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No bubble for retail as low supply represses activity

EMEA retail property investment in Q4 2014 totalled €15.4 billion, with little changing compared to the same period in 2013 (€15.3 billion); according to data released today by global real estate adviser Cushman & Wakefield at MIPIM.

According to Cushman & Wakefield’s annual global capital markets report International Investment Atlas, demand is escalating nonetheless and annual volumes, €49.2 billion, were at their highest since 2007.

Activity clearly would have been higher still had there been sufficient available stock in the target markets but in the absence of this, offices dominated in many areas, taking a 44% market share in Q4 compared to 20% for retail.  Other sectors recorded a 25% market share as interest in areas such as hospitality, student housing, mixed-use and medical facilities all rose.

The UK and Germany remain the number one and two retail markets despite a slight fall in activity over the year as a whole, with the level of available quality stock failing to meet demand.  France however took advantage of this, with very strong growth over 94%, cementing its third placed spot against a challenge earlier in the year from Spain and underlining the market’s appetite for quality locations.

Southern Europe in general has performed well, with volumes in Spain up 117% to €2.6 billion, a six-year high, while Italy rose 65% and Portugal 98%.  The fastest growth however was in Ireland (714%), the Czech Republic (407%), Austria (328%) and the Netherlands (207%).

While events in Ukraine have destabilised some markets, much of Central & Eastern Europe had a buoyant year-end, with retail volumes ahead strongly in Hungary, Slovakia, Romania and Bulgaria.

Cushman & Wakefield says supply levels in general are improving but shortages of quality space will continue to hold back the market in 2015.  Yield compression will accelerate thanks to quantitative easing however and this may attract more profit takers.  Alongside a spreading of demand to new markets, this should be sufficient to deliver further growth in turnover in the market

Most of Europe is set to see at least a firmer economy in 2015 and in particular stronger consumer sentiment.  David Hutchings, head of EMEA investment Strategy at Cushman & Wakefield, commented: “Conditions in the retail market will be more favourable this year thanks to lower oil prices and deflation as well as a steady improvement in employment. However, a rising tide of consumer demand is not going to lift all retailers or retail property as the sector changes at an even faster pace than usual thanks to multi-channel retailing.  What’s more, performance is going to be more differentiated by city as the characteristics of a winning property increasingly rely on the quality of the urban area they sit in.  London is clearly the number one at present, speaking for 6.7% of the European retail market last year, but Paris closed the gap with volumes ahead 27% while London actually fell as quality space became even harder to find.  Next in line was Birmingham followed by Madrid, which saw 123% growth as it led the Spanish upturn.”

Southern Europe overall saw volumes rise 87% compared to a 19% increase in the West and 5% in the Nordics. Central & Eastern Europe saw a 23% drop in trading but excluding Ukraine and Russia the region was ahead 18%. 

According to Michael Rodda, head of EMEA retail capital markets at Cushman & Wakefield: “The market was held back last year by a lack of supply and with the search for quality continuing apace, more investors are having to look outside their comfort zone to find opportunities or accept higher pricing.  Southern Europe had a very strong 2014, with a real recovery taking grip as confidence improved and opportunities emerged.  Spain in particular stood out as its economy started to firm and reforms seem to be bearing fruit but Italy will not be far behind in 2015.  Interest is also still spreading, with much of Central & Eastern Europe enjoying a stronger end to the year despite the uncertainty of events in Russia and Ukraine.”

Cushman & Wakefield’s head of EMEA capital markets, Jan-Willem Bastijn, added: “Investor demand in Europe is incredibly strong but with a real focus on quality retail assets and no sign yet of an unsustainable bubble or widespread mispricing.  However, risk tolerances will continue to loosen to allow investors to find stock and this will include increased interest in new markets as well as development in some cases.  Competition to buy is only likely to increase as the underlying consumer market picks up and all in all, we expect retail volumes to rise 14.5% this year to €56.3 billion.”


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