bought a 12-unit retail park north of Berlin using an undisclosed fund. The firm was particularly keen on the complex’s anchor tenant, a grocery store. It has amassed €2 billion of food-centric assets since 2012.
The rise of e-commerce is often claimed to herald the demise of traditional retail. That may come to pass. For now, however, it is exposing the disparities between assets and markets. Europe is a prime example of this with its numerous countries, cities and submarkets, each of which has its own social, economic and demographic makeups.
Several factors are at play in determining a country’s competitiveness. According to German manager Union Investment’s retail attractiveness index, the gap between the markets that are positioned well for retail investment and those that are not is growing.
This complexity only feeds into the sentiment that European retail is more trouble than it’s worth. For opportunistic investors looking to buy, fix and flip assets quickly, that may be a wise stance. On the other hand, firms with local knowledge and sector expertise, and that are willing to seek out niche properties and hold on to them, should not be deterred.
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