Investment up 78% in Continental retail sector

EuropeanTrends: Investment in Continental European retail property saw extraordinary growth over the course of 2005, up an astonishing 78 per cent on 2004 levels, to reach approximately €14.7 billion, according to Jones Lang LaSalle's 2005 European Retail Capital Markets Report. The report does not include the UK and Ireland or deals under €5 million.

"The year surpassed all expectations as the weight of money continued unabated, leading to further yield compression across the Continent," said Jeremy Eddy, a European director in retail capital markets at Jones Lang LaSalle. "Net initial yields have continued to converge across Europe. Yields in the more mature markets of northern and southern Europe were at the bottom end of the spectrum, with several landmark transactions resulting in yields of 5-5.25 per cent. We now consider yields below 5.75 per cent to be the market norm."

Richard Bloxam, a European director in retail capital markets at Jones Lang LaSalle, added: "The retail warehousing sector has shown phenomenal growth, with deal volume totalling €3.3 billion in 60 deals - over six times the volume of 2004 (€0.55 billion). As we predicted this time last year, the sector has shown the most significant growth, with the average deal increasing from €23 million to €56 million. Ten deals surpassed the €100 million mark, primarily in Germany."

He continued: "Looking ahead to 2006, we believe that the retail warehousing sector will continue to show high trading volumes. We expect further sale and leaseback deals will be offered by owner-occupiers, particularly supermarket portfolios in the Nordic region. We also expect to see more retail park transactions as developers respond to retailer demand across Europe."

According to the report, Germany will be the largest traded retail investment market in 2006, but investors will have to accept lower yields. Asset management will continue to be the key to income growth on shopping centres.

Meanwhile Central Europe will reflect western European pricing and should be considered core markets. The Nordic region, according to the report, will continue to attract increasing investment volumes driven by strong local economies and the opportunity to add value through active asset management.

UK and Irish investors will become increasingly prominent in 2006, says the report, driven by attractive financing and thin investment returns in domestic markets.

In addition, value-driven investors will target maturing markets such as Russia, Turkey, the Baltics and Balkans, and Ukraine. "We see real opportunities for yield compression in these markets as the availability of debt finance and market transparency improves," says the report.

Shopping centre investment opportunities will remain scarce and hotly contested as sector specialists compete for any product that comes to market despite upward pressure on ECB base rates.

"We believe that shopping centre yields will further compress as new benchmark transactions lead to revised pricing levels. We foresee a harmonisation between UK and Continental European shopping centre prime yields for the first time," according to the report.