The Yanks Are Coming! Americans Eye European Retail
As investors in the commercial real estate market continue to ride an increasingly uncertain wave due to financial instability in Asia and a stall in record growth in the U.S., a number of investors are looking to Europe for new opportunities in the retail sector.
Seasoned U.S. developers and money funds are acquiring shopping centers, investing in mixed-use commercial projects and launching joint ventures with experienced European real estate brands, as favorable cap rates and relatively low prices present increasingly attractive investment opportunities not seen since before the crash of 2008.
“The demand for retail acquisitions in Europe is extremely strong,” said Charles Baigler, European Head of Transactions at CBRE Global Investment Partners. The fund acquired the BIG Shopping Center in Copenhagen, Denmark, through a joint venture with Portus Retail earlier this month.
Mr. Baigler told Commercial Observer that cap rates for core assets are at or below the peak years of 2007 and 2008. In many cases however, he said, rents are up to 40 percent lower as many landlords negotiated substantial rental discounts during the downturn in order to uphold rental occupancy rates.
The 491,965-square-foot mall is 98 percent leased with 26 top retail tenants, including H&M, Fotex, Elgiganten and Nike. CBRE said the deal represents the fourth acquisition for the European fund and is located in one of the best economies on the continent with a strong gross domestic product forecast, low unemployment and an affluent market with 1.7 million people located 6.2 miles northwest of the Copenhagen city center.
The new owners plan to alter the tenant mix by introducing more fashion retailers to the center over the next three to four years. He said the performance of the mall thus far, however, has been so strong that it may prove to be a challenge.
“Due to the very strong macro-economic situation in Denmark, the retail market is very buoyant, particularly in Copenhagen,” he said.
According to a March report from Cushman & Wakefield, prime shopping center rents remained stable during the first quarter, but prime High Street rents rose 2.8 percent year-over-year to $252 per square foot.
CBRE Global Investment Partners, in a joint venture with IBA Capital Partners, in February, acquired the ABC Serrano Shopping Centre in Madrid, measuring 150,695 square feet, as well as a 25,833-square-foot retail building on Preciados Street, in Madrid, from Zambal Spain Socimi.
Mr. Baigler said the retail building has been leased to Europe’s largest fashion retailer whom he declined to identify, and both properties are going through a complete refurbishment and releasing, which will all be completed in 12 months.
According to a March report by Cushman & Wakefield, retail was the fastest-growing segment of the commercial property market in Europe last year—rising to 67 billion euros ($75.9 billion), the second largest annual total on record.
Germany drove most of the increase with trading volume doubling, surpassing the United Kingdom to become the largest retail investment market in Europe. Key contributors to the increase were interest in shopping centers, and a great deal of interest in High Street shops and retail warehousing, according to the report.
Prudential Real Estate Investors and QInvest, the leading investment bank in Qatar, entered a joint venture in November 2015, to acquire a portfolio of 16 retail properties in western Germany. The 140,000-square-foot portfolio includes a group of retail stores anchored by leading grocery and home improvement stores in western Germany. Prudential is managing the real estate on behalf of the venture.
Following this acquisition, Prudential, which now operates under the name PGIM Real Estate, managed about 700 million euros ($793 million) of retail assets in Germany, according to the company.
In December 2015 the Carlyle Group acquired a controlling stake in Hunkemoller, the largest lingerie brand in the Benelux, from PAI Partners. The firm, originally from Amsterdam, has more than 700 retail locations throughout Europe and the Middle East.
The United Kingdom for the first time rose to the top of the list as the most attractive international market, followed by Germany, according to the annual State of the Market survey released on May 2 by DLA Piper.
The 2016 survey of 186 top real estate executives in the U.S. showed that the U.K. market is now considered a safe haven amid concerns that China and the Middle East are increasingly volatile markets for investors.
“This is a reflection of the fact that London is viewed as a really safe and secure place to invest, even though the pricing is still quite high,” said Jay Epstein, a co-chair of DLA Piper global real estate practice.
He noted that this is not only the first time that the U.K. reached the top, but this year marks the first time that China failed to crack the top four positions in the history of the survey, which has been conducted at least seven times since 2005.
Related Companies formed a joint venture in 2015 with Argent, a firm with more than 30 years of experience with urban redevelopment, including Brindleyplace in Birmingham, England, Piccadilly Place in Manchester and King’s Cross in London.
In March of this year, the joint venture gained local approval by the Barnet Council to develop Brent Cross South, a mixed-used community in a 180-acre footprint just south of the borough’s Brent Cross shopping center.
The scope of the Brent Cross South master plan includes 6,700 new homes, workspace for more than 25,000 new employees, shops and restaurants, a new transit station and other upgrades, including walking and cycling paths, community facilities and new parks. The development will be located adjacent to the Brent Cross shopping center redevelopment project from Standard Life and Hammerson.
Construction is scheduled to begin in 2018.
Sources familiar with the Brent Cross development said it is the firm’s first major project in Europe with a retail component. The company also acquired a 50 percent stake in Pocket, an affordable housing firm that will co-develop first-time homes at Tottenham Hale.
Related is also expanding its overseas presence in Abu Dhabi, through an existing joint venture with Gulf Capital called Gulf Related. After opening the Galleria on Al Maryah Island in 2013, the company is working on a new project called Al Maryah Center, which will include a hotel, residential units and 2.3 million square feet of regional retail and entertainment space, including the first Macy’s department store outside of the U.S. and a Bloomingdale’s. That project is scheduled to open in 2018.
Prudential in February expanded its European holdings with a much smaller deal, by acquiring an eight-unit retail property on Fulham Road in the Chelsea section of London. The company did not release terms of the deal, but published reports have the price at $64 million.
The eight-unit, 7,825-square-foot site covers the basement, ground and first floor of a residential building and is adjacent to the Brompton Cross shopping center.
The fully leased site includes Ralph Lauren, OKA and Poltrona Frau’s first flagship London store.
During the last DLA Piper State of the Market survey, Germany topped the list of most attractive international markets, followed by Brazil, China and Mexico.
Europe is certainly not considered a risk -free market, as there are a few pressing issues that raise concerns about the long-term stability of the regional economy.
The German economy grew at a rate of 0.7 percent during the first quarter, more than double the 0.3 percent rate during the fourth quarter of 2015, beating consensus forecasts by economists and the strongest level in two years.
Time Equities, a New York-based owner and developer of commercial office, residential and shopping malls, has invested in various commercial properties in Berlin, including retail, and announced in March a deal to buy a total of 12 single and multitenant office buildings in the Netherlands for $48 million.
Francis Greenburger, the chairman and CEO of Time Equities, said in an interview that the company is attracted to Europe as opposed to other emerging markets because of the relatively stable economic and political environment.
“We want to see a very transparent system and a very solid government in terms of longevity and democratic tradition,” Mr. Greenburger said. “We would not go into markets that are fragile; where [there is not transparency] and where there are business practices that are inconsistent with American standards.”
For example, he said that his company took a look at Chinese investment in the past but balked due to the inability to repatriate profits for several years.
The company remains active in the U.S. as well and is in talks to acquire a suburban office site near St. Louis, a large shopping mall in Utah and a development site in Chicago, he said. The company owns a total of 20 million square feet of commercial, residential and retail space, with retail comprising about 17 percent of the total, mainly in the U.S. and Canada.
Despite the concerns that many have raised about the possibility of Great Britain splitting off from the common market, he said he doesn’t see any major impact on business fundamentals in Europe. Likewise, CBRE’s Mr. Baigler said that investors are holding back from investing in the U.K. until after the Brexit vote in late June.
Mr. Epstein noted that while Germany is considered the most robust economy in the region, there are some concerns about the lingering impact of the refugee crisis on the continent. Refugees have flooded into Europe as the Syrian civil war and lingering conflict in Libya have forced millions to flee into neighboring countries, and hundreds of thousands of refugees have made perilous boat trips across the Mediterranean.