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THINK Europe: RetailAn overview of the European retail market
Data generating art
Using data from Fig.1 in this report, the graphic is an abstract representation of shopping centre transaction volumes across Europe from 2007-2014.
3THINK Europe: Retail
Introduction
This report discusses the attributes of the European
retail property market and explores opportunities that
the sector offers for investors. There is a sound research
case to support investing in European retail property, in
the diversity on offer across the region. A successful
prospects and performance characteristics, by country
and sub-sector, capitalising on these to maximise
performance and minimise risk. Capital should not be
deployed indiscriminately across this region;; retail real
estate performance is highly dependent on local market
fundamentals, and requires ground-up analysis.
Retail, particularly prime core retail, is favoured for
its defensive qualities. The sector has historically
demonstrated relative resilience to market turmoil. In
European retail has also outperformed in a historical
context. This has been a result of stronger growth as the
sector continues to mature, and less yield movement,
both negative and positive, which has made it a better
markets where performance relies heavily on the timing of
entry and exit. Equilibrium yields for European retail have
continued to fall, as the investment market has become
more institutional. The sector continues to attract growing
interest from international investors, who would previously
opportunities in a slightly less crowded market place.
retail property values across Europe, and a return to a
arguably lacked adequate discrimination. Of course, there
has been a subsequent recovery in values, but this has by
no means been uniform, with investors largely focussed on
core markets and prime assets. Only in the past 12 months,
have we really seen investors casting their nets a little
wider to some of the more peripheral economies. Investors
accessing these markets now, can take advantage of the
full-rental recovery cycle. Some non-core markets may have
to wait a little longer to return to positive rental growth, but
investors should seek mis-priced opportunities, nevertheless.
Investors deploying capital across the European retail
market strategically, from a market, sub-sector and
timing perspective, should enjoy attractive medium-term
performance. We believe that over the medium to longer
term, retail should again prove to be less volatile than
will not be short-lived. Investing in retail should complement
there will be further yield correction in some European
markets where, given the right asset, there will be strong
short-term returns. We believe, in the longer term, retail will
to excellent covenants and real long-term rental growth.
This report focusses on the shopping centre market in
the more mature European economies (where data is
extensively available). Large shopping centres are favoured
for their defensive qualities, and are very much the focus
for most international investors looking at European retail.
The European retail hierarchy is, however, comprised of
many retail sub-sectors, including smaller or secondary
shopping centres, high street retail, retail warehouses and
designer outlet malls which, at present, fall off the radar
of most international investors. These sub-sectors can all
produce compelling investment opportunities and can often
be purchased at more attractive prices (compared to prime
shopping centres).
Fig.1: Shopping centre transaction volumes ($bn)
0
10
20
30
40
50
60
200
7
200
8
200
9
2010
2011
2012
2013
2014
Key UK Germany France Spain
Italy Sweden Poland
Source: Real Capital Analytics, 2014
4THINK Europe: Retail
Markets at a glance
The UK, France and Germany are among the largest and
most established real estate markets in Europe, and have
mature retail economies. Investors in these markets
from international retailers. The French retail market is
notoriously tight, and opportunities to access the market
are infrequent. Those investors that do manage to secure
quality assets in France should enjoy some solid returns,
based on a healthy demand-supply imbalance in both the
occupier and investor market. Germany is a highly defensive
property market and, while it is not expected to be among
the top performers, it should offer low levels of volatility.
German shopping centres have not been particularly well
managed historically, and the upside potential from asset
as occupier demand continues to strengthen.
Fig.2: GDP: per capita and forecast growth (size of bubble represents size of economy)
0%
20%
40%
60%Fo
reca
st G
DP
gro
wth
(%
, 20
10-2
030
)
80%
100%
120%
140%
160%
0 20,000 40,000
GDP per capita ($)
60,000 80,000 10,0000
Austria
Bulgaria
Croatia
Czech Republic
DenmarkFinland
France
Germany
Greece
Hungary
Ireland
Italy
Netherlands
Norway
Poland
Portugal
Romania
Spain
Sweden
Switzerland
Turkey
UKEurope is a series of individual countries, each with its own law and customs. It is important to be aware of differing market practices, retail trends and consumer behaviour. For example, the German shopper is more cautious than the UK shopper, who happily loads up multiple credit cards. France and UK
shopping centres, but the institutional market in France is very small, so it is
France is heavily controlled by the key hypermarket groups, whereas in the UK, a food anchor is unusual.
Source: Oxford Economics, 2014
5THINK Europe: Retail
Markets at a glance (continued)
The Nordic retail markets (with the exception of Sweden)
to offer a stable economic backdrop, and good retail
sales growth potential. Investor sentiment for the region
is relatively strong and investment activity is rising.
This region is expected to deliver stable, solid rental
returns is weaker due to low yields, on a risk-adjusted
basis, the Nordics remains attractive;; mature stock in
the region offers scope for driving performance through
refurbishment and repositioning.
Central and Eastern Europe retail markets are much less
mature, and spend per capita is modest. They are, however,
expected to see strong long-term sales improvement as
they enjoy structural growth. These markets are small,
though the outlier is Poland. Poland avoided recession
during the past downturn, and currently enjoys good
demand is relatively strong. There has been strong growth
in shopping centre stock over the past decade, but this
has slowed markedly and retailers are now reported to be
queuing up for the best schemes. Good rental growth is
dampen this) and yields are likely to harden, generating
good medium-term performance. Some investors will be
wary of this market due to its location, and they should be
mindful that planning legislation here is less rigid, but basic
fundamentals suggest that Poland is less risky than its
geography implies.
Fig.3: Retail sales: per capita and forecast growth (size of bubble represents size of retail market)
Austria
Bulgaria
Croatia
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Netherlands
Norway
Poland
Portugal
Romania
Spain
Sweden
Switzerland
Turkey
UK
0%
20%
40%
60%
80%
100%
120%
140%
5,000 10,000 15,000 20,000 25,000 30,000
Fore
cast
ret
ail s
ales
gro
wth
(%
, 20
10-2
030
)
Retail sales growth per capita ($)
Source: Oxford Economics, 2014
6THINK Europe: Retail
Markets at a glance (continued)
Spain and Italy are the largest of the Southern European
economies. Both have been out of favour with investors for
Europe. However, these markets, particularly Spain, have
enjoyed a resurgence in demand over the past 18 months,
as investors’ sentiment towards these economies has
improved. While yields have moved quite markedly over
covenant strong assets in these markets, at attractive prices.
To this end, we recommend these markets continue to be
monitored for opportunities, as they still offer the chance
to capture the full-rental recovery cycle. With rents having
fallen sharply, they offer potential for strong growth over the
medium term.
Fig.4: Global shopping centre space per capita (sq m per ‘000)
0
200
400
600
800
1,000
1,200
1,400
1,600
Sw
eden
Fin
lan
d
Irel
and
Net
her
lan
ds
Au
stri
a
Den
mar
k
Un
ited
Kin
gd
om
Po
rtu
gal
Sp
ain
Fran
ce
Ital
y
Cze
ch R
epu
blic
Po
lan
d
Hu
ng
ary
Ger
man
y
Bel
giu
m
Gre
ece
Au
stra
lia
Ho
ng
Ko
ng
Sin
gap
ore
Jap
an
Un
ited
Sta
tes
Source: TH Real Estate, 2014
7THINK Europe: Retail
Markets at a glance (continued)
Fig.5: Summary of markets
Source: TH Real Estate, Q1 2015
UK France Spain Germany Italy
Occupier summary
Strongest European economy
Weak economic growth
Economic growth returningWeak economy
Primary target for international retailers Retail sales LFL growth in 2014 +1.3%
London major international centre
but reluctance to spendMarket remains attractive to
international retailers
Parent company covenant Consumer spend hampered by high unemployment Vacancy rates reducing quickly in core Strong retail demand driving rents up in core locations Investor focus on North Italy
Full occupancy and rental growth at coreLimited retail demand,
except for primary cities / mallsSecondary still suffering as retailers
rationalise storesKey European target for
international retailers after UKCovenants primarily franchises
with high credit risk
Main fashion occupiers
Zara/Inditex Zara/Inditex Zara/Inditex Zara/Inditex
Zara/Inditex
H&M
Abercrombie
Top Shop H&M H&M H&M Guess
H&M Primark Primark C&A Piazza Italia
Next Cache Cache Peek and Cloppenburg OVS
River Island New Look C&A Primark Bata
John Lewis Mango New Yorker Forever 21 Pittarosso
Typical lease structure
10 years
10–12 years Five years10 years
Five to seven yearsFixed rents
No breaks
Five yearly upward only rent reviews Break every three years Tenants break at year three
Tenant right of renewal Tenant rights of renewal Base plus turnover rentShopping centre and retail parks generally
no incentive or rent free periodLimited incentive in stronger locations
Indexation None
Fixed rent indexed annually in line with CPIFixed rent indexed annually
in line with CPIFixed rent indexed annually in line with CPI,
but uplift limited by regulationFixed rent indexed annually
in line with CPITurnover rent indexed
Shopping centre pricing
Prime 4.50% Prime 4.00% Prime 5.25% Prime 4.50% Prime 5.75%
Secondary 6.50% Secondary 6.50% Secondary 7.00% Secondary 5.50% Secondary 7.50%
Investor summary
Huge international and domestic investment appeal
Focus on main cities with highest purchasing power and in established centres
$5.5bn transacted in 2014
Recent pricing has compressed yields and investors now moving back to core+ for increased yield
Owners not selling big malls at current pricing
Very limited stock available Four fold increase in activityInvestor interest primarily
for larger malls
Strong transparent and long-term income Need to trade by share deal
8THINK Europe: Retail
European retail investment styles: Core
High streets
The most expensive sub-sector of the European retail
locations are rarely traded and largely sit within private
ownership. Retailers will always seek representation on
high. Investors pay well for these units as part of their wealth
returns, with deals commanding yields sub-3% in some
locations. This area might be interesting for institutions,
where a block of shops can be acquired and there are
opportunities for repositioning through tenant engineering.
Shopping centres
Consensus research predicts that shopping centres will
outperform the European property market average over
for asset management than unit shops, which can help drive
superior rental growth. Larger, dominant shopping centres
that are well-anchored, are expected to achieve high levels
The Nordic region is expected to be the strongest
short-to-medium-term performer. Strong performance
is anticipated as markets are driven by strong rental
value growth in the medium-term, following the sound
economic fundamentals of the region. Our research case
advocates seeking opportunities in these markets now,
ongoing rental growth recovery.
Shopping centres should be considered on an asset-by-
asset basis, and excellent schemes can be found in all
European markets.
“Super prime” regional centres
Yields for large “super prime” regional centres currently
stand at c.4.5% NIY. These relatively low yields are
typically driven by the strong rental growth prospects of
these centres and the larger potential to implement asset
management initiatives, coupled with the risk-adverse stance
of many investors. Accessing such stock in sole ownership is
only realistic under a large account. In many situations, joint
ventures are required to access this stock as investors and
developers look to reduce part of their exposure.
“Super prime” shopping centres in Spain and Italy may
still be available at marginally better prices than our other
“more core” markets, though this margin is quickly being
eroded as investor appetite for these countries is on the up.
9THINK Europe: Retail
European retail investment styles: Core-plus
Retail warehouse parks
While investor demand has largely focussed on a thin
slice of the market, opportunities ought to exist to secure
attractively priced, good assets that just fall off the radar
of international investors. To this end, we highlight the
retail warehouse sector. This sector suffered badly in
the downturn, quite rightly due to its ties to the housing
market, but hasn’t really recovered to the extent that high
streets or shopping centres have. While investor demand
for retail appears to be concentrated on large shopping
centres or prime shops, occupiers are less discerning and
more cost conscious. For the longer term, we think the
growth prospects for this sub-sector are excellent, with
rents offering good value compared to city centres or
shopping centres, and we believe there is scope for yield
compression as this sector matures. Investment in retail
the non-homogenous nature of the concept and a lack
of understanding, rather than — we believe — a greater
inherent risk. In most of the markets that we forecast,
retail warehousing is expected to outperform both shops
and shopping centres. Investors should seek well-located,
dominant fashion retail parks in core markets now, before
investor attention returns to this sector. Early movers ought
to be rewarded accordingly.
Outlet malls
A further sub-sector of the retail market that we believe
deserves attention is the outlet mall sector. Like retail
warehouse parks, this sector is less established as an
institutional investment class, and as such, is less liquid
than the traditional shopping centre market, and perceived
as being more risky. Many investors believe outlet malls
fall outside their area of expertise.
Outlet malls are purpose-built centres, where a range of
manufacturers and retailers offer stock at discounted prices
(not stand-alone factory stores). They are a relatively new
concept, but one that is growing in popularity. Landlords
will typically require retailers to offer minimum discounts
managed environments and economies of scale.
Outlet centres have become an increasingly sought-after
asset class by investors. The popularity of these centres
is based on a mixture of retailer needs and consumer
requirements, with retailers requiring a suitable channel
of distribution for surplus stock, whilst discounted prices
make the brand available to a wider consumer base.
These schemes are extremely popular with retailers and
brands, providing a reputable channel to dispose of surplus
stock. They are equally popular with shoppers, seeking
quality brands at discounted prices. These schemes attract
high levels of tourist spend. Journey times, dwell times and
average spend at quality outlet malls, far exceeds those for
regular shopping centres. Furthermore, sales held up well
during the downturn, making this an economically defensive
investment class.
Successful investors in the sub-sector will likely have
partnered with a specialist manager, ie McArthurGlen or
Value Retail, who will manage marketing of the scheme and
alignment on landlord tenant interest.
10THINK Europe: Retail
European retail investment styles: Value-add
Recovering markets
Investors remain cautious about “non-core” markets, particularly those commonly described
as the ‘GIPS’ markets during the recession. However, recent evidence shows investors are
showing an interest in recovery markets again. Italy is hot on the heels of Spain in terms of
recovery, and we expect Portugal to follow suit. Greece has much deeper structural issues and
should not be treated as an imminent recovery play.
Good returns, that also carry a large risk, can be found in the less established European
markets in Central and Eastern Europe. The risk here relates to market size and liquidity,
rather than relying on recovery. These markets are expected to enjoy structural growth and
could produce some interesting opportunities as their retail economies evolve.
European retail investment styles: Opportunistic
Development
For property investors, one good thing to come out of the global recession is the virtual
disappearance of the development pipeline. So while demand has been weak, supply
comprise extensions to existing schemes. This is a problem for retailers looking to grow their
businesses, and with demand picking up, rental levels at the best assets will be bid up. When
though it should be noted that planning legislation is generally restrictive in core Europe, and
Investors looking to boost returns should include the ability to access development stock
within their strategy. As there are fewer investors willing to undertake direct development at
present, it could be smart to include a proportion of developments within an overall strategy,
ahead of the next development cycle. The type of development exposure we recommend,
typically includes refurbishing and extending existing stock, or developing new schemes that
are fully consented and have a high proportion of pre-lets. It does not include acquiring sites
at an early stage of the development process or speculative bets. Therefore the principal
contracts, for example.
11THINK Europe: Retail
Summary
The research case strongly supports investment in European
retail, but we believe money should not be deployed
indiscriminately, or indeed evenly, across the market, as
and market pricing will emerge as this market matures.
either by geography or sub-sector. Larger portfolios will
be expected to enjoy lower volatility of returns through
the ability to pick stock from a bigger pool.
Historically, research shows that larger lot sizes, or at
least those that dominate their catchment area, have
outperformed in terms of rental growth. Larger schemes
have also produced lower volatility of overall returns.
The most dominant, prime assets tend to have low
leasing risk, low market risk, limited defensive investment
expenditure, low vacancies and better tenant covenants.
Furthermore, larger assets also offer greater scope for
asset management, driving rental growth and capital
appreciation. With consumers, retailers and investors
increasingly favouring bigger assets, we believe that larger
lot sizes will continue to outperform and prove more
has substantial growth potential, due to a combination of
restrictive planning controls and lack of available land.
It is important that any investment strategy is elastic
enough to be able to respond to market conditions, and
market rapidly;; the ability to mobilise capital swiftly
will help enhance performance by taking advantage of
attractive market opportunities. We do not recommend
making restrictive allocations to markets and sectors. Our
the same over the short term. We do, however, review these
on a regular basis and might expect some change as we
move through the next market cycle.
Although most European investment markets are generally experiencing greater liquidity, the supply of good quality, “interesting” stock remains tight. It is therefore important that any investment strategy is elastic enough to ensure it has the greatest chance of meeting its investment objectives.
13THINK Europe: Retail
Fig.6: Summary of sub-sector differences
Source: TH Real Estate, 2014
High streets Shopping centres Retail warehousing Outlet malls Multi-channel
Physical attributes
Single shop units covered malls with an anchor store plus unit shops and car parking
Out-of-town big-box units, either solus sheds or
purpose built parks
Typically open-air village-style centres, clean modern
shopping environment
Online retailing with physical collection points
becoming important
Location Town and city centresIn-town and out-of-town locations,
close to shopper populationsAccessible locations close to
suburban populations
Located some distance from city centres to avoid cannibalisation of sales,
accessible locations on motorway networkCyberspace
Attraction to retailers
Loyal local shoppers, public transport
enhanced by asset management and
tenant engineering
Affordability,
doorstep car parking
High sales volumes, strong footfall, channel for
disposing of excess stock
No catchment or shelf-space constraints
Tenant baseNeeds based shopping, banks,
travel agents, mainstream fashion, independent retailers
Predominantly domestic, mainstream fashion and comparison goods
Bulky goods, electricals, furniture, DIY,
discount fashionInternational, aspirational brands
Music, books, electricals, food, retail services (ie travel,
banking), mainstream comparison goods
Asset management potential
Weak – fragmented ownership Good – improves with size of schemeModest – improving as depth
of occupier market growsStrong n/a
Growth phase
Mature/Shrinking
Established/Polarisation
Expanding Expanding Structural growth
Role in retail hierarchy
Daily/weekly needs based shopping
Convenience
Discretionary, comparison goods shopping
Comparison
Predominantly bulky goods shopping, as
and when neededConvenience
For those that love to shop, a day out, bargain hunters, tourists
Experience/leisure
Convenience of 24 hour arm chair shopping, home delivery,
price comparison, customer reviews and choice
14THINK Europe: Retail
Sub-sector highlights
High streets
High streets are the most traditional, well-established part of the European retail hierarchy.
workers. High streets in capital cities, and attractive, historical centres remain some of
high footfalls and tourist spend. Prime retail pitches in leading cities will typically have an
upmarket, international fashion bias. Beyond major cities, the high street offer is more mass-
market with a high representation of retail services, ie banks, travel agents, hairdressers,
all catering for needs-based shopper requirements. Indistinguishable high streets have
the impact of the internet. Some high streets in secondary locations are thought to be in
irreversible decline.
Shopping centres
Shopping centres have become an increasingly important component of the retail hierarchy
in recent decades. Their physical attributes vary by country, and they range in size from
small, convenience-led district centres or precincts, to major regional malls over 200,000 sq m
GLA. Good shopping centres will have one or more anchor stores, which would usually be
a hypermarket or department store. Shopping centres are more mature and established
in northern Europe, while in southern Europe stock is more modern, and supply per capita
tends to be lower. Shopping centres are dominated by mainstream fashion and are used by
shoppers for weekly or monthly comparison shops. The diversion of sales to the internet, the
increasingly mobile consumer, and consolidation in the occupier market, means we are seeing
polarisation of shopping centre performance with an increasing proportion of sales being
captured by fewer centres – those with critical mass, strong anchors, good car parking and a
strong catering/leisure offer.
36–48 Argyle Street, Glasgow, UK Bullring, Birmingham, UK
15THINK Europe: Retail
Sub-sector highlights (continued)
Retail warehousing
Retail warehousing is a less established shopping concept (with the exception of the UK) and
typically comprises large out-of-town sheds, housing bulky goods, furniture and DIY stores.
They are located in accessible, out-of-town locations close to suburban populations, the
attraction being the ability to carry goods to the car easily. In the mature retail park markets
in northern Europe, the range of retailers on parks is much deeper and includes some
fashion, sports, children’s goods, and health and beauty retailers. Shoppers would typically
use retail warehousing for non-speculative trips to buy large items, as and when needed;;
the journey is more about convenience than the experience. This concept is still maturing in
many European markets.
Outlet malls
Outlet malls are usually village-style, open air, attractive schemes. They are strategically
cannibalisation of sales. Retailers at outlet malls must sell goods at a discount, and provide
a channel for disposing of surplus stock. Tenants are mostly international, upscale brands.
Shoppers travel from large distances, lured by the range of brands not found at traditional
shopping centres, the discounts available and the clean, safe shopping environment. This is
a concept for people who enjoy shopping and is complementary to other more needs based,
regular shopping trips. Dwell times are longer than average, and while it is a speculative
shopping journey, average spend levels are high. This experience cannot be easily replicated
online, for either the shopper or the retailer. This concept is immature with room for
expansion, as demand from retailers and shoppers grows.
Wellington Retail Park, Waterlooville, UK McArthurGlen Serravalle Designer Outlet, Italy
16THINK Europe: Retail
Sector focus: Retail warehousing
retail warehousing in Europe has evolved rapidly as a
warehouses were developed to service the needs of “bulky
goods” retailers, however, the attraction of easy access
and convenient free parking soon registered with other
retailer groups. Increasingly, fashion, footwear, sports and
household goods retailers have committed to out-of-town
formats where planning conditions permit.
The evolution of the sector has resulted in the creation
of several distinct retail warehouse types representing the
different generations of development. These include:
• “First generation” industrial units converted for retail use;;
• “Second generation” purpose-built freestanding “solus”
retail warehouse units;;
• “Third generation” multi-unit retail parks;; and
• “Fourth generation” fashion parks, dominated by a mix
of “high-street” style retailing and often developed to a
Across Europe, the retail warehouse market has evolved at
different rates. The UK is by far the most mature, and on
that in shopping centres. Well-established fashion retailers,
such as M&S, Next and Gap, are all well represented within
the UK retail warehouse sector. German and French retail
warehousing has also evolved and “fourth generation”
parks have begun to emerge, with retail occupiers including
Stefanel, New Yorker and H&M. The depth of the retailer
an impact on future rental growth potential. There are a
number of tenants with pan-European portfolios that are
found in many European out-of-town markets;; these include
DIY store Leroy Merlin, electrical retailer MediaWorld,
sports retailer Decathlon and a number of discount brands
such as Takko.
As the sector has matured, the different scheme types have
developed their own investment characteristics in terms of
lot size, liquidity, sustainable rental levels and pricing, with
the latest generation schemes usually commanding the
highest rental levels, and occupier and investor demand.
where units are sometimes awkward and often historical in
good opportunities for driving sales densities through the
more popular as demand from traditional high street
retailers has grown). Despite rising rental levels as the sector
service charges) offer good rent affordability for retailers –
particularly higher margin “high street” operators.
We are wary about generalising, and there are retail
warehouse locations that are sub-optimal in terms of
location and where the shopping experience is far from
good. We favour “next generation” retail parks that
will meet the requirements of tomorrow’s increasingly
discerning occupiers and consumers. We also support
investment in early generation parks, that dominate
their catchment area and can be repositioned through
refurbishment and re-branding.
While we believe the sector remains fairly priced, medium-
term performance will not be driven by asset repricing and
weight of money, but instead by property fundamentals as
the economy improves and we return to a stable occupier
market and improved rental growth opportunities.
Our forecasts highlight disparities among the different
retail warehouse typologies;; secondary parks are projected
to outperform as a result of higher income returns, but
On a risk-adjusted basis, prime fashion parks continue to
provide the best opportunities with rental growth forecast
to outperform.
The Fort Shopping Park, Manchester, UK
17THINK Europe: Retail
Sector focus: Outlet malls
Designer outlets have been one of the most widely
misunderstood, but strongest performing, real estate
sectors in Europe over the past decade and, relatively
speaking, they thrived during the global economic
downturn. This is a specialist division of the retail market
and relatively immature — as both a shopping concept and
an investment opportunity. But this is changing as retailing
becomes more international, and demand for luxury goods
grows in line with the burgeoning middle classes. The sector
is already popular with shoppers and tourists, and the best
schemes generate among the strongest sales densities
of any retail destination. Retailers, enticed by the strong
footfall and sales, are increasingly including outlets in
their portfolio strategy. In turn, the sector is attracting the
attention of a wider pool of investors.
Despite the sector being considered niche as an investment
class – a word often associated with risk — it is underpinned
by very sound drivers of performance, and should continue
to enjoy structural growth globally. In fact, unlike other core
real estate sectors, where market cycles have become more
pronounced, designer outlets have proved to be relatively
immune to cyclical economic and real estate market swings.
Not only can outlets generate sales densities that are
superior to traditional shopping centres or high streets, they
have a relatively cheap entry cost and low rental burden,
with turnover-based leases giving tenants the comfort of
that outlet operators can respond rapidly to both structural
retailer requirements. This is key to optimising tenant mix,
the shopper experience and performance.
While this is a small, specialist part of the retail market,
investors should not be deterred by perceived risk or
illiquidity;; the good investment value it offers, compared to
The sector offers some of the most attractive risk-adjusted
returns in the European real estate market, as long as a
reputable operator is in place. Perhaps most importantly,
this is a retail investment which is defensive in light of the
ongoing diversion of sales to the internet;; it is a shopping
Strong demand from international retailers means the
occupier base is broadening and covenant quality is
improving. Constrained supply, coupled with growing
demand, should see continued rental growth and a long-
term structural improvement in investment pricing for the
sector globally. In Europe, for the short term, we expect
the strongest performing markets to be those enjoying
economic recovery, and where real estate demand is
focused. Longer term, we expect the strongest performance
to come from markets where the demand supply imbalance
from structural growth.
Roppenheim The Style Outlets, France
19THINK Europe: Retail
Key markets overview: UK
Demographic and economic context
The UK economy saw strong growth in 2014 at 2.6%,
with further outperformance expected this year as GDP
is forecast to grow by 2.6%. Longer-term growth will
be supported by improving demographics, as the UK is
projected to see its working age population expand. This
is driven by natural increases, net inward migration and
further rises in the state pension age.
3.2% in 2015, and growth is expected to average 2.2% over
the medium term. Research shows a strong correlation
between incomes and retail spending power, meaning that
higher salaries will translate into higher retailer turnovers.
This should have a knock-on impact for rent levels at the
best trading space.
It should be noted, that relatively high levels of household
debt will hinder retail market growth, and households will
need to tackle their debt levels over the long term to create
a sustainable consumer economy.
By 2030, 23% of UK households will have incomes greater
than $100,000;; this is 10% higher than the European
2.5 million households, will reside in London. The UK and
rates and a greater proportion of ‘thriving’ towns.
0-4 10-14
20-24 30-34 40-44 50-54 60-64 70-74
80+
-8% -6% -4% -2% 0% 2% 4% 6% 8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
European average 2030
2030 2010
Key UK
European average
Source: Oxford Economics, 2014
Key $0–20,000 $20–35,000
$35–70,000 $70–100,000
$100,000+
Source: Oxford Economics, 2014
20THINK Europe: Retail
Key markets overview: UK (continued)
Retail supply
The UK has the largest volume of shopping centre space in Europe in absolute terms, though
space means that retail spend is spread over few locations and produces better densities. UK
comparison goods sales densities are often quoted as 40% higher than Germany, for example.
Stock is more mature than average and the occupier base more established than in many of
its European peers.
in Europe. The sector has evolved as a trading format over the past 30+ years and now
The UK’s shopping centre development pipeline remains below the European average but
there are a number of schemes marked for redevelopment, including St James Shopping
Centre in Edinburgh.
Fig.9: UK retail stock
Source: TH Real Estate, 2014
UK Rank European countries
Number of shopping centres 817 1
Shopping centre stock (‘000 sq m GLA) 17,896 1
Shopping centre stock per capita
(sq m per ‘000)286 7
UK market conditions
0
5
10
15
20
25
Source: TH Real Estate, Q2 2015
Key Prime
Standard
Secondary
Dec
07
Mar
08
Ju
n 0
8
Sep
08
Dec
08
Mar
09
Ju
n 0
9
Sep
09
Dec
09
Mar
10
Ju
n 1
0
Sep
10
Dec
10
Mar
11
Ju
n 1
1
Sep
11
Dec
11
Mar
12
Ju
n 1
2
Sep
12
Dec
12
Mar
13
Ju
n 1
3
Sep
13
Dec
13
Mar
14
Ju
n 1
4
Sep
14
Dec
14
Mar
15
Ju
n 1
5
-6-5-4-3-2-1012345678
Source: IPD, 2014
Key UK
European average
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
2010
2011
2012
2013
2014
21THINK Europe: Retail
Fig.12: Mall investment volumes ($bn)
Q4
20
05
Q4
20
06
Q3
200
7
Q1 2
00
8
Q3
200
8
Q1 2
00
9
Q3
200
9
Q1 2
010
Q3
2010
Q1 2
011
Q3
2011
Q1 2
012
Q3
2012
Q1 2
013
Q3
2013
Q1 2
014
Q3
2014
Q1 2
015
Q2
2015
4
5
6
7
8
200
7
200
8
200
9
2010
2011
2012
2013
2014
0
2
4
6
8
10
12
14
16
18
20
Source: CBRE, Q2 2015
Source: Real Capital Analytics, 2014
Key markets overview: UK (continued)
UK market outlook
The retail sector accounts for over 50% of institutional investment in the UK and has
historically rewarded investors with both outperformance and lower volatility of returns.
Large, dominant shopping malls in the UK offer investors access to an excellent quality
of income, in terms of covenant strength and lease length. Constrained supply of quality
assets, coupled with good demand from shoppers, occupiers and investors alike, means we
expect demand for this product to remain strong, putting further pressure on yields.
IPD data indicates the retail warehouse market has historically outperformed All Property
over its 14-year history. The long-term outperformance has been supported by the maturing
of the sector, as both a shopping format and investment class. However, the characteristics
which supported this change remain relevant today, with continued demand from retailers for
Prime shopping centres and retail parks are expected to see annualised rental growth
recovery of 2.6% and 2.4% respectively, over the medium term. Asset management
strategies can help support further uplifts in rents.
22THINK Europe: Retail
Key markets overview: Germany
Demographic and economic context
The fundamentals for German consumer spending are now
levels are at an all-time high, and many sectors are enjoying
real wage growth. Retail sales increased by about 1.7% in
2014, and are expected to average 1.5% pa growth over
coming years. These relatively low growth levels, compared
to many other markets, can be explained by high saving
rates and the low propensity of German consumers to spend
additional income in the retail sector. A focus on travel,
cars and services means only 28% of German consumer
spending is captured by the retail sector, compared to 36%
in France or 31% in the UK.
The German unemployment rate fell to 6.5%, another
record low. The annual fall in the number of unemployed
actually rose to a near three-year high. Although the
pace of employment growth may slow in response to
rising labour constraints, this will be partially offset by
rising inward migration. Labour market tightness and the
imposition of a minimum wage at the start of this year
should also boost workers’ incomes, adding to the windfall
from the oil price decrease.
Fig.14: Germany demographic and economic stats
Source: Oxford Economics, 2014
GermanyEuropean
averageRank European
countries
Population (million) 82 - 1
Population growth (2010–2030, %) -1% 5% 16
GDP 2014 ($bn) 3,597 - 1
GDP per capita 2014 ($) 43,742 32,162 9
GDP growth (2010–2030, %) 34% 40% 16
Retail sales 2014 ($bn) 1,702 - 2
Retail sales per capita 2014 ($) 20,699 17,355 5
Retail sales growth (2010–2030, %) 30% 39% 18
Clothing & footwear sales 2014 ($bn) 81 2
Clothing & footwear per capita 2014 ($) 991 901 6
Clothing & footwear sales growth (2010–2030, %) 11% 47% 23
% population under 65 79% 83% 26
Number of households with income >$100,000, 2030 (‘000) 5,340 4
23THINK Europe: Retail
Key markets overview: Germany (continued)
Oxford Economics expects real incomes to rise by 2.6% this
year, the largest annual gain since 1992. Additionally, low
household indebtedness will help consumers, but it is by no
means inevitable that households will use the rise in their
real incomes to buy more goods and services. Over recent
years, German households have saved a lower proportion
of their incomes than the historic norm and we have to
assume that some of the rise in incomes will be saved.
Given that household debt as a share of disposable income
has been on a downward trend for over a decade, the
transmission to increased spending will be stronger than it
would be in other Eurozone economies, where household
Longer term, Germany is among the most demographically
challenged countries in Europe. The working age population
has already peaked, and this process will constrain
economic growth rates, and hence retail sales, over the
immigration of around 400,000 mainly young people per
year (the highest inward migration after the USA), which
demonstrates that job growth may be able to mitigate the
low birth rate.
The key feature of German real estate is a striking market
stability. With property valuation focused on long-term fair
values, the rental and investment market has historically
experienced very low volatility. Cross-border investors
should target German retail to provide a stable anchor in
their portfolio, rather than excess returns.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
European Average 2030
2030 2010
0-4 10-14
20-24 30-34 40-44 50-54 60-64 70-74
80+
-8% -6% -4% -2% 0% 2% 4% 6% 8%
Key UK
European average
Source: Oxford Economics, 2014
Key $0–20,000 $20–35,000
$35–70,000 $70–100,000
$100,000+
Source: Oxford Economics, 2014
24THINK Europe: Retail
Germany retail supply
Germany has the smallest shopping centre stock per capita among developed economies.
However, in terms of turnover per sq m, Germany ranks at the bottom in Western Europe. The
reason for this is a large stock of high street retail and retail warehousing, which is diluting
sales in shopping centres. German consumers’ spending power is only slightly above average,
but a larger proportion than in other countries is not spent in the retail sector.
Relatively low average sales densities mean that average rents are lower than in other Western
European countries, however it has not affected occupancy rates. With 4.0% in 2014, German
shopping centres have the lowest vacancy rate in Europe, falling to c.2.5% in dominant
shopping centres. These favourable supply conditions are set to last as the pipeline of new
space is only 10 sq m per 1,000 population, the lowest construction level in Europe, compared
to the European average of 38 sq m per 1,000 population. The majority of space will be added
medium sized towns in Germany.
The retail planning regime in Germany is among the strictest in the world. Local and regional
authorities are very reluctant to allow new shopping centres;; in particular, large-scale out-of-
town retail tends to face strong resistance, which in particular has held back the development
of outlet malls. Traditional high streets are protected, which means shopping centres, which
are integrated into an existent city centre high street, are viewed more favourably, and are
therefore more common.
Fig.17: Germany retail stock
Source: TH Real Estate, 2014
Germany Rank European countries
Number of shopping centres 543 4
Shopping centre stock (‘000 sq m GLA) 11,914 5
Shopping centre stock per capita
(sq m per ‘000)146 15
Key markets overview: Germany (continued)
Germany market conditions
Mid
-siz
e re
tail
Mid
-lar
ge
reta
il
Larg
e re
tail
Sm
all r
etai
l
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Source: IPD, 2014
Key 2004–2014 (end) 2011–2014 (end)
25THINK Europe: Retail
Fig.19: Mall investment volumes ($bn)
4
5
6
7
8
Q3
20
06
Q4
20
06
Q1
200
7Q
2 2
00
7Q
3 2
00
7Q
4 2
00
7Q
1 20
08
Q2
20
08
Q3
20
08
Q4
20
08
Q1
200
9Q
2 2
00
9Q
3 2
00
9Q
4 2
00
9Q
1 20
10Q
2 2
010
Q3
20
10Q
4 2
010
Q1
2011
Q2
20
11Q
3 2
011
Q4
20
11Q
1 20
12Q
2 2
012
Q3
20
12Q
4 2
012
Q1
2013
Q2
20
13Q
3 2
013
Q4
20
13Q
1 20
14Q
2 2
014
Q3
20
14Q
4 2
014
Q1
2015
Q2
20
15
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14 0
2468
101214161820
Source: CBRE, Q2 2015
Source: Real Capital Analytics, 2014
Key Prime
Secondary
Key markets overview: Germany (continued)
Germany market outlook
Around half of the retail property transaction volume generated over the course of the year,
has come from international investors. Due to the severely limited availability of core product
in the top locations, investment volumes in second tier locations and regional markets are
increasing. As a result, yields have been hardening over the course of this year, with prime
shopping centres now trading at 4.25-4.5%, after 4.75% in 2013 (net).
The largest deal was the share acquisition by Unibail-Rodamco in both CentrO Oberhausen
included the purchase of the Christie portfolio, by a joint venture of Morgan Stanley Real
Galerie by Blackstone to Allianz Real Estate. The latest notable deal of 2014 was Wiesbaden’s
Lilien-Carré, sold out of a troubled situation by TJ O’Mahony to Orion Capital Managers.
The low interest rate environment will most likely push yields further down in 2015 and 2016.
However, once interest rates start to normalise, there will be upward pressure on yields.
26THINK Europe: Retail
Key markets overview: France
Demographic and economic context
France’s GDP per head is relatively low on a pan-European
basis, estimated at c.$40,000 in 2014, adjusted for
purchasing power. The number of households earning
$35–70,000 is expected to rise by 0.7% pa over the period
2016–2030, according to Oxford Economics, adding a
further 1.4 million households into this income bracket.
France’s demographics are not favourable, with a shrinking
of 4 percentage points in working age share of the total
population over the next 15 years. Rising participation
should partly offset the situation, but overall the labour
supply will be broadly stagnant. Stronger population growth
is expected in the Ile de France and South of France.
Household indebtedness had risen to 100% of household
disposable income by 2013, albeit not too excessive
relative to many other Eurozone countries. It is expected
to deteriorate slightly over the next decade, and this will
maintain the savings ratio at a higher level than might
have been the case. The personal sector savings ratio
was 12.3% in 2014, and is expected to fall gradually to
11.6% by 2024.
High structural unemployment is part of the reason for high
precautionary savings among households. Unemployment
is currently 10.3% compared with the long-run average of
8.9%. It has turned the corner, but is expected to remain
above the long-run average over the next decade.
Fig.21: France demographic and economic stats
Source: Oxford Economics, 2014
FranceEuropean
averageRank European
countries
Population (million) 66 - 3
Population growth (2010–2030, %) 8% 5% 10
GDP 2014 ($bn) 2,708 - 2
GDP per capita 2014 ($) 40,987 32,162 12
GDP growth (2010–2030, %) 31% 40% 21
Retail sales 2014 ($bn) 1,229 - 4
Retail sales per capita 2014 ($) 18,610 17,355 9
Retail sales growth (2010–2030, %) 26% 39% 20
Clothing & footwear sales 2014 ($bn) 51 5
Clothing & footwear per capita 2014 ($) 765 901 15
Clothing & footwear sales growth (2010–2030, %) 8% 47% 24
% population under 65 82% 83% 16
Number of households with income >$100,000, 2030 (‘000) 3,096 5
27THINK Europe: Retail
Key markets overview: France (continued)
Prospects for France have improved in recent months, and
GDP growth is expected to gain momentum, such that the
years and nearly closes by 2017. Low oil prices, the weaker
unemployment rate.
Consumer spending will be the main driver of growth in
the short term, rising to 1.9% in 2015 against 0.7% in 2014.
House prices are forecasted to grow by 2.0% pa over the
absence of any substantial correction during the GFC.
reform is very much needed to improve France’s long-term
competitiveness and to bring down the unemployment rate,
but a recovering economy might allow politicians to limit
their ambitions with regards to the reform agenda.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
European average 2030
2030 2010
0-4 10-14
20-24 30-34 40-44 50-54 60-64 70-74
80+
-8% -6% -4% -2% 0% 2% 4% 6% 8%
Source: Oxford Economics, 2014
Source: Oxford Economics, 2014
Key France European average
Key $0–20,000 $20–35,000
$35–70,000 $70–100,000
$100,000+
28THINK Europe: Retail
France retail supply
France has 685 shopping centres, incorporating 15.5m sq m, compared with the 17 country
average of 314 centres and 6.4m sq m. The stock is relatively mature with almost half
having been constructed prior to 1980. However, the amount of space per head is in line
with the average. Half of mall space is in mid-size schemes and nearly one-third is in very
large schemes.
After the high level of completions in 2009, 2010–2013 witnessed a fall-off in projects, as the
witnessed the delivery of many schemes, including large-scale destination centres. Future pipeline
space per head, either under construction or with full planning consent, at 2.75m sq m, is more
than double the 17 country average.
The largest pipeline, adjusted for population, is in the southern and western regions, with
Provence-Alpes, Aquitane and Midi-Pyrenees particularly affected.
Fig.24: France’s retail stock
Source: TH Real Estate, 2014
France Rank European countries
Number of shopping centres 685 3
Shopping centre stock (‘000 sq m GLA) 15,556 2
Shopping centre stock per capita
(sq m per ‘000)238 10
Key markets overview: France (continued)
France key market conditions
French schemes tend to enjoy relatively low vacancy compared with the European average,
although vacancy rates have been creeping upwards in recent years. They are currently
around 5.0%;; they are only lower than this in Germany. Of the biggest cities, Marseille has the
highest vacancy at 7.0% and Strasbourg the lowest at approximately 2.0%.
Churn rates, when analysed at city and asset size level, are generally healthy. Like-for-like
from indexation and new lettings at higher rents.
Rental growth is likely to be below its long-run trend over the medium term, and will
underperform the average of key markets. Mall rents are barely expected to rise in 2015
and 2016, but then improve over the medium-term outlook.
-5Klépierre Corio ECP U.Rodamco Hammerson Altarea
-4-3-2-1012345678
Source: Company Accounts, 2014
Key 2011
2012
2013
2014
29THINK Europe: Retail
France market outlook
French shopping centres typically account for a small share of overall investment volumes,
but have seen rapid growth in recent years. Total mall transactions accounted for c.$4bn
the total for the year to $7bn, marginally higher than Germany and second only to the UK.
Core shopping centres are rarely traded and demand is intense, despite a cooling in investor
sentiment in 2012 and 2013.
CBRE estimates the prime shopping centre yield at 4.0% (Paris), in line with its low of the
last cycle, pre-GFC. Although prime yields are higher in the regions at 4.5% plus, the net
initial yield on the average portfolio of malls is close to 5.0% and, with modest growth in
return required to cover key aspects of real estate mall market risk, notably transparency,
liquidity, volatility in returns and security of income. Prime malls are assumed to be held long
second lowest required return of all key European markets, including the UK. This is partly
because the bond yield is currently exceptionally low at just 59 bp (at the end February 2015).
medium term.
Key markets overview: France (continued)
30THINK Europe: Retail
Key markets overview: Spain
Demographic and economic context
Spain’s GDP per head is relatively low on a pan-European
basis, estimated at $28,000 in 2014, adjusted for
purchasing power. The number of households earning
$35–70,000 is expected to rise slowly over the period 2016–
2030, according to Oxford Economics, adding a further
64,000 households over this period. Spain’s demographics
are not favourable with a shrinking of 3 percentage points in
the working age population share of the total, over the next
15 years. However, this is relatively less problematic than for
most other European countries.
Household indebtedness is high, at 125% of household
disposable income in 2013, the second highest in the
Eurozone. It is expected to improve to 112% over the next
decade, and this will maintain the savings ratio at a higher
level than might have been the case. The personal sector
savings ratio was 9.2% in 2014 and is expected to fall
modestly to 7.5% by 2024.
High structural unemployment could affect household
security. Unemployment is currently 23.8% compared with
the long-run average for Spain of 15.2%.
Fig.26: Spain demographic and economic stats
Source: Oxford Economics, 2014
SpainEuropean
averageRank European
countries
Population (million) 47 - 6
Population growth (2010–2030, %) -3% 5% 20
GDP 2014 ($bn) 1,324 - 5
GDP per capita 2014 ($) 28,343 32,162 15
GDP growth (2010–2030, %) 33% 40% 18
Retail sales 2014 ($bn) 855 - 6
Retail sales per capita 2014 ($) 18,317 17,355 11
Retail sales growth (2010–2030, %) 30% 39% 17
Clothing & footwear sales 2014 ($bn) 43 6
Clothing & footwear per capita 2014 ($) 922 901 9
Clothing & footwear sales growth (2010–2030, %) 25% 47% 17
% population under 65 82% 83% 15
Number of households with income >$100,000, 2030 (‘000) 2,802 6
31THINK Europe: Retail
Key markets overview: Spain (continued)
Spain is outperforming the wider Eurozone, and only Ireland
is expected to grow at a faster rate. Spain’s economic
growth was 1.4% in 2014, and the forecast for GDP growth
in 2015 has been revised up from 3.2%. Households are
real income gains this year – partly the result of the sharp
fall in energy bills. Oxford Economics believe the labour
market will improve vigorously over the medium term and
unemployment will fall to 18.5% by end-2018.
Consumer spending growth was strong in 2014, growing
by 2.4%. The forecasters expect an acceleration to 3.3%
in 2015 and 2.6% by 2016. Recovering house prices will
to grow by 4.0% pa from 2016 to 2020, the fastest of any
Eurozone country.
the popularity of the anti-austerity party, Podemos, may
lead to a change of direction. On balance, the risks facing
the economy should subside over the medium term. High
levels of debt in both the public and private sectors means
the economy remains vulnerable to external shocks.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
European average 2030
2030 2010
0-4 10-14
20-24 30-34 40-44 50-54 60-64 70-74
80+
-8% -6% -4% -2% 0% 2% 4% 6% 8%
Key Spain European average
Key $0–20,000 $20–35,000
$35–70,000 $70–100,000
$100,000+
Source: Oxford Economics, 2014
Source: Oxford Economics, 2014
32THINK Europe: Retail
Spain retail supply
Spain has 537 shopping centres, providing some 12.5m sq m gross leasable area, the vast
majority of which completed in the past two decades. Completions fell sharply after 2009, but
the short-lived improvement in the economy in mid-2010 led to a number of schemes starting
or re-commencing in Spain. Spanish completions therefore rose sharply again in 2012 at the
height of the Eurozone debt crisis. 2014 was a record low for mall development and there is
little under construction to complete in 2015 and 2016.
Islands, an even lower provision and higher level of retail spending per head. Other regions
have low retail spending per head but very low provision (eg Extremadura) and look better
combines high provision of space with relatively low retail spending per head, so looks less
appealing, while Aragon also has high provision relative to the level of retail spend. Galicia
looks reasonably well-balanced between provision and retail spending. In reality, the focus
should be on micro-location and asset quality. Broad assumptions about a particular region is
not always helpful, as there are wide variations between provinces within a region, and also
mall schemes within a province.
Fig.29: Spain retail stock
Spain Rank European countries
Number of shopping centres 537 5
Shopping centre stock (‘000 sq m GLA) 12,560 4
Shopping centre stock per capita
(sq m per ‘000)271 9
Source: TH Real Estate, 2014
Spain market conditions
H1
20
12
H1
20
13
H1
20
14 -15.0
-10.0
-5.0
0.0
5.0
Key Unibail-Rodamco Corio Klepierre
Source: Company Accounts, 2014
Key markets overview: Spain (continued)
33THINK Europe: Retail
Spain market outlook
super prime schemes, in contrast to rising vacancy in secondary schemes. The market
remains highly polarised, with prime high streets in Barcelona and Madrid, and large,
dominant and well-established malls, proving most resilient in terms of rents and vacancy.
Vacancy rates have fallen on prime schemes but continue to rise on secondary. Klépierre
and Unibail Rodamco reported growth in like-for-like income in H1 2014, but other landlords
admittedly continue to face a squeeze on margins. Following such a deep recession,
rationalisation among some retailers is bound to continue for a while, but the positive news, at
least for now, seems to be outweighing the negative. Mall fashion sales are proving resilient,
but retailer churn rates are high at malls and still rising, particularly in Madrid and Barcelona.
While super prime malls in Spain have registered positive rental growth in recent years, rents
falls, amounting to around 40% in total since 2009. The improving consumer demand climate
suggests future rental growth will be reasonably strong, particularly from this low base.
What will be the “new normal” for bond yields? Fig.31 contains a forecast of 2.5% for Spain’s
10-year sovereign bond coupon at end-2019, which is still substantially lower than the long-
run average yield of 4.43%. In addition, rental growth will still be expected as the consumer
recovery consolidates into the next decade. Considering these factors, current pricing
appears relatively defensive.
Prime malls are assumed to be held long term, and the liquidity and volatility risk across
and expected returns should be higher.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
UK
Spa
in
Po
rtu
gal
Net
her
lan
ds
Ital
y
Irel
and
Ger
man
y
Fran
ce
Bel
giu
m
Au
stri
a
Source: Bloomberg as at 27 February 2015, Oxford Economics as at March 2015
Key Average 2000–2014 February 2015 Forecast 2019
Key markets overview: Spain (continued)
34THINK Europe: Retail
ItalyEuropean
averageRank European
countries
Population (million) 60 - 5
Population growth (2010–2030, %) 2% 5% 15
GDP 2014 ($bn) 1,972 - 4
GDP per capita 2014 ($) 32,872 32,162 14
GDP growth (2010–2030, %) 12% 40% 26
Retail sales 2014 ($bn) 1,087 - 5
Retail sales per capita 2014 ($) 18,115 17,355 12
Retail sales growth (2010–2030, %) 7% 39% 25
Clothing & footwear sales 2014 ($bn) 76 4
Clothing & footwear per capita 2014 ($) 1,270 901 3
Clothing & footwear sales growth (2010–2030, %) -10% 47% 25
% population under 65 79% 83% 25
Number of households with income >$100,000, 2030 (‘000) 2,083 7
Key markets overview: Italy
Demographic and economic context
Italy has been suffering from a structural growth problem
since the early 1990s. Silvio Berlusconi’s three premierships
and short-lived governments with weak mandates have
had limited success with economic reforms. Italy has done
much less than the other peripheral economies to improve
its competitive position. The reform impetus of the current
government appear more promising than previous attempts.
However, Italy started from a more comfortable position
than Spain: it was spared a housing boom (and bust);;
Europe’s third largest industrial base (after Germany and
France but ahead of the UK), and has accumulated a huge
savings pile in the private sector (government debt is one of
the highest in the OECD).
The Italian economy continues to suffer from a host of
domestic social economic risks, which are undermining
projected to emerge from recession in 2015, but lingering
market uncertainties, linked not only to Italy’s tight credit
conditions and a lack of domestic demand, is likely to curb
Italy’s expansion to 0.6% this year, rising to 1.0% in 2016.
As such, attention will remain focused on policy measures
by Prime Minister Matteo Renzi, in conjunction with the
European Central Bank, to try and re-engineer growth and
and the actions of the European quantitative easing
programme.
Fig.32: Italy demographic and economic stats
Source: Oxford Economics, 2014
35THINK Europe: Retail
Key markets overview: Italy (continued)
Whilst incomes are under pressure, Italian consumers have
strong balance sheets. Housing owner occupation is high,
with 73% of the population (82% of households) living in
their own house. More importantly, most people own their
house without debt and only 15% of the population has a
mortgage. As a result, Italy has the lowest household debt
level in Western Europe, amounting to only 59% of GDP (for
comparison: Germany 59%, UK 99%).
Italy is an economically divided country: in the South,
of Spain, whereas in the North, income levels are on par
with German and UK regions. Over the past two decades,
this polarisation has shown no signs of closing, but quite
the opposite;; with people gravitating north for better job
opportunities, many southern provinces are suffering from
declining population.
Despite its challenging economic performance, Italy has
seen very few retailer insolvencies. Most major domestic
brands have manageable levels of debt, and in the fashion
sector, the market share of international brands is high. In
addition, the still sizeable sector of independent retailers
has been suffering disproportionately higher declines in
sales, compared to modern chain retailers. Retailers remain
highly selective in terms of locational preferences. Most
retailers remain focused on the North and Centre, and some
have retreated from the South altogether.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
European average 2030
2030 2010
0-4 10-14
20-24 30-34 40-44 50-54 60-64 70-74
80+
-8% -6% -4% -2% 0% 2% 4% 6% 8%
Source: Oxford Economics, 2014
Source: Oxford Economics, 2014
Key $0–20,000 $20–35,000
$35–70,000 $70–100,000
$100,000+
Key Italy European average
36THINK Europe: Retail
Italy retail supply
Italy has 766 shopping centres, with 13.7m sq m GLA (as of 2014);; on average the stock is
more modern than in more mature markets, such as Germany and the UK, with about 90% of
shopping centres completed in the past two decades. Due to local planning approaches, there are
The focus of development is on medium-sized schemes, and in particular, very large projects,
as the existing stock is concentrated in smaller and medium sized schemes. There is a growing
number of shopping centre projects focused on urban regeneration, where malls form part of
capita, and there is a potential threat of over-supply in some regions. The bulk of the pipeline
Investors have very limited appetite for the South, which also reduces development activity in
Southern Italy.
Out-of-town shopping centre vacancy rates are typically higher than those of the city centre
rates have increased from around 3% prior to 2007, to 6–10% in 2014. The good news is
that vacancy rates have stabilised;; since 2013, void rates have remained stable. However,
at around 16%, churn rates are higher than in Northern Europe, but lower than in Spain,
Portugal and Poland.
Fig.35: Italy retail stock
Italy Rank European countries
Number of shopping centres 766 2
Shopping centre stock (‘000 sq m GLA) 14,283 3
Shopping centre stock per capita (sq m per
‘000)235 11
Source: TH Real Estate, 2014
Key markets overview: Italy
Italy market conditions
The retail market is sharply polarised along the lines of location quality. Falling sales and,
much less so, growing stock, continue to put pressure on rents, and retailers are getting
into the habit of asking for rental discounts. At the top end of the market, things look much
better. Prime shopping centre and high street rents have remained stable since 2007, as many
international retailers continue to expand and compete for the best space.
Polarisation between locations is typical for contracting markets, but in Italy, tourism
reinforces the trend in favour of top high streets, shopping centres and outlet malls. About 44
million people travel to Italy each year, compared to c.60 million to the US or 28 million to the
with newly travel and spending-hungry Asians and Eastern Europeans. A bias towards prime
centres is supported by tourists and Italian shoppers. In the fashion sector, the market share
of value retailers in Italy stands at 36%, compared to 59% in Europe. Aspirational retailers
take 15% of space (Europe 8%) and luxury retailers take 7% (European average 3%).
The composition and tenant mix of Italian shopping centres continues to evolve: food
food retailers (eg Apple, Hollister) are emerging as footfall-generating junior anchors. Food
courts are also becoming an increasingly important element of shopping centre provision.
Corio Eurocomm. Klépierre -2
-1
0
1
2
3
4
5
Key 2012 2013 2014
Source: Company Accounts, 2014
37THINK Europe: Retail
Italy market outlook
on spending. The unemployment rate shows no signs of falling, and the labour market is
expected to improve slowly. As a consequence, private consumption is forecast to increase by
just 0.4% in 2015, rising to 0.8% in 2016, unless reforms surprise on the upside.
In contrast to Spain, Italian shopping centres have seen limited declines in headline rents. A
large part of the downward adjustments in the recession were implemented via more generous
Italy, compared to Spain. Before successful economic reforms indicate a stronger economic
growth outlook, the expectation for expansion in the retail sector remains subdued as well,
resulting in moderate returns going forward.
While total returns include very limited income growth, the total return for Italian shopping
centres is aided by higher initial yields. The time of bargain yields in Italy are behind us, but in
contrast to Sweden, Germany or the UK, investors can enter the market at a sustainable yield
level, not having to account for negative yield impact.
International investors’ appetite for Italian retail is back, highlighted by rising investment
sentiment indicators, putting Italy among the most sought after investment destinations.
However, this has only translated into small increases in investment volumes. Investors are
ready to deploy capital in Italy, but are waiting for clearer signs of recovery. In addition, the
market is constrained by lack of available product.
Key markets overview: Italy
38THINK Europe: Retail
Key markets overview: Sweden
Demographic and economic context
Over the past 15 years, Sweden’s economy has grown by
2.2% pa outperforming Europe, which averaged growth
of 1.3% pa. Going forward, Oxford Economics expects
years to 2019, compared to Europe at 1.9% pa. Retail sales
are expected to average 2.5% in real terms over the next
growth league in Western Europe. In 2015, the outlook
for domestic demand remains solid. Consumer spending
is expected to increase at a healthy pace as the labour
in real disposable incomes.
These growth numbers underline the fact that Swedes have
a high propensity to spend their disposable income in the
retail sector. In 2012, retail spending in Sweden accounted
for 38% of private consumption compared to Germany at
28%, France at 36% and the UK at 31%.
environment is the strong housing market, while house
supply shortages, and household income growth sections of
the market look overheated. A housing market adjustment
as a result of rising interest rates, would have a negative
impact on consumers.
Fig.37: Sweden demographic and economic context
SwedenEuropean
averageRank European
countries
Population (million) 10 - 15
Population growth (2010–2030, %) 11% 5% 8
GDP 2014 ($bn) 541 - 9
GDP per capita 2014 ($) 55,973 32,162 4
GDP growth (2010–2030, %) 45% 40% 11
Retail sales 2014 ($bn) 191 - 12
Retail sales per capita 2014 ($) 19,794 17,355 7
Retail sales growth (2010–2030, %) 48% 39% 11
Clothing & footwear sales 2014 ($bn) 9 11
Clothing & footwear per capita 2014 ($) 951 901 7
Clothing & footwear sales growth (2010–2030, %) 54% 47% 10
% population under 65 81% 83% 20
Number of households with income >$100,000, 2030 (‘000) 317 16
Source: Oxford Economics, 2014
39THINK Europe: Retail
Key markets overview: Sweden (continued)
Population growth is forecast to average 0.4% pa (source:
Oxford Economics) over the next 10 years, and the total
population will not peak until the 2030s (source: UN), later
than most other European countries. Importantly, the
working age population will grow marginally until 2040,
when most of the developed world countries are expected
public debt, and the favourable demographic makeup of the
country, is likely to keep Sweden in a leading position for
the long term.
Sweden continually achieves high scores in competitiveness
rankings. The extensive survey, published by the World
Economic Forum, placed Sweden in fourth place globally
in 2012. The country is seen as particularly strong in
technology and the quality of public institutions. The
talent, and research and development, are among the main
growth and the success of Swedish products abroad.
Geographically, Sweden is about 25% larger than Germany,
but due to its comparatively small population, the majority
of the larger towns and cities are clustered in the south
of the country. After the capital Stockholm, the next two
in the south west of the country. Next in the hierarchy are
18 university towns, boasting a young population and
a vibrant local economy, which lends them well for
institutional retail investments. 14 of these have a
population of around 100,000 people. The majority are also
located in the more densely populated southern part of the
country, with only three in the north.
2010 2030 European average 2030
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80+
-8% -6% -4% -2% 0% 2% 4% 6% 8%
Key $0–20,000 $20–35,000
$35–70,000 $70–100,000
$100,000+
Key Sweden European average
Source: Oxford Economics, 2014
Source: Oxford Economics, 2014
40THINK Europe: Retail
Sweden retail supply
Unlike other European countries, Swedish local authorities do not generally impose trading
restrictions in their zoning for retail areas. This is a very positive characteristic for investors
as it allows landlords to manage their assets unhindered. When restrictions are applied,
they normally relate to the trading of food, large volume trading, environmental impact,
infrastructure solutions, and more recently, for the preservation of vibrant city centres. Due
to this relative relaxed planning approach, Sweden has one of the highest per capita shopping
centre stock provisions in Europe, and one of the larger development pipelines. The high
stock levels in shopping centres have to, however, be seen in context: Swedish consumers are
to a lesser extent the retail warehouse sector, are unusually small. As in any other mature
market, there are obsolete schemes, and investors need to target locations with a high degree
of local market dominance.
Fig.40: Sweden retail stock
SwedenRank European
countries
Number of shopping centres 272 8
Shopping centre stock
(‘000 sq m GLA)4,721 8
Shopping centre stock per capita (sq m per ‘000) 499 1
Source: TH Real Estate, 2014
Sweden market conditions
The high stock levels in shopping centres have to be analysed in context: Swedish consumers
are appropriate, is space productivity. GfK data reveals that average retail sales densities in
Sweden are among the highest in Europe, averaging €6,000 per sq m pa, compared to €5,000
per sq m pa in the UK, €4,000 per sq m pa in Italy, and just €3,000 per sq m pa in Germany.
The shopping centres’ segment can be divided into “in-town” and “out-of-town” centres,
offering different characteristics for investors and shoppers.
Most Swedish cities tend to have several in-town shopping centres, rather than one large
dominant scheme. As land is more restricted and constrained by historical buildings, rivers
etc, the shopping centres are multi-levelled and sometimes compromised from a design
perspective. The dominant schemes will, however, trade well and form the focus for the city.
Most Swedish cities will also have out-of-town shopping centres which, if large enough, will
act as a regional scheme for the wider catchment. The retail offer may be similar to the
town centre but they will nearly always have a major grocery retailer anchor. With fewer land
and large car parking provisions. They also regularly offer the owner the ability to add value
through carefully planned extensions.
Unibail Rodamco Citycon Klépierre ECP -2.0
0.0
2.0
4.0
6.0
8.0
Key H1 2010
H1 2011
H1 2012
H1 2013 H1 2014
Source: Company Accounts, 2014
Key markets overview: Sweden (continued)
41THINK Europe: Retail
Sweden market outlook
The Swedish retail market is mature with professional retailers and landlords. A speciality of
Sweden is the fact that several large chains have developed a variety of brands, to take advantage
of their consumer knowledge and establishment expertise. This strengthens their position towards
provides the opportunity to agree package deals and more easily implement asset management
initiatives. Five of the chains represent 28 active retail brands in Sweden. Although Sweden is
dominated by strong Nordic brands, international brands are slowly increasing their market share.
The steady entrance of these international brands is considered a positive characteristic, as it
increases competition in the Swedish retail market
of retail stock;; at 7%, the shopping centre vacancy rate in Sweden is below the European
average of about 10%. Only strong centres will experience good rental growth, driven by
buoyant retail sales, while weaker centres will show lacklustre performance.
Prime net initial yields across sectors are currently at a similar level to those in Germany,
low interest rate environment.
The widely quoted prime shopping centre yield at 4.0-4.5%, is for inner Stockholm schemes,
which are rarely traded and as such, often demand a premium. Outside of this sub-market,
yields are typically 5.0% to 5.75%. Further inward yield shift is to be expected in 2015 and
2016;; long-term yields will soften when the interest rate environment changes.
Sweden investment market
In contrast to the emerging markets in Central Europe, which are being driven by foreign
investors due to a small domestic investor base, Sweden boasts a mature market dominated by
sophisticated domestic investors. The funded pension system in Sweden has constantly channelled
institutional capital into the property market, giving rise to a well-functioning, listed and unlisted,
property investment sector. As a result, owner-occupier rates are low, and the stock of assets
managed by professional investors is large relative to the size of its economy. IPD estimates the
size of Sweden’s institutional grade stock to be $113bn compared to the UK, the largest European
market, at $296bn. Sweden has established itself as the fourth largest investment market in
Europe, ahead of the Netherlands, Spain and Italy, and is the second most transparent market
after the UK. Swedish retail has shown the same high level of liquidity as the markets in Germany
The proportion of cross-border investors has varied considerably from year-to-year. At the peak
of the market in 2007, leveraged investors from outside the Nordics dominated activity (several
and residential sectors are the traditional focus of domestic investors, with prime yields currently
being too keen for most international investors. International investors are spreading their
capital more evenly, but with a clear preference for retail attracted by pricing, strong underlying
fundamentals and accessibility to high quality stock.
Key markets overview: Sweden (continued)
vary. In particular, the document has been prepared by reference to current tax and legal considerations that may alter in the future. The document may contain “forward-looking” information or estimates that are not purely historical in nature. Such information may include, among other things, illustrative projections and forecasts. There is no guarantee that any projections or forecasts made will come to pass. International investing involves risks, including risks related to foreign currency,
is no guarantee of future performance. The value of investments and the income from them may go down as well as up and are not guaranteed. Rates of exchange may cause the value of investments to go up or down. Any favourable tax treatment is subject to government legislation and as such may not be maintained. The valuation of property is generally a matter of valuer’s opinion rather than fact. The amount raised when a property is sold may be less than the valuation. Nothing in this document is intended or should be construed as advice. The document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. TH Real Estate is a name under which
Alice Breheny
Global Co-Head of Research
T: +442037278122
Angela Goodings
Associate Director Of Research
T: +442037278147
threalestate.com
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