How to make money on shops and supermarkets in Europe

European commercial property is getting more and more popular

Demand for European retail property has been rising steadily over recent years. During the first nine months of 2015, this segment received investments totalling €51.5 billion, which is 59% more than the same period in 2014 according to Cushman & Wakefield. Germany is the most popular market: investments were 90% higher than in 2014, breaking all the records since the 2008 crisis.

Property types

The minimum investment threshold for high-quality retail property is €2.5M. Prices for shopping centres often start in the tens of millions.

High street retail: the main liquidity indicator for these properties is location. Premises situated in popular shopping streets with intensive pedestrian traffic that have an attractive exterior and are conveniently designed for customers (e.g., brightly and well-designed shop windows, separate and easy access entrance). High street retail property lease agreements are usually short-term (i.e., commonly 3–5 years) and have low yields (i.e., 3–4%) that are compensated by high tenant demand.

Supermarkets: the best locations are in residential districts of cities with growing populations. They should be situated near public transport links and main roads. This is one of the most popular investment formats for international investors. The advantages include ease of management, low risk and relatively high yields (i.e., 5–6%). Lease agreements on this kind of property are long-term (i.e., 15 years).

Shopping centres: pay attention to the spending capacity in the region, surrounding infrastructure and transport access to the premises. Recommended tenants include food retailers, consumer electronics, soft goods stores (e.g., clothing brands), cafés, recreational centres and cinemas. This type of investment is challenging to manage due to a large amount of tenants and should only be considered by professional real estate investors. Lease agreements are usually signed for 5–15 years with annual yields of 4–7%.

Retail warehousing property: it's better to choose warehouses located near major transport arteries (e.g., motorways). This type of property comes with high yields (i.e., 6–8%) and high risks (i.e., dependence on the economic situation, low lease rates, quick deterioration of the premises). Lease agreements are signed for 5–10 years.

Lease rates and yields for retail property in Austria, Germany and the UK

High street retail Shopping centres
City Prime
property
lease rate,
EUR per sq m
per month
Annual
lease rate
dynamics,%
Yield,
%
Prime
property
lease rate,
EUR per sq m
per month
Annual
lease rate
dynamics,%
Yield,
%
Berlin 0,330 00.0 5.00 180 0.0 6.50
Birmingham 0,167 00.0 5.00 238 0.0 4.75
Vienna 0,400 00.0 4.25 080 0.0 6.00
Hamburg 0,280 00.0 4.60 180 0.0 6.00
Düsseldorf 0,270 08.0 4.25 200 2.6 6.00
London 1,252 25.0 2.50 376 6.0 4.00
Manchester 0,209 00.0 4.75 209 0.0 5.00
Munich 0,360 02.9 3.50 100 0.0 5.50
Frankfurt am Main 0,340 05.3 4.20 320 3.2 5.45
Stuttgart 0,330 00.0 4.00 100 0.0 5.10
Source: Colliers, Q1 2015

Where to buy

The retail segment depends enormously on the economic situation, even more so than other property types. Therefore, it is worth choosing countries with stable economic indicators. Tranio’s commercial property experts recommend investing in Austria, the UK and Germany. The pros of these markets are GDP growth, low inflation, falling unemployment and strong legislation guaranteeing reliable protection for business activity as well as affordable lending rates and high internal demand.

Anna Kurianovich Anna Kurianovich,
Investment and Commercial Property Expert at Tranio
Property in big European cities is easier to sell, in demand and presents lower risks. It’s important to remember that towns with 50,000−100,000 inhabitants are not necessarily high-risk. For instance, retail property in the centre of a small German town is a safer investment vehicle than buying in a peripheral district of a major city.

-> Commercial property investments soar in Germany’s “Big Seven”

It is better to buy property in cities that are not resorts but receive large numbers of tourists and business travellers throughout the year. These places are capitals like Berlin, Vienna and London as well as big regional centres Graz, Düsseldorf, Salzburg, Innsbruck, Manchester, Munich, etc.

Main European retail markets

Country City Streets/districts
Austria Vienna Kärntner Straße, Kohlmarkt, Mariahilfer Straße, Tuchlauben
High street retail property and shopping centres in key locations is in demand. In 2016, Tranio.com expects tenant demand and lease rates to increase.
United Kingdom Birmingham New Street, High Street
London New Bond Street, Brompton Road, Carnaby Street, Kensington High Street, King's Road, Covent Garden, Regent Street, Sloane Street
Manchester King Street, Corporation Street, Market Street, New Cathedral Street
Lease rates for retail property in Central London are among the most expensive in the world (e.g., $14,200 per sq m per year for New Bond Street). Vacancy rates there are declining but demand and investors are rising.
Germany Berlin Alexanderplatz, Wilmersdorfer Straße, Kurfürstendamm, Tauentzienstraße, Friedrichstraße, Hackescher Markt, Schloßstraße
Düsseldorf Grabenstraße, Königsallee, Mittelstraße, Flinger Straße, Schadowstraße
Munich Weinstraße, Dienerstraße, Sendlinger Straße, Kaufingerstraße, Leopoldstraße, Maximilianstraße , Perusastraße, Residenzstraße,Theatinerstraße
Frankfurt am Main Gоеthestraße, Große Bockenheimer Straße, Neue Kräme, Rossmarkt, Steinweg and Biebergasse, Schillerstraße, Zeil
Nearly 50% of all requests for commercial property purchases on Tranio.com are for Germany, especially shopping centres in Western Germany’s biggest cities.
Source: Cushman & Wakefield

Negative economic factors such as inflation, recession, shrinking consumer demand can force vendors out of the market, leaving property owners with empty premises. Minimizing macroeconomic risks is difficult for investors. The main way to approach this question is to study market forecasts from reliable sources in the years before investing.

Tenants and risk

Choose a tenant pool with partners ranked BBB− to AAA. These tenants are most capable of fulfilling their obligations towards the building owner once the lease agreement is signed. In addition, banks are more willing to provide the investor with a loan based on this tenant pool. In London these are Marks & Spencer, Tesco, Sainsbury’s. In Germany, aim for Aldi, Edeka, Lidl, Metro and Rewe.

When investing in shopping centres, it’s important to choose the right anchor tenants. Typically, these are major well-known brands that occupy 45–70% of the surface area and attract the main customer flow. The total profit of a shopping centre investment largely depends on the anchor operators.

Anna Kurianovich Anna Kurianovich,
Investment and Commercial Property Expert at Tranio
The success of a shopping centre draws upon the anchor operator, which is part of a major retail network that attracts customer flows with its name for the other, smaller tenants. As a general rule, the construction of retail property begins upon signing a lease agreement with the main tenant. The lease agreement will also help when looking for a loan to finance the construction stage. Major operators also pay a lower lease rate compared to smaller tenants. Anchor tenanst usually sign a lease for at least 10 years but dealing with such operators has its own risks. If the key tenant decides not to renew the lease, the owner could lose a lot of money.

Adjusting the lease rate to reflect inflation is a helpful tool. In Austria and Germany, rates are reconsidered annually in line with the Consumer Price Index (CPI). In the UK, rates are usually recalculated every five years in accordance with market prices.

The specifics of retail property purchases and ownership

Austria United Kingdom Germany
Lease term, years Typical — 10 years (5 years for shopping centres)
Maximum — 18 years
Typical — 15-25 years
Maximum — 35 years
10 or 15 years
Lease payments Monthly, one month in advance.
Paid as a percentage of turnover (6–10% per year) for factory outlets, hotel shopping units and airports.
Quarterly/monthly, in advance.
Paid as a percentage of turnover for factory outlets, hotel shopping units and airports.
Monthly, one month in advance
Paid as a percentage of turnover for shopping centres and retail complexes: minimum rent paid at the beginning of the year and turnover percentage fee charged at the end.
Lease rate adjustment Annual for 5-year leases and longer Yearly according to CPI Annual for 10-year leases
Maintenance Tenants — indoor premises
Landlords — supporting structure and surrounding area
Tenants — indoor premises
Landlords — supporting structure and surrounding area
Maintenance is the owner’s responsibility; some indoor duties can be shifted to the landlord
Taxes Tenants pay:
– service fee (2−3.5% of the monthly rate) incl. property tax, stamp duty (1% of total rent), VAT (10−20%)
– Deposit (3−6 months rent)
Tenants pay:
– service fee incl. the utility charges and VAT (20%)
Tenants pay:
– service fee incl. property tax and VAT (19%)
Source: Cushman & Wakefield
Yulia Kozhevnikova, Tranio
 
 
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