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Impact Investing

IPE special report May 2018

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The call of the south

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Early entrants to the southern European retail market were drawn for the most part by the yield differential apparent between this sector and the home markets of many of Europe’s more prolific foreign investors at the time of the implementation of the euro. The expected yield convergence has now become reality, to the benefit of early southern European retail-focused funds. Yet interest in this sector from investors is stronger than ever.
The current wave of property investment is driven by the continued appetite of consumers in these markets, for the most part well above the European average. In Spain, growth in consumer spending continues unabated, while in Italy and France consumer spending is again picking up after two years of lower growth. These figures should also be viewed in the light of a sizeable shadow economy present in some of these markets. The improved macroeconomic scenario and a relatively stable level of inflation is then expected to trigger a steady rise in consumer spending, driving retail rental growth across the southern European markets.
Whilst this macroeconomic picture is positive, retail property remains dynamic in nature and marked regional differences in the success of property concepts are apparent both across Europe as a whole and, interestingly, within this highly popular southern European retail market.
The global tendency towards polarisation in retailing between luxury fashion and discounting is no less apparent in Europe than elsewhere leading to the emergence of the retail warehouse next to the classic shopping centre format.
This global phenomenon aside, continental consumers are generally perceived to be more individualistic in taste than their Anglo-Saxon counterparts. As a result. the increasing prevalence of global brands needs to be tempered with an eclectic mix of independent retailers in southern European centres. This individualism is also apparent in the varied success of entertainment-anchored retailing.
Each of these influences threaten the current dominance of imported concepts of shopping centre development and management. The importance of an approach to investment and asset management based around an understanding of the idiosyncrasies of each of these markets is then paramount.
The Spanish retail market, while justifiably the focus of much investor attention, given consumer spending patterns, is also the most developed within the region with over 9m square metres of lettable shopping centre space spread over 428
centres. When viewed against the substantial development pipeline in the principle population centres there is an
argument to be made that both Barcelona and Madrid
are close to saturation point.
The relative scarcity of development in many provincial areas of Spain suggests that, most particularly, northern provinces will outperform Madrid and Barcelona as modern, albeit relatively unsophisticated, retailing concepts penetrate new provincial markets.
Much of the attention on southern European retail property is driven by this perceived under-development of retail formats. The French market is the exception to this, with one of Europe’s most mature retail property markets dominated by a number of domestic listed property companies. This dominance, as elsewhere in more mature markets of Europe, restricts the scope for new entrants most notably in indirect investment vehicles. Where indirect investors have secured access to product in France has generally been through the placement of developers’ portfolios rather than fund assembly on an asset-by-asset basis.
The Italian shopping centre, by contrast, has one of Europe’s lowest per capita retail space densities and, although the market is also facing a strong development pipeline, Italy has some 7m square metres of lettable shopping centre space. Again, regional disparities are evident. In northern Italy, shopping centre density is close to the level of the most mature economies in Europe; yields are lower and are expect to remain stable. Southern Italy on the other hand has a particularly low shopping centre density, offering similar opportunities for market penetration to those of provincial Spain.
While the appetite of indirect investors for retail property remains, pressure on yields is broadening the scope of the southern European retail property funds, drawing in smaller markets such as Portugal and Greece.
Strong consumer spending in southern Europe, coupled with relatively immature property markets, justifies interest from indirect investors outside the region. That said, the ability to deliver on return expectations will be driven by the individual ability of asset managers rather than the market movement of recent years, in what is becoming a crowded playing field increasingly dominated by those same indirect vehicles.
Andrea Attisani is research analyst at Aareal Asset Management
in Amsterdam  

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