Restructuring of European retail parks is driving investors back to prime retail warehousing sector

The recent restructuring of Europe’s retail parks is improving investor perception of the prime retail warehousing sector, says Savills.  The international real estate adviser has recorded that the total investment volume over the first three quarters of this year was close to €6.6bn, already 60% of last year’s level and almost double the 10 year long term average.

Overall, Savills has analysed that retail warehousing volumes (including hypermarkets, supermarkets, retail parks and stand-alone units) in Europe* have been rising at a significant pace (38% pa on average) since the bottom of the market in 2009. Indicatively the total volume last year (€11bn) was 4.2 times higher than the total of 2007. The highest increases over the past decade were noted in Germany (8.8 times) and Sweden (5.7 times).

Savills states that it is Germany that accounted for the lion’s share of investment activity into the sector, at 41%, confirming its safe haven status at the top of investors’ list of choices. In the second place follows the UK at 27%, which has an established but evolving retail warehousing sector that is ahead in the cycle of structural change.

The sector has been in recovery since the GFC, when the widespread drop in consumer spending and the onslaught of e-commerce took their toll on the European retail warehousing sector, creating retailer insolvencies and creating vacancies in retail parks.

“Retailers and landlords realised that the changes in the retail sector were structural rather than cyclical,” explains Eri Mitsostergiou, director of Savills European Research. “It was time to adapt or die, and out-of-town schemes needed to offer  a diverse mix of product categories, wide leisure and an F&B offer plus an overall attractive environment in order to become a destination of choice.”

Savills has observed that the occupational markets of out of town warehouses are now increasingly driven by  value retailers as well as non-traditional retail warehousing retailers. The UK has seen value retailers such as ALDI and LIDL more than double their store count in out-of-town schemes from 5,000 to 10,000 since 2014. Some fashion high street brands are also taking an ever greater interest in retail parks, while the leisure component and F&B offer has had an ever growing importance in the retail park tenant mix and positioning.  Often these retailers are filling voids created by the downsizing and subdivision of larger units.

Oli Fraser Looen, Head of European Cross Border Retail Investment, Savills, comments: “The changes in tenant mix and market positioning of retail parks have been facilitated by the efforts of owners, asset managers and developers of retail parks to ‘survive’  in an evolving retail scene, and this has in turn attracted capital. Across Europe, there are now many investor and developer initiatives to improve the performance of existing schemes, through active asset management, renovation and repositioning in the market.”

Rents however, are yet to recover on the same trajectory as investment activity with the average prime rent across Europe* being recorded at just 7% above the cyclical low level and still 13% below the past peak in Q4 2007. “While in the previous cycle occupier demand and the expansion of the newly emerging retail park sector in Europe has driven rental growth, in the current cycle the pace of rental recovery is more modest as retailers margins are under pressure due to competition from online and rising investment costs into omni-channel strategies,” says Eri Mitsostergiou.

From an investor’s perspective, the prime retail warehouse sector is one of the most competitive within the real estate spectrum and, with an average prime of yield of currently 5.7%, it is currently the most desirable.  “The market is largely being driven by simple fundamentals such as tenants paying low rent and service charges and furthermore, due to the strategic location of a lot of these schemes, they offer future alternative uses such as residential and last mile delivery depots.  Although the gains from future rental growth maybe slightly limited, there is certainly. scope for further capital growth gains,” concludes Oli Fraser Looen.