In any form of investing, it is always difficult to fight sentiment. This is no less true when considering the negative popular perception that surrounds the retail property sector. But successful investors understand the need to make a deeper examination because it is in overlooked property that true value often lies.
Today’s reality is that publicly listed retail real estate players are trading below their NAVs (net asset value). What lies behind this are structural changes in how sales are achieved.
Successful retailers, particularly fashion retailers, adapt swiftly to new consumer demands, especially new environments and technologies. Most retailers examine space productivity at the top of their strategy evaluation, focusing on the location, flow and design of their retail operations as a valuable tool in influencing the shopper’s purchase.
A shopfront and its position can add value or even distinguish a retail brand. At an operational level, the considerations of space, amenity, footfall, access, demographics and complementary retail are key factors.
Knee-jerk reactions by retailers to trading dips can blame location, prompting relocation and expansion slowdown. The consequent closures, lease-term renegotiations and store downsizing cause headaches for landlords. Although the finger often gets pointed at online retail here, it cannot be used exclusively as a scapegoat, as proper assessment often exposes properties not fit for purpose.
Institutional investors have not stopped investing into retail property, but rather are shifting their focus to units that appeal to retailers adapting to new consumption patterns. For many investors, retail parks, best-in-class shopping centres and high-street segments are the most secure in their eyes.
Compression of yield
Ireland typifies this trend, with investors such as DWS and Friends First focusing on retail parks, and Irish Life and AEW acquiring on the high street. This is while all the major Dublin shopping centres have changed hands in the past three years, to major international investors such as Blackstone, Oaktree, BvK and Hammerson. All have major plans for expansion.
The overall outcome is the compression of yields for quality properties down to cyclical low levels, with core product in high demand. And demand continues as retail forecasts remain buoyant. Recent reports indicate that, within the euro zone, retail trade will stand at +1.6 per cent in 2018 and should reach +2.0 per cent in 2019. In the three largest European markets in 2019, Germany, the UK and France, retail sales growth will continue to increase by more than 2.0 per cent.
Consumer habits are evolving with the "destination shopping experience" increasing alongside online shopping purchases. Online sales in 2017 represented nearly 9 per cent of total European retail sales. Europeans, especially millennials, enjoy going to big shopping centres and retail parks, with highest proportion of "destination experience" favoured in Romania (87 per cent), Portugal (84 per cent) and Spain (83 per cent).
This is similarly reflected in the shopping centre investment segment, where investors are shunning smaller schemes, provincial locations or secondary products in the major cities in favour of the premier shopping centres.
There is also a notable trend in that asset managers are repositioning existing neighbourhood schemes to ensure that high footfall is maintained in the shadow of the larger schemes. Examples include Friends First's plans for Blackrock Shopping Centre and Kennedy Wilson's current refurbishment/realignment in Stillorgan Shopping Centre – both centres with close proximity to Dundrum Town Centre, benefiting from good infrastructure accessibility.
Dublin city centre is also undergoing a renaissance, with the last major retail development of note being Chartered Land’s South King Street in 2008, which was an infill site. Retail property is now undergoing an overdue development phase in the city centre.
The Hines redevelopment of Central Bank; the Meyer Bergman/BCP demolition and rebuild of the former Aviva Buildings, which occupy a substantial site fronting both Nassau Street and Dawson Street; and Europa Capital's recent acquisition of Clerys department store all underpin investor confidence in city centre retail.
Because information is not perfect, this adjustment process in retail creates gaps. Value-add and opportunistic investors accordingly are on the lookout for unloved property on their investment radar: real estate that has the potential to work efficiently for multichannel retailers.
While the retail sector is in cyclical transformation, retailers will chase where their customers go. And in turn retail property owners will chase their customers: the tenants.
The trading below NAVs reflects that that chase is still ongoing, through repricing and space adjustments. The end point of the chase is inevitable: property is the most efficient channel of distribution for retailers, in Dublin as with other cities across Europe, and good retail will remain good retail.
Some properties might require upgrading, enlargement or redevelopment to meet consumer demand, but if the retail fundamentals are sound, then the retail offering will be a success and investment returns remain secure.
Kenneth Rouse is managing director and head of investment at BNP Paribas Real Estate Ireland