For the first time since H2 2008, prime capital values for retail assets increased year-on-year (y-o-y) in CEE in H1 2010 in response to prime yield compression and increasing prime rents. However, the retail investment market is increasingly divergent, with the gap between prime and secondary markets growing.
Based on economic performance in the first quarter (Q1) of 2010, most CEE countries are now out of recession, with some markets showing positive retail sales growth in recent months. Consumer confidence in Central Europe (CE) is on the rise as unemployment has started to decline and economic growth rates have turned positive. Nevertheless, recovery remains fragile and has had limited positive impact on consumer spending so far, with the announcement of government austerity measures likely to remain a risk to the recent improved confidence. Consumer confidence in South-Eastern Europe (SEE) has significantly deteriorated due to a much more challenging economic outlook.
The retail development pipeline in CEE has declined by 20% in the past six months. SEE countries, however, still await the delivery of a significant amount of new space, scheduled to come onto the market until the end of 2011. The Czech Republic has the highest shopping centre provision rate (around 250 sq m/1000 inhabitants) in CEE. This relatively high provision is causing increased competition, which is visible in schemes not favourably located. Countries like Bulgaria, Serbia and Croatia are some two years behind the development curve of the more emerged CEE retail markets and are as a result still in the middle of extensive supply growth. Despite the uncertain outlook, construction is still moving ahead in many of the capital and regional cities across these countries. As a result, shopping centre provision rates are likely to increase significantly here. Given this is occurring during a period of increasing pressure on consumers and limited retailer demand, it is likely to result in increased pressure on the retail structures in these markets.
Prime shopping centre rents remained mainly stable across CEE in H1 2010. Prime rents in Eastern European (EE) capitals have, however, increased considerably. Rents increased for the third quarter in a row in EE and are 10-15% above the levels recorded in H1 2009. The significant changes in EE are a result of a better economic outlook combined with the more volatile character of these markets. The majority of CE capitals witnessed prime yield compression of 10-25 basis points (bps) in H1 2010, while prime yields in Kyiv and St. Petersburg dropped by 100-200 bps after dramatic softening during the crisis.
Jos Tromp, Head of CEE Research & Consulting, commented: “In line with the divergent performance of the CEE retail market, investors that bought prime schemes in recent years are faring much better than others. The outperformance of some of the Central European retail markets – especially Poland – has caused renewed interest from specialised shopping centre investors to expand their property portfolio in these markets. These prime shopping centres have a unique position in their market place and are therefore able to maintain footfall and trade volumes that provide a sound basis for decent returns, even in times of economic turbulence. Unibail-Rodamco’s recent announcement of the pending purchase of a shopping centre portfolio in Poland is an example of this trend.”
“It was highly interesting to see that the largest retail investment transaction in CEE was closed in Hungary where Allianz Real Estate bought 50% of Allee SC from ING Development. – added Gábor Borbély, CEE Research Analyst at CBRE. “Although the state of the economy has clearly improved, it is still in a challenging situation. This transaction proves that the perception of prime retail assets can be more positive than the sentiment about the general state of an economy as such.”
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