1. Capital rising
In terms of capital raised for retail real estate funds, 2017 proved underwhelming. PERE data showed capital raising fell off a cliff edge last year – $0.55 billion compared with $4.84 billion in 2016 – perhaps reflecting a sector grappling with fundamental structural shifts and investor uncertainty about where to place capital in retail funds. Also revealing is the number of retail funds closed in 2017 – only two compared with 23 the previous year.
So how is 2018 shaping up? We are only half way through the year, but there are signs of improvement. In the first quarter $1.61 billion was raised for retail funds, according to PERE data, which already outperforms the whole of 2017. Two funds closed in Q1 2018, equivalent to the number closed in the whole of 2017. There is some way to go to reach the heights of 2011-16, but there can be some optimism that things are moving in a more positive direction.
2. Moving up in Asia
The US often sets performance benchmarks for the rest of the world to follow. In the last 12 months, however, we are seeing a steady reversal in the retail real estate deals universe. This picture is brought to life through Real Capital Analytics data (p. 27), which highlights contrasting regional stories. Asia-Pacific’s deal volume has picked up while in the US there has been a marked drop off.
At the end of 2016, deal volume in Asia-Pacific stood at $31.6 billion. In Q1 2018 the figure was $36.7 billion. In the US, by contrast, deal volume was $63.4 billion at the end of 2016, but $44.9 billion in Q1 2018. The renewed confidence in the region is illustrated with Chelsfield’s first deal in Hong Kong – the acquisition of Provident Square – from its debut Asia fund. The island-city is starting to attract investors again, especially in the luxury end of the retail market. Factors fueling this include an increased number of wealthy shoppers from Mainland China, a growing urban-living middle class and generally improved business sentiment.
3. Consolidation wave
Continuing the deal theme, there has been a wave of consolidation in the sector in the last few months, as traditional retailers try to find ways to expand and tap into new markets. This includes two notable mall REIT takeovers: Brookfield’s acquisition of mall owner GGP, and Unibail-Rodamco’s agreed purchase of Westfield. And in late 2017, two listed retail giants Hammerson and Intu tied themselves together. The Brookfield/GGP is of particular interest as there has been noted resistance among some REITS – not all in retail – to the advances of private buyers. Recent rejected private equity bids for REIT-owned real estate include Starwood Capital’s for a REIT in the residential sector. And Brookfield’s bid for GGP was also initially rejected.
So can we expect to see further consolidation in 2018? Industry experts say yes, and some believe that private equity are the more likely buyers; they have the capital retailers need to adapt their businesses to modern shopping trends and compete in the digital age. Wells Fargo’s Greg Wolkom says: “It makes sense for private equity buyers if there are opportunities to redevelop, to reposition, to do things in my opinion better done outside the glare of quarterly reporting.”
4. Winners and losers
Bricks-and-mortar retail is facing difficult times, not least from the creeping presence of e-commerce. Walk up the high street in most UK towns, for example, offers ample evidence of the problem. Nevertheless, according to industry experts, there is life in the physical shop, a sentiment conveyed by Kiran Patel, Savills Investment Management’s global CIO: “E-commerce is changing how people shop [but] that does not sound the death knell for bricks-and-mortar retail.” Outlet centers, luxury retail and the retail warehouse sector are also identified as current good investment opportunities. Neinver, for example, reports an average increase in sales of 10 percent in the last six years across their European outlets portfolio.
There is also optimism around the US mall sector, considered by many to be at crisis point. But there is a footnote – not all malls are created equal. Premier A and B grade malls are best positioned to withstand e-commerce and the closure of anchor department stores, whereas C and D grade malls “will struggle to maintain consumer relevance,” says QIC’s Matthew Strotton. So what is the key to retail survival and, for managers and investors, selecting assets? Two points stand out:
- Strategic location: Retailers in premier, well-rounded destinations are most like to weather the storms, and real estate assets here are attractive. This means urban locations where people are increasingly moving to live and work; 24-hour cities like London and Paris, and places that attract large tourist numbers. Keeping an eye on demographic trends is therefore critical; this has a knock-on impact on where bricks-and-mortar retail can thrive.
- Adaptive business models: Retailers that stay relevant to the customer and adapt their real estate space accordingly are the most likely to survive and attract investors. This means retailers embracing experience-led shopping – mixing retail with food and beverage, leisure, entertainment and services. Xander chairman Siddharth Yog says, “in India you wouldn’t have a retail center of any consequence without a multiplex cinema and a massive food court.” “Traditional retailers capturing the right mix are finding success,” says Yardi’s Brian Sutherland. Business models combining bricks-and-mortar with e-commerce stand the best chance of survival. This includes embracing shorter leases allowing for concepts like pop-up stores to demonstrate product and drive online sales.
5. The data age
Technology and data are a disrupting forces across the real estate sector, but also a force of empowerment. It is now much easier for retailers to collect valuable data on customer behavior and shopping patterns: who is spending money, where they are shopping, how they shop – physical or online – and what they are spending it on. It gives fund managers and investors a unique view as to how to position portfolios to benefit from megatrends like urbanization and demographics. As Meyer Bergman CEO Markus Meijer comments: “To adopt an occupier-focused approach to investment you always have to get inside the head of retailers.”