In contrast to the strong transaction results recorded on the overall German investment market, activity in the retail segment remained relatively calm in H1 2018.
According to Colliers International, the €3.5 billion in transaction volume posted at mid-2018 was down 38% yoy and one third below the five-year average. Activity has picked up considerably over the past three months, however, bringing in a transaction volume of €2.3 billion, almost twice the result of the previous quarter.
Market share rose to 14% as a result, putting retail assets again in second place behind office assets with 45% and just ahead of industrial and logistics with 13%.
Thomas Dänzel, head of retail investment at Colliers International, said: “Following a Q1 with no deals above €100 million, five such deals have changed hands within the past three months. Some of those were confirmed at the beginning of Q2 even though they were finalised at the end of March, including the acquisition of 15 high street assets by DIC Asset.
“Other deals concluded in Q2 were in preparation for some time and provide a good example of the extremely lengthy negotiations that are currently preventing high transaction volume. In terms of demand, we are still experiencing ongoing interest in German retail properties, whose attractiveness not only comes from the general high quality of the assets but also from Germany’s strong domestic economy even in the face of external crises.”
Other major deals in the €300 million range include the Boulevard portfolio featuring 18 high street properties, which was sold by BMO Real Estate Partners to a German superannuation scheme, and a portfolio comprised of 27 retail warehouses and retail parks, 70% of which was sold to Adler Real Estate through the takeover of Brack Capital.
As a result of the above-mentioned deals, the share of portfolio deals again increased to 40% by mid-year (around €1.4 billion). Based on total transaction volume, however, portfolio deals were down 60% yoy, while single-asset deals came in basically neck-and-neck with previous year results at around €2.1 billion. The absence of high-volume portfolio deals therefore fully accounts for the difference to the extremely strong mid-2017 result.
RPA Perspective Retail warehouses and retail parks remain the most popular retail format, accounting for almost half of transaction volume. More than two-thirds of invested capital was poured into this type of asset, particularly within the context of portfolio deals. Unlike a year ago, the portfolios that changed hands were quite small and often comprised less than ten assets, which ultimately explains the low volume. High street properties claimed second place with a market share of around 30% (€1 billion) with shopping centers in third at 22% (€790 million).
Foreign investors accounted for only one fifth of transaction volume in contrast with the 36% attributed to them at mid-2017. Only €732 million were invested by international players, including investors from Switzerland with €190 million (5% market share), the US (€79 million) and France (€60 million), both of which claimed a market share of around 2%.
“Foreign investors are reluctant to get involved in structured sales processes with uncertain outcomes or in small-volume investments located outside of Germany’s seven investment hubs, which bring with them higher transaction costs in addition to already high purchase prices. Considerably limited supply in the Big 7’s retail segments is therefore blocking the inflow of foreign capital,” explains Thomas Dänzel. In fact, more than three quarters of the entire investment capital at mid-year (€2.7 billion) was poured into markets outside the Big Seven.
German investors continue to dominate market activity with €2.8 billion or almost 80% of transaction volume.
There were several changes in terms of activity both buy and sell side. Not only did open-ended real estate fund and special funds claim first place buy side with 23% or €796 million, they also took the lead sell side with 21% or €723 million. Their performance buy side can be explained by the fact that funds are under high pressure to invest in a persistently low interest rate environment. Activity sell side can be attributed to the current peak phase in the cycle, which many investors are taking advantage of to streamline their portfolios. Asset and fund managers came in second both buy side (18%) and sell side as well (19%). Private investors also made a stronger showing than in previous quarters for the first time with a share of 18%.
Yields have for the most part remained low over the past few months. According to Thomas Dänzel, “This trend can be attributed to a drop in the number of deals finalized. Buyers are generally willing to accept further price increases, especially for high-volume assets in coveted locations and portfolios.” Prime yields along the Big 7’s high streets currently range between 2.8% (Munich, Frankfurt) and 3.3% (Düsseldorf, Cologne). The supply bottleneck, which can be seen throughout Germany’s retail investment hubs, has particularly triggered price adjustments. Average prime yields for modern shopping centers with high footfall in the Big 7 currently come to 4.5%. With yields in some cases at well over 5%, retail warehouses and retail parks remain a target for investors in search of sufficient interest rates and stable, long-term cash flow.
“It is becoming increasingly difficult to predict total transaction volume for 2018. One major factor here is the fact that the length of sales negotiations is difficult to estimate, especially when it comes to major deals that would boost market activity. Another factor is limited supply, which is even more pronounced in the retail sector than in the office segment,” said Dänzel. Nevertheless, we expect to see more major transactions in H2. Negotiations regarding the merger of Karstadt and Kaufhof alone hold potential for a mega deal, the like of which we have not yet seen in 2018. However, even if these deals are finalized it will still be difficult to cross the €10 billion mark predicted by Colliers International at the start of the year.”