EUROZONE: Taking the high street

The high street is dying. Or so say certain statistics. The latest survey from the British Retail Consortium revealed that high street traffic in the UK fell 4 percent in December, and has been falling for many months on end. A similar picture can be painted elsewhere in Europe.

It was no wonder that a few property professionals admitted mild perplexity when quizzed on the viability of a European high street property strategy in recent weeks. The high street largely fell out of fashion with institutions due to the threat from online shopping and poor consumer spending in the aftermath of the global financial crisis.

The big fear was that the high street would eventually host little more than cafes and restaurants, while the remaining shops are converted into collection points, where people pick up goods they have bought online. These collection point stores would need far less space, which would result in vacant lots, and in turn, lead to lower rents and lower property prices.

But, not everyone buys into that view. German pension Bayerische Versorgungskammer (BVK), and US developer-to-fund manager Hines are in fact backing the high street. The pair launched a €1.3 billion European high street retail separate account last month. (See page 20 for a more in-depth look at the strategy.)

The negative sentiments on European high street are generalist, however, and, judging by the majority of PERE 's conversations following the announcement of the tie-up, an understanding of what parts of the high street are falling is important.

The high street market is polarized: while secondary locations are performing poorly, retail assets in central locations are offering considerable growth potential. Naysayers of European high street are typically referring to the former. Meanwhile, the first investment for the Hines' separate account falls into the latter category, having been made in Oslo's premier shopping avenue, a sale and leaseback of a property from Landkreditt Bank for €52 million.

However, there are other retail plays on the high street other than merely unit shops. Some have a looser definition of high street than Hines and consider all town or city retail as the 'high street', whether that be shopping arcades or mini shopping centers.

Regardless, the investment rationale for investors targeting the high street are threefold: firstly, the widespread perception that there is consumer spending growth in Europe; two, there is not a lot of development in the retail sector so there is a degree of supply constraint; and thirdly, the yields in retail have stayed a little higher than other parts of the wider real estate sector.

Others have already made early moves in high street retail. For instance, AEW Europe acquired the St Nicholas Shopping Centre in Sutton as well as a number of retail properties in Germany with an opportunistic strategy last year. The firm also launched the AEW Europe City Retail for which it raised €125 million of equity from two institutional investors at its first close in November.

And, though AEW Europe will be unlikely to compete with Hines' separate account, the City Retail Fund strategy shares a similar thesis to the Hines account, in targeting income producing retail assets in European city centers. Growth is expected from the improvement in the European economy and consumer confidence, as well as strong demographic and urbanization trends.

This rising positive sentiment for European high street was also reflected at a seminar held in London by professional services firm PWC and property association Urban Land Institute. The pair launched a sector trends report which found high street was the most popular sector among investors. Among the 550 sector professionals polled for their annual Emerging Trends in Real Estate report, 72 percent picked high street retail as the sector of choice for 2016.

Whether or not consumers and occupiers play their part in this story, European high street properties are back in fashion among private real estate investors.