Consumer spending may not be able to keep up with development pipeline’s output
Last year, international investors made significant inroads into France’s retail sector, buying mainly shopping centres and high street assets, either going it alone or in joint venture.
But with the Paris office sector the talk of the town, French retail, dominated as it is by shopping centres (40% of the total stock, according to DTZ), is experiencing a lull in investment activity.
France, according to PROCOS, the country’s federation for urbanism and development of specialist retail, has the most active pipeline in Europe. Some 7.5m m2 of retail space is in the five-year pipeline. Oversupply is a possibility.
“Even allowing for the large French population, there is a risk of oversupply in the French retail market, which is already being hit by falling consumer spending,” said DTZ in a recent report.
The imbalance between out-of-town locations and town-centre retail could also be aggravated, the report says. At present, 80% of retail stock is out-of-town.
“The difficulty today is finding product. There is very little retail for sale,” says Jean-Philippe Mouton, Hammerson’s director for France. “We have £1bn to spend and we regard ourselves as buyers. But that depends on opportunities.”
Hammerson buys at below book value
Most recently, Hammerson bought the SQY Quest mall in the Parisian new town of Saint Quentin-en-Yvelines for €38m at a net yield of 9.2% from SNC Parc. The price was, according to Fitch Ratings, “well below the July 2009 value of €73.3m”.
The sale price also reflects a 71% drop in value since the original May 2005 valuation of €130.8m. Hammerson bought the 31,000m2 mall, which is 87% let, in a joint venture with developer Codic from SNC Parc. The asset is next to the Espace Saint Quentin, in which Hammerson sold a 75%-stake to Munich-based Allianz Real Estate for €176m last year.
Core offices have become too expensive and at present do not interest Hammerson. Mouton says he was surprised by the fact that France’s spending rose last year, albeit by 1%. With an election looming and all the added uncertainty that could bring, he expects similar results for both this and next year.
“We expect 2011 and 2012 to be similar to last year,” says Mouton. “We don’t expect exceptional improvements. Unemployment is still an issue.”
Having sold stakes in malls it considered mature to the Korean Pension Fund, as well as the Espace Saint Quentin stake to Allianz, Hammerson is unveiling new tactics to entice customers and improve footfall. And connecting new sources of equity with a retail player who knows the asset makes sense for both parties.
“We will continue to develop the assets we have in France, in particular Les Terrasses du Port in Marseilles as well as our retail parks in Mantes and Beauvais,” says Mouton. “The aim is also to refresh our malls and replace tired retail concepts with new more dynamic brands. We are aiming for a 9% turnover of tenants each year. At present, that figure around 5-6%.”
Working on the performance of existing French assets will also mean keeping up with the switch to online purchasing.
“As the overall outlook is not as strong as it once was, we’re looking at ways to be more innovative than we have been in the past and use e-commerce to bring more shoppers to our malls,” says Mouton.
Late last year, Hammerson introduced “vente flash” discounts, whereby online customers were required to collect purchases in-store.
“It’s a win-win tactic because it brings people in and we then open up the chance for more impulse buying,” he says.
UK brand Marks & Spencer recently announced its return to France after leaving the country 10 years ago. The chain, which will open a flagship Paris store in Generali’s 100 Avenue des Champs-Elysées, is also looking to open Simply Food stores in and around the French capital.
With its second entrance to the French market, M&S is aware this time of the need to tap into the online market. A French M&S website will therefore be launched alongside the return.
The cost of yield compression
As has also been the case for the office sector, yield compression is pricing some buyers out of the market. The solution is for buyers to take stakes in assets.
But retail investment has not gone away.
Union Investment is looking to increase its exposure to French real estate as it diversifies its portfolio and attempts to diversify from what has been a Paris-focused strategy.
“We decreased the percentage of offices in our portfolio by increasing retail, which is now around 15%,” says Karl-Joseph Hermanns-Engel, investment director at Union. “Retail has historically been difficult but shopping centres are particularly good structures to deal with.”
There are, says Hermanns-Engel, inflationary risks but it “would make sense to increase to 20-25% in retail”.
Grosvenor wants to spend €350m on French assets this year. So far, it has spent €23.5m on the Provence Opéra shopping arcade in the eighth arrondissement at an estimated 6% yield. And late last year, Grosvenor paid €95m for Heron Parc in Villeneuve d’Ascq near Lille, at a similar yield.
