Overall, the retail market in southern Europe is fairly healthy, recording a good level of activity supported by low interest rates and steady consumer spending. However, current market conditions differ among the three countries – Italy, Spain and Portugal – and among regions within the each country.
The performance of the retail sector, as indicated by IPD figures for 2003, recorded best property market results in Portugal, with total returns of 11.6%, followed by Spain’s total return of 10.4% and Italy’s 9.1%.
Retail in Portugal has been the best performing property sector over the past three years, delivering an average annual return of 14.8%, whereas in Spain, in the same period, retail recorded second-best performance, with 11.4% annual return (trailing the residential sector’s 11.7% in the same period).
Southern European consumers continue to support the retail sector with a steady rate of spending growth in recent years, and expectations based on consumer confidence point towards sustained progress at similar rates in the medium term. Spain leads this advance with average consumer spending growth of 3.4% in recent years, well above the European Union comparative growth of 2.3%. Italy and Portugal have also recorded positive but less aggressive growth of 1.6% and 1.8% respectively.
Accordingly, retail spending has been positive in Spain and Portugal, with accumulated retail sales growth of 5.3% and 3.0% respectively at December 2004. Italy ended 2004 with flat retail sales.
Consumer spending forecasts expect stable rates of growth in the medium term in Spain, with 3.2% annual growth. Somewhat more recovery is expected in Italy and Portugal, with average annual growth of 2.0% in Italy and 2.3% in Portugal predicted.
These figures have encouraged domestic and international retailers to feature southern Europe in their cross-border expansion plans and seek out retail space in high streets and shopping centres. The increase in popularity of regional shopping centres and new retail schemes has fostered this trend as well, as retailers find better quality space.
At the end of 2004 stock under construction in Spain, Italy and Portugal represented 24%, 12% and 16% of the existing stock of shopping centres. The completion of new developments will position the average level of shopping centre density at 285m2 per 1,000 inhabitants in Spain, 214m2 in Portugal and 175m2 in Italy, compared with the current European Union average of 180m2. As can be seen, despite the strong development activity going on, Italy remains among the countries with the lowest density figures in Europe and the country’s development differs from region to region, with the highest growth in density figures being recorded in central and southern Italy.
Similarly, in Portugal and Spain the new developments are mostly concentrated in areas with relatively low shopping centre density compared with the national averages. In Portugal, the steady stream of new shopping centre space continues, with a number of the larger schemes expected in low-density areas, while new developments in Lisbon or Porto are smaller. In the Spanish cities, pipeline developments indicate that the highest supply growth is in areas where current density is low compared with the national average. It means that supply in these currently low-provision areas should in the future become more in line with supply in areas that were developed earlier.

Positive retail fundamentals have delivered rental growth in 2004 and this is expected to continue in 2005. Market reported rents show average annual real rental increase achieved in the last five years of at least one percentage point above inflation, with stronger growth recorded in Spain followed by Portugal and Italy. A similar trend is expected in the next three to four years, more emphasized in Spain and Italy, while rents in Portugal might register limited growth.
Limitations to overall rental growth might be found in areas where new retail developments increase the stock of retail schemes. This may be the case in prime markets such as Milan, Madrid or Lisbon. In these locations active asset management becomes crucial to maintain the positive performance of shopping centres and realise potential rental growth. However, the regional imbalance of shopping centre provision within countries in southern Europe provides opportunities in some secondary areas where retail provision remains below the national average, hence providing room for further retail developments.
This is the case of Italy, where the southern regions hold only 61m2 of retail space per 1,000 inhabitants. On the other hand, regions in the north have provision above the European average at 219m2 per 1,000 inhabitants.
Demand from domestic and international investors for retail assets has been strong following falling yields and rental growth in recent years. Yield depression continued in 2004, especially in Italy, where minimum net yields for shopping galleries fell to 5.75%. The figure for Spain was below 6% and it was 6.50% in Portugal. Higher yields of around 8% were reported for retail parks, factory outlet centres and other leisure schemes in this region.
Spanish retail yields remain under pressure because
of the lack of products in the investment market and
the weight of money from investors that want to enter the market. The retail investment market remains
active and, in recent months, net initial yields have
hardened in all areas of the shopping centre market, while high street yields have been largely stable. ING Real Estate and German fund manager CGI were significant international players, while local participants included Vallehermoso and Metrovacesa.

There is still limited transparency in the Italian
investment market, with a number of “off market” transactions taking place. German open-ended funds and Dutch funds executed most of the transactions in 2004, while Italian closed-ended funds had limited
participation due to tight competition with aggressive international investors. Investors are keen for good quality products in Portugal. However, a shortage of investment products is holding back the market and reported transactions are limited. Demand is currently focused on shopping centres, with Sonae, ING Real Estate, Predica and CGI playing a role in the market for investment products.
The registration of five new funds specialising in retail in southern Europe in the INREV database in 2004 highlights investors’ interest in this property market. The target gross asset value of these funds is close to €4bn, adding to the four funds registered in 2000 and 2003. Today, the total gross asset value target of the INREV registered funds is more than €6bn.
Out of the retail-specific funds registered in INREV, three are targeted at Italy. These represent 38% of the target gross asset value of the total funds launched in 2004. The six others are targeted at least two countries, and three funds target the whole region. Most registered funds are closed-ended. Only three funds label themselves as core funds while most are value-added funds with gearing of 50% or higher; in a low interest rate environment, most recently launched funds gear above 50%.
The southern European retail sector is expected to remain active. Further development of the retail investment market is expected, especially in Italy. New schemes move towards a larger format with a wider retail offer and leisure facilities. The development pipeline figures for southern Europe clearly indicate this trend. In Spain, Portugal and Italy, developments in the pipeline categorised as regional shopping centres with more than 40,000 m2 accounts for more than 50% of the total development pipeline.
Further downward shifts in yields appear less likely in Spain and Portugal but there is room for such movement provided market fundamentals remain solid and given the limited availability of shopping centre investment product.
Ruth Gavilan is is a member of the research and strategy team at ING Real Estate