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Retail in Europe - Demand focused on prime locations

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Current economic conditions are making investors particularly cautious. Because of the uncertain outlook and weaker economic growth anticipated for the second half of the year, retail investment could slow down, along with the total volume. Nevertheless, retail should remain amongst the most favoured assets thanks to its defensive characteristics.



Prime retail yields are stabilising
Following last year’s common trend of yield drops in Western Europe, no significant movement occurred in prime retail yields since early 2011. In the third quarter, prime yields were already stable in almost all markets. With the current uncertain environment prime retail should continue to be strongly demanded as investors focus on locations offering the best prospects thanks to strong footfall and decreasing vacancy rates.

In the UK, no yield movement has been recorded in 2011 so far for prime high-street and shopping centres, with yields stabilising at 4.65% and 5.75% respectively. On the other hand, slight yield drop occurred in the out-of-town retail category, for fashion parks. Fashion retailers are increasingly present outside the town thus offering a real alternative to city centre shops. This type of retail format has become more and more attractive for consumers.

In Germany, prime retail locations continued to face strong demand. Besides slight drops in the first quarter, yields have stabilised since in all of the Big Six markets. Currently, high street prime yields are ranged between 4.20% for Munich and 4.50% for Berlin. On the other hand, during 2011 the prime shopping centre yield decreased from 5.40% to 5%, the level reached in the first half of 2008, thanks to strong demand for best located centres.

In France, following the downward trend in 2010 high street prime yield was stable in 2011 at 4.40%. Behind, the attractiveness of high street retail is the low level of vacancy rate and therefore the resilience in rental values. Investor interest for shopping centres remained quite strong, therefore prime yield dropped sharply since the end of last year to just 4.75%. As regards out-of town retail yields, they were flat at 6.50% in Q3 2011.

In Italy, retail yields were flat last year, but in 2011, the prime retail yield dropped by 50bp to 4.50%, reflecting the increased interest from investors for core high-street areas at the expense of shopping centres. Indeed, high-street prime retail is considered as a relatively safer investment at a time when the Italian market is regarded as riskier by investors. In Spain, although prime locations in both Madrid and Barcelona remained resilient, yields have been unchanged for more than one year. Currently at 5.50%, Spanish high-street prime yields are relatively high compared to core European markets.

Retail investment is in the 5 major European countries should exceed last year’s total volume, but a slowdown is expected from Q4 2011 onwards. In the meantime, government bond yields are rising across Eurozone countries and the risk premium has been reduced significantly especially for retail assets. Therefore, further yield drops are quite unlikely in the short term, even in the markets witnessing the strongest demand. However, the yield gap between prime assets and the rest of the retail market should widen further as consumer sentiment is expected to worsen.