Germany overtakes UK as largest European retail investment market in Q3 2011

London, 2 November 2011 – Germany was the largest retail property investment market in Europe after outpacing the United Kingdom (UK) for the first time ever in the third quarter of (Q3) 2011, according to the latest data from global real estate adviser CBRE.

Underpinned by strong economic and occupier market fundamentals, Germany reported close to €2.3 billion of retail investment in Q3 2011. The shift started earlier this year and, considering the size of its economy and property markets, as well as country’s geographic structure with a large number of business centres, is expected to be maintained in the near-to-mid-term.

The UK, having seen downward revisions to its economic growth forecasts and a decline in consumer spending, reported its weakest quarterly retail investment result since Q1 2009 at €1.8 billion for Q3 2011. Of the 36 transactions reported, just one retail property with a lot size of €100 million-plus was completed. However, investor demand for good quality product remains strong, with a growing number of international players, including several euro-dominated investors completely new to UK retail investment, currently seeking opportunities.

Iryna Pylypchuk, Associate Director, EMEA Research, CBRE, commented:

“Germany is attracting strong demand from international investors, but also increasingly from local players, who in the current uncertain climate are shifting their focus back to their home market. With €8.5 billion transacted in the first three quarters of 2011 this is already above the annual total of 2010. Investor confidence in the long-term growth prospects for core retail and growing tenant demand from foreign retailers, combined with favorable supply characteristics, form a strong case for German retail. The bottom line is that Germany will maintain its prominent position as a major retail destination for both investors and retailers, with plenty of opportunities for a wide range of specialist and non-specialist investors at both the core and value-add sides of the spectrum.”

Strong fundamentals, combined with higher yields, attracted increased investor demand in Central and Eastern Europe (CEE), with retail investment activity in the first three quarters of this year already double that of 2010. Poland has seen a strong influx of predominantly international capital over the last few years, and now the Czech Republic is also seeing a flow of cross-border capital.

John Welham, Head of European Retail Investment, CBRE, commented:

“The importance of CEE as a retail investment market is clearly growing. In terms of investment activity, 2011 has seen the region taking a very strong third place after Germany and the UK. Poland and Czech Republic continue to be the primary focus, with the latest economic data supporting the growth story for both of these markets. Investors are increasingly comfortable looking at regional centres in these markets, where yields are higher and the retail offer tends to be fairly limited. In addition, Russia is seeing more activity and is set to grow significantly as a retail investment market.”

In line with the overall commercial real estate market, European retail property investment activity grew only marginally in Q3 2011. A total of €7.8bn was transacted during the quarter, a 3% increase over Q2 2011, but significantly below the previous six-quarter average of €9.4bn. In light of recent economic developments and growing concerns over sovereign debt issues, some investors are postponing investment decisions and this is reflected in the latest results.

John Welham added:

“The ‘flight to quality’ will continue to favour retail property, especially good quality assets in established locations with a strong tenant mix. Outside of the core retail spectrum, we are expecting a weakness in sentiment, as consumer confidence weakens. Overall, good quality retail assets should hold their value, with some further, albeit small, yield compression likely to take place, particularly in markets which deliver stronger economic growth.”

CBRE’s latest yield data confirms this view, with no quarter-on-quarter change in the EU-15 High Street Retail Yield Index (currently at 4.98%), and a 6 basis points (BPS) fall in the broader Economic Shopping Centre Index, which now stands at 6.24%. With investors closely following the economic picture, it is not surprising that most of the falls in yields took place in the CEE region: Russia – 75 bps, Czech Republic – 25bps, compared to Q2 2011. Reflective of weakening fundamentals and looming sovereign debt concerns, Spain, Greece and Portugal all reported outward movements in shopping centre yields in Q3 2011.