The shopping center sector was again the best performing sector across Europe as a whole last year, according to the third edition of the CB Richard Ellis/IPD European Shopping Center Digest, which was officially launched at MAPIC.
In 2005 the shopping center sector out-performed the other real estate sectors in seven of the thirteen European countries covered by IPD and in a further three, the sector was only out-performed by the other retail property in the index for that country.
The clear exceptions to this trend were the UK and Denmark, where shopping centers ranked behind nearly every other sector.
The star performers in Europe were shopping centers in Ireland and France, which generated returns of 28.4% and 27.2% respectively. This is the third year in succession that Irish shopping centers have been the best performers in Europe having topped the table in 2003 and 2004 with total returns of 24.1% and 18.1% respectively.
The lowest shopping center total returns in 2005 were generated in Germany (4.1%) and Switzerland (5.5%). In both countries, income returns were only slightly below the European average and it was the lack of capital value growth that resulted in the poor overall returns. Germany was the only country to see an overall fall in shopping center capital values in 2005 at -1.1%. It is notable, however, that despite this shopping centers in Germany out-performed the office sector by a significant margin, with office total returns being -0.7% for 2005.
Nick Axford, Head of EMEA Research & Consulting at CB Richard Ellis who co-authored the report comments: "Shopping centers in Europe continue to be a target for many investors and it is clear that demand is significantly higher than supply. Investors are attracted not just by the high returns that the sector is currently generating, but also by the fact that strict controls on development in many countries mean that supply will remain constrained in the future."
The Digest pulls together investment performance data from 1,519 shopping centers in thirteen countries across Europe, with a combined total capital value of €81.4 billion at the end of 2005. Based on data compiled by Investment Property Databank (IPD) from its national databanks, the Digest provides a unique guide to the investment performance of the sector.
The results presented in the report indicate that yields are converging across Europe for the large centres that are most sought after by international investors. There is a steady decline in the average Net Income Yield as the centre size increases, with the largest centres (over 75,000 m²) showing an average Net Income Yield of 4.5% in 2005 compared to 7.4% for the smallest centres (up to 2,000 m²).
However, in addition to the decline in average income yield as size increases it is also evident that the range of yields decreases with size, suggesting that the international competition for such centres is resulting in a convergence in pricing. Conversely, the smallest centres, which appeal mainly to local investors, show by far the largest range of Net Income Yield.
Andreas Arend commented: "As yields converge across Europe, more and more attention will be focused on the prospects for rental growth in the various European countries rather than the prospects for further yield compression. It is interesting to note that in 2005 rental value growth was correlated with the growth in Household Spending growth in 2004. Furthermore, analysis of the UK market shows that this relationship holds true over the long term as well."
Looking forward investors may need to be more selective in the shopping centers that they acquire according to CB Richard Ellis.
According to Nick Axford: "The key drivers of shopping center performance include unemployment and consumer spending. Unemployment has been falling for the last two years, but now appears to be stabilizing across Europe as a whole. Similarly, consumer spending is generally increasing at a slightly slower rate. Investors will therefore need to target