Property Investment in European Outlet Centers Explode 300 Percent Since 2013
According to CBRE, over €1.1 billion ($1.26 billion USD) was invested into European Outlet Centres in 2015, with transaction volumes more than three times the number recorded three years prior.
In 2015 the number of centres transacted increased by a third over the previous year, but whereas in 2014 all of the purchasers were made by investor/managers already active in the sector, in 2015, 70% of transactions were to new entrants to the sector including Institutional capital.
"In the past 12 months, we've seen institutional capital enter the sector in a big way, out-bidding the traditional specialist owners and driving yields sharply lower across Europe," said Daniel Hayden, Director International Valuations at CBRE.
"With rental growth forecasts in most sectors being generally muted, stronger growth in Outlet Centres presents opportunities for investors to improve their overall returns. Well managed Outlet Centres around the world exhibit strong cash flow growth to investors, through the shared risk / share reward mechanisms of the leasing structures.
"Just as retailers have acknowledged the importance of outlets by incorporating them into their multi-channel approach to distribution, property investors have followed, concluding that Outlet Centres help deliver a balanced portfolio strategy that aligns with retailers' market penetration strategies."
John Welham, Head of EMEA Retail Investment at CBRE added, "Until fairly recently investors have preferred to leave the ownership and management of Outlet Centres to the specialist funds. However the strong relative performance of the sector, particularly through the last downturn, has led to a significant interest in direct investment in Outlet centres".
Marco Rampin, Head of Debt & Structured Finance for CBRE Capital Advisors, also commented, "Bankers would be put off at the thought of short lease terms and turnover rents," he said, "so it was an education process to teach them that Outlet leases in fact deliver income growth through turnover rents, underpinned by base rents and a level of flexibility for asset management that isn't available in longer fixed term shopping centre leases."
Daniel Hayden further stated, "You can't assess an Outlet Centre as you would a shopping centre; they simply don't work in the same way. But we're now seeing a deeper lender pool in the sector, as a result of these differences being more clearly understood and the risks factored accordingly."
"With increased investor activity and capital flowing into the sector, we've seen the spread between prime shopping centre yields and prime Outlet Centres narrow from around 200 basis points two years ago, to 100 in the early part of last year to probably less than 50 today. And for the very, very best in class, that gap could even be as low as zero."
CBRE research shows that while shopping centres offer almost 225 sq m of space for every 1,000 head of population across Europe, Outlet Centres provide less than 5 sq m. Representing less than 2% of the total retail landscape, but showing some of the strongest returns over the past three years, it is little wonder that a supply/demand imbalance has become apparent.
Mr. Welham concluded, "Whilst there is much less Outlet Centre stock available than shopping centres, there has been a notable uptick in liquidity as a number of existing owners take advantage of the recent increase in investor interest and increased values. Already in 2016, we are seeing a significant number of sales, which should translate into a strong year ahead for the sector."