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The case for ‘less volatile’ retail in international property
Nick Evans
A new research report from TH Real Estate has highlighted the diversification benefits institutional investors can gain by investing in European retail property. The manager believes retail will continue to be less volatile than office blocks over the medium-long term.
The 40-page report, launched in Australia last week, provides an overview of the retail property market across the UK and Europe, including the many sub-sectors. It presents a strong case for investing in European retail property, in part for the diversification benefits that can be gained through geography, sub-sector and risk profile.
However, the findings caution that a successful strategy should acknowledge the significant differences in prospects and performance characteristics, by country and sub-sector, capitalising on these to maximise performance and minimise risk.
The report also warns that capital should not be deployed indiscriminately across this region; retail real estate performance is highly dependent on local market fundamentals, and requires ground-up analysis.
Nick Evans, TH Real Estate executive director and country head for Australia, said Australian institutional investors were increasing their appetite for international real estate.
“The European retail market presents an attractive, defensive opportunity for investors, due to its asset management potential, long lease terms and diversity of tenant base,” he said. “Retail property, particularly prime core retail, has demonstrated relative resilience to market turmoil when compared to more cyclical sectors, while European prime retail has also outperformed on a historical context.”
Focusing on shopping centres in the more mature European economies, the research predicts that this market will outperform the European property market average over the coming five years. According to the report, well-anchored shopping centres, specifically, are expected to achieve high levels of rental growth and stable yield profile.
The Nordic region is expected to be the strongest short-to-medium-term performer, according to the report. Strong performance is anticipated in this region as markets benefit from steady rental value growth in the medium-term, combined with sound economic fundamentals of the region. “Super prime” shopping centres in Spain and Italy may still be available at marginally better prices than other more core markets, though this margin is quickly being eroded as investor appetite for these countries is on the up.
Alice Breheny, the manager’s global co-head of research, said: “We predict that over the medium-to-longer term, retail should again prove to be less volatile than offices. Rental growth may be modest, but is improving and will not be short-lived. Investing in retail should complement commitments to more cyclical sectors.
“We expect there will be further yield compression in some European markets where, given the right asset, there will be strong short-term returns. In the longer term, retail will prove more defensive, offer diversification benefits, access to excellent tenants and real long-term rental growth.”
