Retail rises higher

Retail property returns, governed by consumer demand, have held up well, writes Anna Bawden. As investors jettison equities and bonds in favour of property investments, retail real estate is looking particularly attractive. Retail property returns have held up, outperforming those in the industrial, office and residential sectors. Nick Tyrell, director at Deutsche Bank Real Estate, says: “Retail has been one of the few sectors to see continuing rental rises in a number of cities and there remain a number of centres where tight supply should continue to ensure impressive returns for investors.” Figures from property consultants CB Hillier Parker show that as of June 2002 annual industrial real estate rental growth in Europe is up 0.9 per cent and office rents are down –7.8 per cent. In comparison, Europe’s retail rents are growing by 1.9 per cent a year. Long-term performance reflects similar trends. Retail was the top performer, up 7 per cent a year, compared with 6.5 per cent for offices and 4.8 per cent for warehousing. Retail property’s strong performance can be put down to several factors. The sector is negatively correlated to traditional asset classes and has been relatively unscathed by the current bear market. Brenna O’Roary, head of European retail research at Jones Lang LaSalle, says: “Retail property is much less volatile and risky than other sectors, especially during the downturn. This is true both in terms of capital value appreciation and rental growth.” According to Frederic Mathier, head of real estate at Credit Suisse Asset Management, retail property is also less cyclical than office or industrial real estate. Retail property is governed by consumer demand. And in Europe, despite the economic uncertainty, consumer price indices have held up well. With tight regulation of planning permission to build new shopping centres, supply is also limited, driving up rents and the values of existing centres. And unlike office or industrial properties, which rely on one or few tenants, the higher number of shopping centre occupants means there is unlikely to be 100 per cent vacancy at any one time, whatever the market conditions. Mr Mathier says retail property’s outperformance is also driven by increasing demand for such investments from high net worth individuals and institutional investors. “Institutional and ultra high net worth individuals (UHNWI) are switching out of bonds and into retail property to take advantage of 1-2 per cent higher returns,” explains Mr Mathier. He says 10-20 per cent of demand for retail real estate comes from UHNWIs. Opportunities in Europe vary from country to country. John Welham, one of the authors of CB Hillier Parker’s Emea Retail Market Index Brief, says “Italy is a particularly favoured destination.” This is due to the perception that because Italy is “undersupplied with shopping centre floorspace, rental growth is still expected. Investors see potential to be involved in what will become the best landmark schemes, whereas in more mature markets this is not possible.” Europa Capital Partners points to Spain as the most interesting market for retail investment in Europe. Charles Graham, chief executive, says that that opportunities are in leisure and shopping centres in major cities and regionally. The other major growth area is in Eastern Europe, in particular in the Czech Republic, Poland and Hungary. This will accelerate after joining with the European Union. “EU subsidies combined with growing disposable income will boost retail property in Eastern Europe,” Mr Graham explains. Ms O’Roary of Jones Lang LaSalle agrees. “Central and Eastern GDP is growing strongly and this will come through in consumer patterns of spending.”