Research by Savills shows that investors into European retail assets are shifting their focus to peripheral markets as economic conditions stabilize, the pricing gap between buyers and sellers gradually converges and financing conditions begin to improve. The firm believes this trend is evidenced by the closing yield gap between peripheral and core retail properties. For example the average yield gap between prime core and prime peripheral shopping center markets, which stood at over 200 bps at the end of 2012 in the markets surveyed, has dropped to 188 bps in Q3 13*.
Furthermore the firm notes that the overall average retail yield achieved in Q1-Q3 13 in the markets surveyed stood at 6.7%, against 6.4% in the same period in 2012. Savills believes this is because investors are beginning to develop an appetite for risk as better value can be achieved in the peripheral and non-core markets as yields for prime product come in.
In terms of investment volumes, the report finds that peripheral markets, including Spain and Italy, have doubled their share of the total retail investment volume in Europe to over 10% between Q1 and Q3 2013 compared with 5% in the same period last year.
Notable increases in retail investment turnover during this period have been recorded in Italy (+36%) and Spain (+119%) with significant transactions expected to complete before year end, particularly in Spain. Overall, core countries, particularly Germany, France, the UK and Poland, continue to dominate activity accounting for 89% of the total retail investment volume in the first three quarters of 2013.
Nick Hart, Head of UK and European shopping center investment at Savills, comments: “There has been a pick-up in activity and a number of very large transactions have taken place in Europe this year as the global equity seeks rarely available prime retail assets. The yields on these assets are rapidly tightening forcing investors to seek better returns in more peripheral markets as economies stabilize and market perceptions improve.”
Danny Kinnoch, European cross border investment director, adds: “Another key contributor to the recorded rise of investment into non-core retail markets is the return of international lending over the past six months to these markets, including Italy and Spain. These are lenders that cannot or do not wish to compete with the pricing of German banks and insurance companies that dominate lending in Germany and the UK.”
Savills notes that these lenders are able to lend against prime product, backed by a strong sponsor, in those markets perceived as more risky in order to meet their return expectations. As a general rule the data indicates that there has yet to be a return to lending against secondary and tertiary product. However, of the loan books which have been brought to market in 2013 the majority are secured against a wide range of asset types and qualities including secondary and tertiary. Interest in these, particularly from the US private equity houses, has been very strong.
Going forward Savills expects investors will continue to favor the best performing high streets and shopping centers in Europe. Oliver Fraser-Looen, European cross border investment director, says: “The prime high street segment will particularly attract investors targeting smaller lot sizes, looking for long-term capital preservation. Limited supply of core European shopping center investment opportunities may also continue to benefit the prime retail park segment.”
According to the report the prime retail park segment accounted for 19% of deals in the first three quarters of 2013, compared with 12% in 2012.