The changing world of retail real estate: the ‘wow effect’ is replacing the shopping list

Retail properties are in high demand in the investment market because they can offer attractive returns. But it’s becoming more and more difficult for investors to find a truly profitable investment, since retailers face stiff competition: booming online sales are forcing them to adapt to the changing needs of their customers and constantly upgrade their stores. Only investors with extensive experience and insight can secure profitable and successful properties.

Across Europe, unemployment rates are falling steadily, down to a record-breaking 3.7 per cent in Germany most recently, with the European average currently settling at 7.7 per cent. So you might think that retailers are doing well. But many stores are struggling with stagnant sales and are facing tough competition from online sales. About 11.6 per cent of total sales in 2016 were generated online. However, the impact of e-commerce on retailers has been mixed: whereas grocery stores have lost hardly any market share, other segments like clothing have sustained appreciable losses. Because the demand for retail space is changing, investments in some retail sectors are now considered risky, especially in assets that are not ‘up-to-date’ from of a consumer’s perspective, are in secondary micro locations, or in small and medium-sized cities depopulated by migratory trends.

The big food retailer chains, specialty stores and stores in centrally located top sites have fewer problems because their locations are simply strong enough or because they’re willing to adapt to the needs of their customers and turn shopping into a ‘wow experience’. Generally speaking, shopping centres dealing with strong competition from e-commerce and/or central city locations are in a period of significant upheaval. “Shopping centres – especially the early standard concepts – are suffering the most from the current wave of change,” said Daniel Herrmann, Head of Fund Management Retail at PATRIZIA Immobilien AG. He believes that instead of developing classic shopping centres the trend is headed towards “urban centres” that are still dominated by retail stores but also have a high portion of other commercial use and maybe even residential and cultural elements.

Consumption temple instead of supermarket

The competition created by online vendors is accelerating the changing trends and the cycles in merchandise assortment design. Keeping up with this dynamic requires more capital than ever before. In addition to low prices and expert advice, customers often want to test their desired product before they buy it. If needed, of course, products can be delivered to consumers’ homes. This kind of service, plus frequent special events, is the best way to compete with internet competitors, which usually offer lower prices. The distinctive shopping experience is the only crucial advantage that brick-and-mortar stores have over online shops.

Specialty stores offering sustainable concepts and properties with a considerable grocery store-anchor promise attractive returns.

This is just as true of department stores, as the example of Markthalle Krefeld shows. real-Markt – part of the Metro Group chain – was transformed into an upmarket consumers’ temple in 2016. PATRIZIA purchased the property for its Handels-Invest Deutschland II fund as part of a package deal. The non-food section shrank after the remodelling, and the store focused on popular product areas like tech products, and the My Family department, which offers a wide range of products such as toiletries, baby and children’s clothing and household goods. On the other hand, the food section was expanded to include a generous assortment of catering products and services, including cooking classes. Here, the customer can try what’s available to buy, and buy what’s available to eat – for instance, in a sushi bar and a pasta-making centre. In addition, Markthalle Krefeld has a station where pre-ordered and pre-packed goods can be picked up.

Shopping centres – especially the early standard concepts – are suffering the most from the current wave of change.”

Daniel Herrmann, Head of Fund Management Retail at PATRIZIA Immobilien AG

Investments are focused on the specialty store segment

In addition to increasing the owner’s need for capital, however, the required investments are also putting pressure on the returns from retail property rents in Europe. Considering the high level of market prices, this calls for an investment strategy that is focused on clearly defined segments of retail properties. Only retail sectors that offer an acceptable risk-return profile, sustainable concepts, and a fair purchase should be considered by smart investors now. That’s why PATRIZIA prefers specialty stores, and primarily properties with a strong grocery store-anchor. Attractive locations include demographically stable and growing regions with strong purchasing power. Even good high-street locations are attractive investments, although they are usually fiercely contested – and expensive.

Upward trend in retail: throughout Europe, stationary retail is growing.

Good retail locations create investment security

Competition was already tough in 2015, when PATRIZIA acquired a high-grade real estate portfolio in the Netherlands for the special fund PATRIZIA Dutch High Street Retail Fund I. In addition to 35 residential and three office buildings, the package included 107 retail properties in first-class shopping locations in urban centres, including Kalverstraat in Amsterdam and Spuistraat in The Hague. The main tenants are prestigious store chains like Apple, Adidas and H&M. Due to the restrictive urban planning laws and stringent approval procedures in the Netherlands, traditional city centres are still among the most important retail shopping centres. Therefore, the purchased properties offer a high level of investment security. “Our portfolio properties are the kind of retail properties that will be successful in the market despite the lasting trend toward online shopping,” said Peter Helfrich, Managing Director of PATRIZIA Netherlands.

The changing world of retail real estate

The ECB won’t end its expansive monetary policy so quickly, fuelling an investment environment that favours material assets like equities and real estate. The handsome returns promised by retail properties are alluring, but often only at first glance. That’s because the sector is changing; only certain clearly defined segments hold long-term promise if the location, strategy and purchase price of a property or portfolio create a favourable risk-return profile for investors. With its many years of experience and retail assets under management of almost EUR 4 billion – ranging from small single-tenant properties to large-scale retail parks – PATRIZIA has the necessary expertise to provide optimal support to investors in this difficult selection process.  

Photos: real,- SB Warenhaus GmbH