European retail warehousing prospects

October 6, 2005
International topics
Current Issues
European retail warehousing
prospects
Interpreting diversity and drivers
Given the increasing investor focus on the European retail warehouse market, this
paper explores the characteristics of the market, establishes the drivers underpinning its performance and evaluates relative investment profiles across the
region. Key findings are:
Being characterised by heterogeneity in terms of age, format, quality and function
the market is disparate. Consequently, it has a variety of names including Big Box,
Bulky Goods, Out-of-Town and in Germany, Fachmarktzentrum.
Broadly, while the Northern European markets are more established than the
younger, modern Southern European and CEE markets, they are also more
diverse in terms of structure.
Where new supply is constrained by planning, the risk associated with retail
warehousing is lower relative to shopping centres. To date, this negative spread is
only evident in the UK and points towards mis-pricing in certain markets.
The role of the housing market is a significant driver of future prospects of the
retail warehouse market. The impact of house price growth has been most
significant in Spain, the UK and France.
Spain, Italy and Poland offer the strongest performance prospects and the greatest
market risk within the unweighted analysis presented in this paper. While the UK
has the highest overall rating, this is due to the low risk profile of the market rather
than performance prospects. France offers a well balanced risk and return profile.
Authors
Tobias Just
DB Research
+49 69 910-31876
[email protected]
Out-performance of retail warehouse market
Annualised total returns (%)
20
15
Brenna O’Roarty
RREEF/DB Real Estate
+44 20 7547-3305
[email protected]
10
Editor
Hans-Joachim Frank
5
Technical Assistant
Sabine Berger
Deutsche Bank Research
Frankfurt am Main
Germany
Internet: www.dbresearch.com
E-mail: [email protected]
Fax: +49 69 910-31877
Managing Director
Norbert Walter
0
3 years
All property
5 years
Office
High Street
10 years
Shopping centres
15 years
Retail warehouse
Source: IPD
Current Issues
Introduction
Pan European retail warehousing is
diverse in name and structure
The complexity of the European retail warehouse market is evident
in the wide range of interchangeable labels used within and between
countries in an attempt to distinguish this heterogeneous retail
property segment (e.g. Bulky Goods, Big Box, Retail Park, Out-ofTown). Nevertheless, a Pan European market is rapidly emerging
driven by both retailer and investor demand. To clarify, in this paper
we use the term ‘retail warehouse’ as a reference for large format
retailing in edge or out-of-town locations, predominantly occupied by
DIY/household goods/discount fashion operators and in certain
countries, a rising trend of retail occupiers more commonly
associated with city centre locations.
The strong investor appetite for retail warehouse product across
Europe is due to two principle factors. First, the positive investment
experience associated with the UK market, and second, the lack of
alternative opportunities to access high returns given the weight of
money targeting property and the slow recovery in office occupier
markets. There is a presumption that the experience of the UK is a
good proxy for expected investment performance elsewhere. The
extent to which this holds true will depend upon how closely the
structure and drivers underpinning each market across Europe
mirror those of the UK.
In this paper, we set out the current and future drivers and risks of
the retail warehouse market in nine countries across Europe. We
briefly review the evolution of the sector in the UK and consider the
current pricing of the sector across Europe relative to other retail
segments and property sectors. First, we set this pricing in its
market context considering the current structure of the market,
current supply and supply risk.
Having set the context, we address the future prospects of the
market by interrogating the fundamental drivers of consumer and
retailer demand. In particular, we examine the relationship between
the residential and retail warehouse market in terms of affordability,
house price growth and household structure. The analyses of risks
and drivers allows us to develop a framework to assess the relative
current and future prospects of the retail warehouse sector in each
European market.
The evolution of the UK retail warehouse investment
market
Out-performance of retail
warehouse market
Annualised total returns (%)
20
15
10
5
0
3
years
5
years
10
years
15
years
All property
Office
High Street
Shopping centres
Retail warehouse
Source: IPD
2
1
In the UK, the retail warehouse market has consistently outperformed other segments within the retail sector as well as the
office sector over a 3, 5, 10 and 15 year timeframe. Initially, the
sector emerged in a piecemeal fashion in the 1970s as bulky goods
occupiers sought a solution to their large space needs that could not
be met by traditional retail formats in town centres. By the early
1990s the sector was maturing into an institutional investment class
in terms of size, format and quality of stock, ownership and depth of
occupier demand. As retailer and consumer demand strengthened,
planning policy shifted to a presumption against out of town retailing
formats by the mid 1990s, leading to a race for space.
As well as creating strong rental growth, such constraints turned the
supply risk associated with the retail warehouse market on its head.
Previously, the low cost, ease and speed of construction associated
with the format relative to shopping centres, increased the impact of
supply risk. This reflected the fact that the market share of sales
underpinning rents could be quickly cannibalised by a new developOctober 6, 2005
European retail warehousing prospects
Low yields suggest
relatively low risk
Cap rates (initial yields), %
10
9
8
Shopping centres
7
6
Retail warehouses
5
4
1990
1993
1996
1999
2002
Source: IPD
2
ment with little time to respond. Given excess retailer and consumer
demand over supply, the implementation of planning constraints
greatly reduced supply risk for both retail warehousing and shopping
centres. However, due to much lower maintenance, management
and depreciation costs associated with retail warehousing investors
reassessed the relative risk and pricing of the market. Consequently,
there has been a negative cap rate spread between retail warehousing and shopping centres since 1993, with initial yields being
lower for retail warehousing.
The breadth of retailer demand has created a two tier market in the
UK. Recognising the higher profitability that could be generated from
occupying this lower cost space out of town, High Street retailers
began seeking space in the mid 1990s. However, planning was
quick to respond and currently, High Street retailing is permitted on
only 20% of the 5.7 m sqm of retail warehousing stock. The
strongest (and largest) fashion parks command rents of as much as
890 GBP/sqm, almost twice that of the best bulky goods parks.
European retail warehousing – a heterogeneous market
The structure of the European retail warehouse market is diverse.
While the current strength of investor appetite for the sector is a
relatively new phenomenon, mature markets exist in Northern
Europe, although dominant formats, ownership patterns, planning
and opening hours differ considerably.
Established but diverse markets in
Northern Europe
In Sweden and the Netherlands the structure of the market broadly
follows that of the UK. Planned retail park formats, in single ownership dominate and consequently, there is a high level of institutional
ownership. Though not in evidence, fashion retailing is permitted in
Sweden while in the Netherlands, planning policy distinguishes only
bulky goods as being suitable for edge/out-of-town retailing.
In contrast, France has experienced more piecemeal development
with critical mass achieved through large agglomerations of solus
units. Hypermarket led schemes are also common although ownership of individual units is fragmented. Consequently, institutional
ownership is low due to illiquidity, lot size and lack of asset management opportunity. While fashion is permitted, occupation has tended
to be limited to large discount retailers. Although, where retail parks
are reconfigured and engineered, High Street retailers have expanded to such locations. Indeed, it is perhaps the lack of modern
planned parks that has restricted the spread of High Street retailers
to this format on a wider scale.
In Germany, while retail park formats dominate, these were largely
developed by retailers who have retained control. As such they have
tended to lack critical mass and focus on one or two large units, with
non competitive rather than compatible adjacencies in much smaller
units. Planning is restrictive, reducing supply risk, however trading
hours are limited with no Sunday trading.
Modern and more consistent markets
in Southern Europe and CEEC
October 6, 2005
In Southern Europe, while the markets in Italy and Portugal are
young, the quality of retail park developments is high and
institutional ownership has been quick to follow where the property
companies developing them have sought to sell rather than retain. In
contrast, the Spanish market is more complex. Initially, lax planning
allowed bulky goods retailers following the consumer opportunity to
develop solus units along arterial roads, resulting in large agglomerations, but fragmented ownership. Planned retail park developments followed, but with planning requiring the incorporation of
leisure for schemes seeking critical mass, the retail offer as well as
3
Current Issues
the income stream became diluted, in turn reducing investor
demand.
In Poland, early retail entrants keen to take and retain market share
developed good quality planned retail formats. This ensured their
store location was strong, having a critical mass of Big Box retailers,
yet protecting sales by controlling competition in their specific retail
category.
Diverse characteristics of European retail warehouse markets
4
Dominant retail
warehouse format
Dominant
ownership
Supply risk
France
Agglomeration of solus
units; individual units
adjacent to hypermarket
Fragmented. Low
institutional. High
retailer/cooperative. High
private investor
Minimal. Schema d’Urbanisme takes
holistic approach with presumption in
favour of town centre
Germany
Small scale park format.
Often retailer
Minimal. Planning restrictive and
One/two large bulky goods owned, Obi and
protective of town centre and
units and smaller
Metro large holdings environment.
convenience retail units
Italy
Modern planned retail
parks
Property company/ Considerable. Recent legislation (Lei
Bersani) increased flexibility and
Institutional
transparency, but regional planning
has regional risks. >2500 sqm
requires regional approval
Netherlands
Traditional and modern
planned retail parks
Poland
Modern planned retail
parks. Often hypermarket
led
Property company/ Minimal. Planning recognised bulky
Institutional
goods as being suitable to out of
town. Under consideration
Retailer developed Moderate to considerable. Strong
and owned
existing pipeline, but Zoning Act
2004 and requirements for regional
planning greatly reducing risk
Portugal
Modern planned retail
parks
Property company/ Moderate. More restrictive panning
Institutional
since April, 2004 for development
>6000 sqm
Spain
Solus agglomerations and
planned parks
Property company/ Considerable. Since 1995 licence
Institutional for
required for development over 2500
parks; owner
sqm regional variations and risks
occupation for solus
Sweden
Traditional planned retail
parks
Property company/ Minimal. Restrictive Greenfield
Institutional
policy, but not against development
per se
UK
Traditional and modern
planned retail parks
Property company/ Minimal. Planning presumption
Institutional
(PPS6) against out of town
development
October 6, 2005
European retail warehousing prospects
Use
Trading licence
Trading hours
Key big box
retailers
France
Open
Requirement (Loi
Raffarin) requires
permit for all units
>300 sqm, a
process of 1 year
Flexible. Include
evenings and Sunday
Conforama,
Castorama, Leroy
Merlin, Darty, Kesa,
Ikea
Germany
Zoning may limit
use to either broad
or narrow use
category
Include early evenings
Mon to Sat. No Sunday
opening
Obi, Praktiker,
Media Markt,
Saturn, Ikea,
Bauhaus
Italy
Open
For towns >10000 Mon to Sat flexible.
licence required for Sunday opening limited to
stores >250 sqm. 12 per year
Since 1998
simplified to
food/non food
Include early evenings
Presumption
Mon to Weds, and late
against high street
evenings Thurs to Fri.
retailing in retail
12 Sundays per year
warehouse formats
Media Markt,
Expert, GET Italia
Decathlon,
Bricolage,
Castorama, Obi
Poland
Open
Liberal, include late
evenings and Sunday
trading permitted
Portugal
Open
Since April, 2004 Include late evenings
Mon to Fri. Sunday
for shops >500
permissible
sqm and groups
operating a
national sales area
>5000 sqm
Castorama, Ikea,
Media Markt, Obi,
Praktiker, Leroy
Merlin
Expert,
Bricomarche, La
Redoute, Decathlon
Spain
Open
For parks include late
evenings. One
Sunday/month
Expert, DensaTien, Media Markt,
Ikea, PC City
Sweden
Open
Ikea, Expert, Media
Markt, PC City, PC
Box, Conforama
UK
Presumption
against high street
unless open
consent
Technically 24/7, but
labour law costs reduce
opening to early evening
Mon to Fri, to 16:00 on Sat
and 12:00 to 16:00 Sun
Liberal. No restrictions
Mon to Sat, Sunday any
six hours between
10:00 and 18:00
Netherlands
Gamma, Praxis,
Hubo, Dixons,
Expert, Carpetland,
Ikea
Dixons, PC World,
Currys, Ikea, B&Q,
MFI, Carpetland
Sources: RREEF/DBRE Research, Mintel, PMA
October 6, 2005
3
5
Current Issues
For the UK, supply risk has been an important aspect of the relative
pricing of retail warehousing and shopping centres. Its reduction
through the introduction of planning constraints generated additional
value in the land and planning rights. While this is also true for the
shopping centre market, given the much lower costs associated with
construction and management, building and depreciation risk is
virtually eliminated for the retail warehouse market.
Positive cap rate spreads
Cap rates (initial yields), %
PL
PT
DE
NL
SE
IT
BE
ES
FR
0
2
4
Shopping centres
6
8
10
Retail warehouse
Source: JLL
4
Equally, given the ease and speed of development of retail warehousing and the resultant higher risk of market cannibalisation and
locational obsolescence, we would expect a positive spread where
higher supply risk exists. However, where the level of existing stock
is low, the risk of market saturation or locational obsolescence is
reduced.
Supply densities across
Europe
m²
350
GLA/'000 Inhabitants
GLA/'000 Households
300
Given that bulky goods retail sales in DIY, Household Goods,
Furniture and Electricals are driven more by the number of housing
units rather than population size, Spain, Poland and Italy appear
undersupplied when considered by retail warehouse space per
household. With the second highest supply per household, Portugal
is approaching saturation, perhaps triggering the introduction of a
more restrictive planning regime. Looking forward, we would expect
the number of households in Portugal to grow as the size of
households decreases.
250
200
150
100
50
0
NL PT UK SE FR SP PL DE IT
Note: GLA = gross leasable area
Sources: RREEF/DBRE Research, Eurostat, JLL
Consequently, in mature markets where planning risk is low to
moderate (France, Germany, Netherlands, Sweden and more
recently, Portugal) a negative cap rate spread should be evident.
However, outside of the UK, a positive cap rate spread persists
between retail parks and shopping centres. Yet, at EUR 1.5 bn
market liquidity in 2005 is already treble record levels achieved for
Europe (excl. UK) in 2004, (JLL, Q2 2005) and retailer and investor
appetite is stronger for retail warehousing than shopping centres
(PMA Occupier and Investor Activity Surveys, 2005). While cap rate
compression has been a feature across all retail warehouse
markets, it has also characterised shopping centre markets. This
suggests market mis-pricing and points towards strong yield compression relative to shopping centres for such supply constrained
markets in the short term.
5
Of course, supply is only one side of the equation. The factors
driving consumer demand for goods, retailer demand for space and
rental growth must be addressed before the future prospects for the
retail warehousing market can be ascertained.
Forces for future growth
Structural change and rising incomes
were the catalyst for the sector’s
growth
In the UK, a number of interrelated factors contributed to the growth
in demand for goods now traded from retail warehouse destinations.
This gap in the retail market was rapidly filled by new and innovative
retailers seeking to meet consumer aspirations. Strong growth in
employment levels, discretionary income and increasing personal
wealth helped to facilitate an increase in the number of households
and rate of home ownership. This was driven by a complex web of
social change, economic policy and political reform. The market size
of the retail sector increased with both disposable income levels
creating the ability to purchase and equally significantly, the number
of households increasing the need for bulky goods.
Clearly, to assess the growth prospects of the European market it is
necessary to examine current and future expectations of demand in
the context of disposable income, household structure, residential
price growth, affordability and its impact on discretionary income.
6
October 6, 2005
European retail warehousing prospects
Disposable income
Remarkable growth
differential
%, yoy (left), '000 EUR (right)
14
28
12
24
10
20
8
16
6
12
4
8
2
4
0
0
FR DE IT NL PL PT SP SE UK
Disp. income (avg. 1995-2004)
Disp. Income (avg. 1999-2004)
Disp. income per capita (level)
Sources: OECD, RREEF/DBRE Research, DB Research
6
Household structure
gradually changes
30
25
20
15
10
5
0
-5
-10
-15
-20
FR DE IT NL PL PT SP SE UK
Number of households
Average household size
Source: Eurostat
7
Smaller households in
Northern Europe
Number of persons per household, 2003
SP
PT
PL
IT
UK
FR
NL
DE
SE
1
2
3
Source: Eurostat
October 6, 2005
Given the maturity and level of stock in Northern Europe by the mid
1990s, it is perhaps unremarkable that development activity in the
retail warehouse market focussed on the strong growth markets of
Iberia and Poland from the late 1990s. However, given the low level
of stock in Italy in contrast to high income levels it is surprising that
attention has only recently turned to the market. This may reflect the
risk and uncertainty arising for both retailers and developers from
limiting and complex trading licensing. Since, 1998 the process has
been greatly simplified by legal reform (Lei Bersani).
While disposable income provides the ability for consumers to
satisfy demand, it does not in itself create need or want for retail
warehouse products. Bulky goods retailers are largely centred
around home improvement (DIY, Furnishings) and household
management (White Goods, Electricals). Consequently rates of
home ownership, household formation and household structure are
direct determinants of consumer demand for retail warehousing.
Household growth and tenure
Changes '90-'03, %
0
Northern Europe and Italy continue to have higher absolute
disposable income levels per capita than Iberia or Central Europe,
although the latter have been playing catch up exhibiting higher
rates of growth over a 5 and 10 year period. With the exception of
Sweden, growth has been strongest in the late 1990s rather than
since 2000, with the rate of growth slowing to a strong, but more
moderate rate of 5.4 % p.a. (nominal) for Poland.
4
8
While the ageing of Europe’s population is well recognised, what is
perhaps often overlooked is the almost counter-intuitive growth in
the number of households. In Northern Europe, fertility rates have
been below replacement level for three decades and at least two
decades in Southern Europe. However, increasing life expectancy,
later marriage and increasing divorce rates have caused the number
of households to increase concomitant with the average size of
households to decline.
Interestingly, the UK has witnessed the lowest household growth
and the weakest decline in average household size since 1990. At
the same time, the average size of housing units has fallen due to
restrictive planning. This suggests that the potential demand for
retail warehousing is stronger across Europe, particularly Iberia.
In terms of opportunity, the market size by number of households
and its expected rate of growth relative to stock will be a further
indicator of future prospects. In terms of market size, Germany, UK,
France and Italy have the largest number of households, however
Germany and Italy also have the lowest levels of future growth,
perhaps reflecting the fact that they possess the oldest age profiles
in Europe. However, given the low level of existing supply per
household in each market, opportunities persist for retail warehousing.
While the number of households is a fundamental driver of demand,
tenure plays an important and complicated role. Consumer demand
for goods associated with household improvement rises with levels
of owner occupation. Therefore high ratios of owner occupation
suggest the relative retail warehouse goods market is larger than for
low ratios. Southern Europe is characterised by the highest ratios.
However, while levels of owner occupation are low in Germany and
the Netherlands, rental levels are controlled, increasing discretionary
spending on certain Household Goods and Electricals. In addition, a
7
Current Issues
low ratio suggests stronger future growth in owner occupation levels
and in turn, market size. Indeed, the recent sale of residential portfolios by the German state and corporates to financial investors and
tax breaks for mortgage repayments in the Netherlands is expected
to generate high levels of owner occupation. Very high ratios may
indicate a ceiling to further growth
Number of households will
grow strongest in Iberia
Number of households, m (right),
growth, % (left)
50
3.5
3
2.5
2
1.5
1
0.5
0
40
30
20
10
0
DE FR UK IT SP PL NL SE PT
Residential house price growth
Households
Household growth ('05-'07)
Sources: Eurostat, DB Research
9
Germany: Land of the
tenants
Owner occupation ratio, %, latest
available data
100
80
60
40
20
0
DE NL FR SE PL UK PT ES IT
10
Source: Eurostat
House price rally in Europe
Overall house price growth, %
200
2004/1998
2004/1991
150
100
50
0
UK ES FR NL SE IT PT PL DE
Sources: BulwienGesa, MVIV, INSEE, Nomisma,
NVM, GUS, IPD, SCB, Nationwide
8
A further and important impact of owner occupation is in its capacity
to generate personal wealth as a result of house price growth. For
existing owners this fuels demand as it provides both a source of
income to finance home improvements and in turn, home improvements increase the price that may be achieved. However, house
price growth also reduces affordability for new market entrants
thereby reducing discretionary spending.
11
House prices have risen very sharply in recent years in many
European countries. This has been most notable in Spain and the
UK, where between 1998 and 2004, house prices increased by as
much as 130%, equating to an average of 18% p.a. However, at
12% p.a., strong growth was also evident in France, while Sweden,
Italy and the Netherlands achieved some 10% p.a. Elsewhere, the
limited price statistics available for Portugal and Poland suggest
performance was considerably weaker, while in Germany, with price
growth well below the general rate of inflation, house prices fell in
real terms.
For most households, residential property represents the single
largest investment asset, from which they receive at least a notional
income. As wealth is ultimately nothing more than the sum of all
possible potential returns from an asset, an increase in value has a
positive impact on household consumption. Consumption is thus
smoothed over the entire holding period. Where price increases are
unsupported by fundamentals and prove temporary, any
consumption brought forward would have to be compensated by
subsequent economising.
In many European countries, particularly the UK, Spain and France,
Central and lending banks have recently joined market observers in
their concern over an apparent disconnect between house prices
and their fundamental drivers (income, interest rates, population
growth and the opportunity cost of alternative investments). Growth
has already slowed perceptibly in the Netherlands. At present the
scenario of a dramatic slump in prices similar to that of the early
1990s is still perceived as a central risk scenario. As growth
moderates and price stabilises in the Netherlands and to a lesser
extent, the UK, this risk is diminishing. However, the longer the price
rally persists in France and Spain, the greater the likelihood of a
housing slump materialising.
Analysis of the affordability of residential property enables to assess
the extent to which house prices are underpinned by fundamentals.
This is of three-fold relevance to the retail market: First, an
unfavourable affordability value flags overvaluation and hence the
possibility of a correction in prices. This could dent consumption
through a negative wealth effect. Second, a deterioration in
affordability points to declining rates of consumption as repayment
levels increase as a proportion of disposable income. Third,
affordability levels are an indicator of potential housing market
growth in terms of new entrants and wider market activity, in turn
increasing demand for retail warehouse goods.
October 6, 2005
European retail warehousing prospects
Affordability
House prices often grew
stronger than incomes
House price/disposable income per
capita, 1999=100
170
160
150
140
130
120
110
100
90
80
1999 2000 2001 2002 2003 2004
DE
FR
NL
PT
UK
SP
IT
PL
SE
Sources: OECD, BulwienGesa, MVIV, INSEE,
Nomisma, NVM, GUS, IPD, SCB, Nationwide
12
Affordability of houses
worsens in many countries
%
2004/1998
2004/1990
60
40
20
0
-20
-40
Two affordability indices for the nine comparative countries are
presented. The first considers house prices relative to disposable
income per capita. The index indicates growth in the income multiple
employed. Higher values indicate that houses have become less
affordable. For Spain and the UK affordability has deteriorated
considerably with the ratio climbing by just under 60% since 1999.
Similarly, affordability has diminished in France by over 40%. The
levels are considerably lower for Italy, Sweden and the Netherlands.
However, the sharp slowdown in house price growth since 2000 for
the latter somewhat masks the earlier deterioration in affordability;
since the early 1990s the Dutch affordability index has risen by
almost 80%. In contrast, the index indicates that affordability is
stable, if not appreciating for Germany, Portugal and Poland.
Indeed, strong income growth in Poland has been driving down the
index there for years.
Although this simple affordability indicator depicts house values
relative to annual income, it does not paint a full picture of the
financial burden on households as it fails to take account of the
impact of interest rate movements. Yet, it was precisely the steep
decline in interest rates, particularly during the 1990s, that lightened
the financial burden of households considerably. Therefore, a
second affordability index is calculated for each country to take
account of changes in interest rates, providing a ratio of average
mortgage payments to disposable income.
Despite having risen by between 30 to 40% since 1998, this
indicator is well below the high ratios experienced in the early 1990s
in the UK, Spain and France due to the prevailing low interest rate
environment since the late 1990s. So while initial mortgage payments are significantly less favourable today than six years ago
primarily due to the higher income multiple required, the impact of
lower interest rates on repayments indicates that they are still more
affordable than during the early 1990s housing market bubbles.
Current mortgage systems in Europe
-60
-80
FR DE IT NL PL PT SP SE UK
Note: Affordability is calculated as initial mortgage
payments/disposable income per capita
Sources: OECD, BulwienGesa, MVIV, INSEE,
Nomisma, NVM, GUS, IPD, SCB, Nationwide
Germany
13
France
Italy
Netherlands
Poland
Portugal
Spain
Sweden
UK
Usual length of
contracts – in
years
Average loan to
value ratio (new
mort-gage) in %
Interest rate
adjustment
(% of all new
mortgages)
Up to 30
70
Mainly M* and F*
15-20
66
F/M(86%),
V(14%)
Okt 25
not available
F(28%)
Up to 30
112
F(74%), M(19%),
V(7%)
not available
not available
not available
25-30
70-80
Mainly V
24
83
V* (more than
75%)
30-50
90-100
F(38%), M(24), V
(38%)
not available
70
V(72%), M(28%)
F=interest rate fixed > 5 years, M=interest rate fixed < 5 years >1 year, V= interest rate renegotiable
after 1 year.
Sources: ECB, National Board of Housing, Building and Planning Sweden
October 6, 2005
14
9
Current Issues
Mortgage debt rising
Outstanding mortgage loans, 1999=100
600
500
400
300
200
100
1993 1995 1997 1999 2001 2003
DE
FR
NL
PT
UK
ES
IT
PL
SE
Note: PL: 1996=100; PT: 1999=100
Source: European Mortgage Federation
15
However, unless mortgage rates are fixed for 25 years, such
affordability is subject to the risk and uncertainty of future interest
rate movements associated with the predominance of variable rates
as is the case in the UK, Spain, Netherlands and France. Should
interest rates rise, the countries with a high proportion of variablerate mortgage loans will clearly suffer a rapid deterioration in
affordability.
Moreover, in many European countries debt levels have risen
sharply in recent years. This is true of secured and unsecured debt
alike (the development in overall household debt and household
mortgage debt has correlated very strongly since 1999; correlation
coefficient > 0.9 for all countries). As unsecured debt repayments
also impact on affordability, high debt ratios are likely to reduce the
volume of future loans. Their presence also indicates possible
liquidity risks. Should interest rates on variable-rate loans pick up,
consumption is likely to fall as repayments increase as a proportion
of disposable income in countries with a high debt ratio, depressing
retail rental growth.
Prospects for European retail warehousing
In order to consider the relative attractiveness and potential of retail
warehouse markets across Europe it is necessary to consider both
the current characteristics of each market and expectations of
prospects using the market drivers discussed. Six major, yet interrelated determinants of the prospects of retail warehouse markets
are identified, each driven by a number of key variables,
summarised in table 16.
Key determinants of retail warehouse
market prospects
GDP per Cap. '04 (EUR PPP)
Economy
GDP per Cap. '05-'06
DB Formel G '07-'20
House price growth '00-'04
Change in Affordability '00-'04
Housing market
structure &
affordability
Change in Affordability '04-'10
Household Units '04
Housing Completions ('05-'07)
Owner Occupation '04 (%)
Growth in Owner Occupation '05-'10 (%)
Consumer market
size
Households (m) '04
Household growth '05-'10
Growth of Key Age Cohort '05-'10
Disposable Income Growth '05-'07
Retail warehouse
market prospects
Retail Warehouse Stock / Household '05
Supply Pipeline / Household
Yield Shift Expectations '05-08
Retail warehouse
market structure
Investment market
context
Quality of Stock
Volume of Cross-Border Retailers '98-'04
Retail Warehouse Stock '05
Average Investment Volume (02-04)
Cross border Investment as % Investable Universe
Market Transparency
Sources: RREEF/DBRE Research, DB Research
10
16
October 6, 2005
European retail warehousing prospects
The complexity of the factors driving the retail warehouse market is
evident. For example, while low levels of owner occupation depress
market size for consumer goods, the interaction of wider economic
and political change may indicate that the rate of owner occupation,
and therefore demand for retail warehousing will rise. For example,
Germany is currently characterised by low rates of owner
occupation, but the implications of the recent sale of housing
portfolios by the state and corporates suggest significant change in
tenure structure.
Overall future
prospects scores
Total score (%) Rank
UK
64.2
1
Spain
64.1
2
France
60.4
3
Germany
54.9
4
Italy
54.4
5
Poland
52.8
6
Sweden
46.3
7
Netherlands
45.8
8
Portugal
42.9
9
Sources: DB Research, RREEF/DBRE Research
17
UK achieves top (unweighted) score,
but Spain and Italy have the strongest
performance prospects
France is having an all round
performance
To illustrate the prospects of each market, for the purpose of this
paper, the values are normalised across the nine countries for each
variable to provide a relative score. The scores are assigned
according to a country’s driver relative position in the normally
distributed net of all countries’ drivers. A value of 10 indicates the top
10%, a value of 1 indicates the bottom 10% of the distribution. Each
variable contributing to an overarching category is given an equal
weighting enabling a relative performance score to be assessed for
each dimension of prospects. These are shown diagrammatically in
the web chart at the end of the document, and simplistically, the
wider the web, the more attractive the market. Again, equal
weightings are placed on each dimension to provide an overall
score for each country, expressed in % terms in table 17.
Obviously, the relative attractiveness of markets will change with
investment style. For example, a core investor would place greater
emphasis on income growth, market maturity and sustainability,
while an opportunistic investor might seek those markets that could
deliver strong returns with an emphasis on realising mis-pricing
and/or windfalls from the probability of structural change, albeit at a
higher risk and greater uncertainty.
Using the overall performance score the top 5 markets are the UK,
Spain, France, Germany and Italy. While the UK has the highest
overall score, this is strongly skewed by the maturity and
sophistication of the investment environment as well as the maturity
of the retail warehouse market itself. However, while economic
prospects for the short to medium term are strong, the overall
prospects for the retail warehouse market are weak relatively. This is
due to low expectations of capital growth as yields have already
undergone significant compression as a result of high investor
demand and there is no arbitrage opportunity on the relative pricing
of retail warehouses and shopping centres. In contrast, Spain and
Italy share the strongest retail warehouse market prospects and in
terms of consumer market size, Spain dominates. However, their
scores are dampened by the relative immaturity of the investment
market and to a lesser extent, the structure of the retail warehouse
market.
While France does not achieve the highest score for any one
dimension of future prospects, its profile is consistently above
average across the performance indicators. Consequently, while
retail warehouse prospects are strong rather than exceptional, they
may be realised with low risk exposure. While not as consistent,
Germany shares a similar profile but in the context of a weaker
economy and more restrictive retail warehouse market structure.
Portugal has the lowest overall score for future prospects, followed
by the Netherlands and Sweden. While the quality of Portugal’s
retail warehouse product is high, it is approaching saturation level in
a weak economy and relatively immature investment market. Like
Sweden and the Netherlands, the relative size of the economy and
October 6, 2005
11
Current Issues
property market dampens its scores for investment market context,
retail warehouse market structure and consumer market size.
Clearly, an investor targeting these markets explicitly and/or in the
context of a balanced Pan European investment strategy might seek
to disregard or reduce the weighting of indicators measuring market
size. Notably, Sweden’s relative scoring would be considerably
higher.
Conclusion
Diversity in the retail warehouse is
evident and can be matched to the
investment style
This paper provides a comparative evaluation of the European retail
warehouse market on a country by country basis. It highlights the
complex nature of the market and explores the key drivers underpinning future prospects. The results suggest that the diversity of the
market is clearly reflected in the investment profile of each market
and that investors should match their risk return strategy
accordingly.
As investors, buoyed by their experience of the UK market, turn their
focus on continental Europe, the heterogeneous nature of the
structure of the market is becoming apparent. Broadly, Northern
Europe is mature in terms of the market being an established part of
the retail hierarchy, although what actually comprises retail
warehousing in terms of quality and format is varied. In contrast,
markets in Southern Europe and CEE are generally younger, with
Spain being the most established market, while Italy is still
considered a development market.
In supply constrained markets, there
is evidence of mis-pricing
The significant role of supply risk in the pricing – and mis-pricing – of
retail warehousing is highlighted. Given the low cost and speed of
construction, retail warehousing comprises a higher risk relative to
shopping centres where planning permission may be readily
achieved. Conversely, where new supply is constrained the higher
costs associated with management and depreciation of shopping
centres increase their relative risk to retail warehousing. Effectively,
a higher proportion of the value of retail warehousing is captured in
the land, planning permission and trading rights which increase as
the risk of competition is removed with restrictive planning.
Consequently, in supply constrained markets we would expect retail
warehouse cap rates to have a negative spread with shopping
centre cap rates. To date, such a negative spread is only evident in
the UK, suggesting mis-pricing in a number of markets.
The interaction of income and
housing market drivers are key to
determining future prospects
Alongside the usual determinants of rental growth, income and
supply, the dynamics of the housing market play an important, if
complex, role. First, given the retail focus of the market, the number
of households is more relevant than population when considering
market size and therefore changing household structures are an
important aspect in determining future growth.
Second, house price growth has a positive impact on consumption
due to the creation of personal wealth for existing owners. The
corollary is that for new market entrants, the affordability of housing
is reduced, decreasing disposable incomes net of mortgage
repayments and in turn, retail spending. Over the past five years,
house price growth has been strongest in the UK, Spain and France
and as expected, these countries experienced the greatest
deterioration in affordability. However, given low interest rates,
affordability is still considerably higher than that experienced in the
bubble markets of the early 1990sThe diverse characteristics of the
European retail warehouse market suggest that each country offers
a distinct risk return profile, enabling investors to target markets
12
October 6, 2005
European retail warehousing prospects
Each country offers a distinct risk
return profile
according to their investment style. Spain, Italy and Poland offer the
strongest retail warehouse market returns, but in the context of the
relatively higher risk associated with the size, transparency and
liquidity of their respective investment markets. In contrast, the UK
offers a low risk environment, but with correspondingly low returns,
while France offers a well balanced risk and return profile.
Brenna O’Roarty (+44 20 7547-3305, [email protected])
Tobias Just (+49 69 910-31876, [email protected])
October 6, 2005
13
Current Issues
Relative future prospects by market
Spain
Germany
Inv. Mkt.
Context
Economy
100
75
50
25
0
Retail
W'house
Structure
Housing
Mkt.
Inv. Mkt.
Context
Consumer
Mkt. Size
Retail
W'house
Structure
Italy
Housing
Mkt.
Inv. Mkt.
Context
Consumer
Mkt. Size
Retail
W'house
Structure
Economy
100
75
50
25
0
Housing
Mkt.
Inv. Mkt.
Context
Consumer
Mkt. Size
Retail
W'house
Structure
Retail
W'house
Prospects
Economy
100
75
50
25
0
Housing
Mkt.
Inv. Mkt.
Context
Consumer
Mkt. Size
Retail
W'house
Structure
Retail
W'house
Structure
Retail
W'house
Prospects
Housing
Mkt.
Inv. Mkt.
Context
Consumer
Mkt. Size
Retail
W'house
Structure
Consumer
Mkt. Size
Economy
100
75
50
25
0
Housing
Mkt.
Consumer
Mkt. Size
Retail
W'house
Prospects
Sweden
Economy
100
75
50
25
0
Housing
Mkt.
Poland
Retail
W'house
Prospects
Portugal
Economy
100
75
50
25
0
Retail
W'house
Prospects
Netherlands
Retail
W'house
Structure
Inv. Mkt.
Context
Economy
100
75
50
25
0
Retail
W'house
Prospects
Retail
W'house
Prospects
Inv. Mkt.
Context
France
United Kingdom
Economy
100
75
50
25
0
Retail
W'house
Prospects
Housing
Mkt.
Inv. Mkt.
Context
Consumer
Mkt. Size
Retail
W'house
Structure
Economy
100
75
50
25
0
Housing
Mkt.
Consumer
Mkt. Size
Retail
W'house
Prospects
Sources: DB Research, RREEF/DBRE Research
14
18
October 5, 2005
European retail warehousing prospects
October 6, 2005
15
Current Issues
Real estate market
Housing portfolios in Germany: Scene set for further divestment .................................................... June 10, 2005
Berlin property market: Heavily mortgaging the future ................................................................... March 16, 2005
UK house prices: end of the rally in sight .................................................................................... October 15, 2005
Demographic developments will not spare the public infrastructure .................................................. June 7, 2004
Demography sends tremor through German property market ............................................... September 26, 2003
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