_Shopping Centres in Spain: the ideal contrarian investment opportunity

Across Europe, retail has traditionally formed a core part of most real estate investors´ portfolios. However, the current transformation of the retail sector, mainly due its transition to online sales, has led many investors to question the sustainability of shopping centres as an attractive investment asset class. 

Shopping centre closures in the US together with events in the UK, where many renowned retailers are struggling and restructuring leases, have created a climate of occupational uncertainty. This, coupled with the continued political and economic ambiguity surrounding Brexit, has led to a record low in UK shopping centre investment this year. It’s a pattern that seems to be evidently now repeating itself in many other European countries. 

According to an article published recently by the Spanish Association of Shopping Centres, global investment in retail is down by almost a third this year. It would seem that Pan-European investors now tarnish all countries, including Spain, with the same negative brush, blind to any macro and micro data suggesting otherwise positive scenarios. 

The case for Spain

Macroeconomic fundamentals in Spain remain positive as the country is set to grow above other European averages and unemployment continues to fall. As reported by the BBVA this quarter, despite the general slowdown across Europe, Spanish GDP growth for 2020 is forecasted at 1.6%, whilst the employment market is expected to continue its recovery. 

Consumer confidence and consumption remain high. Key retail players continue to report growth in retail sales and steady increases in footfall are being seen in many retail schemes across the country. Spain is home ground to strong global operators such as the Inditex Group, Tendam and Mango who are demonstrating a healthy performance. Furthermore, Spanish retail developers remain confident in the sector with plans to build up to 20 new retail schemes over the next 5 years (966.000 sqm). 

We can safely say that Spanish retailers are not struggling in the same way as retailers in the UK and that Spain does not have the same oversupply of obsolete retail schemes as the US, where it is estimated that approximately 70% of shopping centres were built before between 1997. Additionally, the traditional Spanish hypermarket-based format can offer excellent reconversion options when linked to the growing ecommerce industry and the logistics of fulfilment centres. 

However, as in other countries, Spanish retail investment seems to have moved from core to a specialist asset class. According to the Spanish Association of Shopping Centres, approximately 150 shopping centres and retail parks have changed hands since the market recovered in 2014, representing circa. 40% of the total GLA in Spain and accumulating in a total investment volume of over €14 billion.

However, this year Spain is likely to see the year close with a reduced number of shopping centre transactions amounting to €2 billion or less, albeit still above historic averages. Prices have certainly begun to readjust and experienced players on the Spanish market are capitalising on opportunity.

Sources of product pipeline include: prime sales triggered by liquidity problems in other markets, key players selling smaller non-strategic assets and international funds exiting properties following the execution of preestablished three to five-year business plans. Many of these properties have undergone extensive investment programs over recent years as a result of repositioning strategies. Hence, it is important to note that much of the hard work has already been done. 

Certainly interesting stock for any experienced players who are now picking up consolidated assets with strong micro fundamentals and who know how to fully extract any additional value through further asset management. 

Completed transactions on the market so far this year, which include the acquisitions made by UBS, who recently completed on The Outlet Stores in Alicante in addition to a further two retail assets in Madrid earlier in the year: Harbert Management Corporation with the purchase of Ballonti from German fund Deka or the purchases of General de Galerias Comerciales and the continued investment from Castellana Propteries for the Vukile Socimi, are prime examples of deals being directed by highly experienced Spanish retail experts leading the way. 

These high-profile players, many of whom have over 20 years of experience on the Spanish retail market are confident that shopping centres can still make safe investor sense in Spain. Food for thought?

For more information contact Elaine Beachill.