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Retail rents in Europe buoy sector

15 March 2010

The recent upturn in the commercial property market has been welcome news for investors says SWIP's Vicky Watson.

By Vicky Watson,

Manager, SWIP European Real Estate Fund

Retail, which comprises about 45 per cent of the listed property market in Europe, has been the sector of choice for us at SWIP throughout the economic downturn – and there's still a lot to like.

Performance of fund over 1-yr

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Source: Financial Express Analytics

On the Continent, the retail sector has weathered the winter chill particularly well. There are a number of reasons for this. Continental European households are in much better shape, mainly because of their comparatively low levels of debt.

Spending declines have therefore not been so severe. Retail rents in Europe are also generally much cheaper than in the UK and less of a cost burden for tenants. They are indexed annually to inflation, unlike rents in the UK, which are reviewed every five years. And European landlords typically have greater access to information on their tenants' turnover, making it easier and quicker to spot those in difficulty.

Admittedly, over the last two years, the UK market has struggled, with a number of high-profile chains such as Woolworths going into administration, many through indebtedness. Retailers on the Continent, though, have proved much more resilient and some companies have even been expanding across continental markets.

Performance of Vicky Watson vs peer group and IPD over 1-yr

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Source: Financial Express Analytics


Primark, New Look and H&M are among the firms that have benefited from shoppers trading down on brands and have been leasing new stores over the downturn. Specialist companies such as Apple, with a strong brand and specialist product range, have also been gaining purchase.

One of the long-term benefits of the retail market, whether on the Continent or here in the UK, is a restricted level of supply. Town centres are generally protected by local government planning and conservation laws that restrict where new sites can be built. Where schemes do get the go-ahead, site assembly issues mean that a new retail scheme can take up to ten years to complete, which makes oversupply much less likely.

On the other hand, offices can generally be redeveloped or built in a couple of years – and it only takes a matter of months to assemble an industrial unit. Internet sales are often cited as a threat to the future of in-store shopping, but most retailers still need a bricks-and-mortar presence and continue to seek good units, whether in profitable neighbourhood centres or as flagship stores in well-located, dominant retail schemes.

While the office sector is more cyclical and thus less attractive in a downturn, it is a more exciting place to be in periods of economic growth. But we remain cautious. Selectively, offices are starting to look better in markets such as central London. The supply pipeline was effectively turned off in the downturn and with financing for new office developments all but impossible, supply will remain limited as demand starts to build once more. This should help to stimulate rental growth more quickly.

While some hard-hit office markets are beginning to emerge from the downturn, in the listed sector, retail – and European retail in particular – remains an attractive place to be. Many European retail companies still trade on discounts to their net asset value, and with dividend yields of 5 to 6 per cent, the income characteristics commonly associated with property exposure can be delivered quite admirably.

Vicky Watson is investment director of European Equities and fund manager of the SWIP European Real Estate Fund. The views express here are her own.

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