The argument is simple: malls may not be the income powerhouses they once were but we’re still enduring their pain. Malls have been through the mill: online retail, consumer recessions, retail bankruptcies, political and economic upheavals, the impact of the experience economy, and let’s not forget, the lockdown closures.  Having been tossed into the lion’s den, the gladiatorial retailers still standing have proved their worth and are geared up to fight another day.

Retail investment has taken three big hits. There’s been Covid, the effects of inflation and interest rate changes, and political instability around the world. And retail itself has been through big structural changes as well as sustainability. When you add all that together in the mixer, it’s been a lot for investors.

Seller’s Market

As in the U.S., Europe has too many malls, but it does not have the same amount of excess space. So, after years of moribund activity, a number of major mall owners are putting their developments on the market.

Those fledgling signs of confidence about European shopping centers prompted Goldman Sachs in June to greenlight selling Ireland’s largest mall, Blanchardstown Centre sited on Dublin’s city fringes, with an asking price of at least $650 million. The timing looked ballsy, but Goldman Sachs is far from the only flagship mall owner to put a toe in the water.

French investor Frey bought the Polygone Riviera open-air shopping center in Cagnes-sur-Mer, France, in October from retail colossus Unibail-Rodamco-Westfield for nearly $300 million. By contrast, ownership or significant stakes in several major UK centers are reportedly up for grabs in fire sales.

The question for 2024 is whether buyers will balk at the asking prices for European shopping centers. That was the small talk at a major international retail event MAPIC, held in Cannes on the French Riviera at the tail end of November. It’s as good a place as any for a litmus test on investor sentiment.

What the Investors Say

“Prices have got to fall — even at double-digit yields some malls have failed to attract any investor interest,” Madrid-based Eurofund Group President Ian Sandford said of any fresh impetus in the transactional landscape. “But the occupational market is really busy, so if you can find the right deal then there is a lot of asset management that can be done.”

Sandford has been involved in some of Europe’s largest retail and leisure projects over the years and has been an active acquirer over the past 18 months, having bought Silverburn in Glasgow, Scotland, from Hammerson and Rhein-Ruhr-Zentrum in Essen, Germany, with Signal Capital Partners, plus smaller schemes in Italy.

Yet he sees little evidence of traditional retail property buyers back in the market, due to the high cost of financing and unrealistic pricing. “What I would say is that I have never seen a situation with the divergence that currently exists between the strength of the occupier market and the strength of the investment market,” he said. “Normally they align but right now we’re experiencing really strong leasing and very confident expansion plans from the major retail groups, but that is not matched in any way by investment sentiment.”

Because of that, investors are maintaining a cautious stance towards European shopping center deals, JLL head of Retail Capital Markets for the Europe, Middle East, and Africa (EMEA) region Sandra Ludwig adds.

Sales Up, Valuations Down

A disconnect exists between strong shop sales in prime locations and prices for retail assets across Europe, Ludwig said, with JLL’s own research showing that European retail transaction volumes were down by 39 percent in the first three quarters of 2023 compared with the same period last year. However, this was higher than the figure for overall real estate investments, which were down by just over half.

Ludwig added: “In a lot of locations sales densities are already back to 2019 levels, sometimes higher. We are also seeing lots of retail expansion at the moment. Most shopping center landlords are happy. But for investors, prices are not matching retail sales and occupancy leases, and there is a mismatch between interest rates and prices.”

Ludwig said that a key trend for 2023 was the much higher proportion of retail volumes being accounted for by retailers. Much of this, she said, was due to retailers, in particular large grocery groups, making strategic investments into their assets.

It’s a Big Deal

During the year there was some movement for European shopping centers with lots of positioning and the big players are looking at possible opportunities to acquire, expand or transform assets.

• In March, UK REIT Landsec acquired 100 percent ownership of the regional flagship St. David’s shopping center in Cardiff, Wales from previous owner Intu and is reportedly in the frame to acquire Abu Dhabi Investment Authority’s 69 percent stake in Liverpool ONE, an open-air mall that links directly with Liverpool city center.
• Meanwhile another regional super, Meadowhall in Sheffield, England, could be up for grabs at $950 million from British Land and Norges Bank Investment Management. The latter is the sovereign wealth fund fuelled by the country’s enormous petro-dollar surplus and charged with investing globally. It is also the co-owner with Crown Estate of Regent Street in London’s West End.
• On the south coast of England, IKEA property arm Ingka Centres has inked a deal to buy Abrdn’s $222 million Churchill Square centre in Brighton, the popular English coastal town often dubbed London-on-sea. It will become an urban community mall, anchored by a city format IKEA.
• Unibail-Rodamco-Westfield completed the acquisition earlier this year of Hammerson’s 50 percent stake in the Croydon Partnership, which includes two existing malls, high street retail frontage, office blocks and multi-story parking lots in what had originally been intended as a third Westfield for London, to complement the two existing megamalls in the city’s East and West. Instead it’s likely that a mixed-use scheme led by residential will take its place.

Slow Motion Market

Joanna Fisher, chief executive of Hamburg, Germany-based ECE Marketplaces, said that doubts over the pricing of assets and future interest rates, compounded by the difficulty in predicting 2024 growth, have led to a “slow motion” market marked by tentativeness.

Based in Germany, ECE is both an investment fund and an owner-operator of shopping centers. The group currently manages some 130 assets in 11 European countries. The fund’s most recent acquisition was the purchase of the PEP Munich shopping center in a joint venture deal of over $500 million, completed in May.

“Everybody is looking at assets and waiting to see. People are waiting for prices to be right. Investors are holding onto capital because they don’t know what will happen in 2024. There are challenges in the future,” Fisher said.

That’s a view echoed by one of the world’s biggest retail real estate holders, Paris-based CBRE Investment Management head of retail EMEA Eric Decouvelaere. It may take another nine months to a year before full stability returns to the real estate investment market, Decouvelaere believes, because of the current flux in the market due to uncertainty over pricing, interest rates, and geopolitical events.

“Retail investment has taken three big hits. There’s been Covid, the effects of inflation and interest rate changes, and political instability around the world. And retail itself has been through big structural changes as well as sustainability. When you add all that together in the mixer, it’s been a lot for investors,” Decouvelaere said.

“But prices are revising, and rental prices have rebased. A lot has happened but now it’s becoming a really interesting market,” he adds. “Polarization has cleaned the market of products that had become pointless. There was too much retail space. We had moved away from the fundamentals of location, proposition and execution. Covid was like the wake up with a hangover.”

He also warned that as transactions begin to return, there will be a temptation for investors to go for the first deals available, and to buy lesser-quality assets at low prices. “Don’t be tempted to buy cheap,” he said.