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A Focus on Retail - Shopping Centres are back!

20/12/2024

A Focus on Retail - Shopping Centres are back!

Marta Vieira Lourenço

Dils

As we navigate 2024, the commercial real estate investment landscape in Portugal presents a more dynamic trend than 2023, and it is anticipated that the year as a whole will achieve a better performance and show signs of recovery, with investment volumes estimated to approximate (or even surpass) €2.0 billion, representing a y-o-y increase of 22%. Nevertheless, 2024 is expected to be a modest year, especially when compared with the investment volumes observed in 2018, 2019 and 2022, when the investment turnover exceeded €3.0 billion.

The market downturns in 2020 and 2021 were attributed to the COVID-19 pandemic, while the substantial drop in 2023 was explained by a more challenging macroeconomic and geopolitical scenario, with a significant rise in inflation and consecutive increases in interest rates, leading to extremely weak momentum in capital markets.

When analysing the history of investment volumes in the Portuguese real estate market, capital allocation has traditionally focused on the office and retail sectors, which together accounted for approximately 60% of total turnover. Looking more closely at capital allocation within the retail sector, shopping centres have always been very attractive to investors, as Portugal is a highly mature market when it comes to this specific asset class. However, the market has been experiencing increasing capital diversification and investment in retail, particularly shopping centres, and the investment in offices shifted towards other real estate segments, such as the hospitality sector, industrial and logistics (I&L), and alternative segments. Indeed, retail exposure significantly decreased in 2021 and 2022, and office exposure has been diminishing since mid-2022.

Several reasons explain the shift in the capital allocation mix. Retail, especially shopping centres, have been significantly affected over the last five years. First, by the rise in e-commerce and, consequently, an increase in the risk perception towards this specific asset class; and second, the COVID-19 outbreak, which highly impacted the performance of shopping centres.

Indeed, capital allocation within the retail sector has undergone significant changes over the last years. While investment in shopping centres was predominant until 2019, it has declined sharply since then. Instead, there has been a growing appetite for standalone units, supermarkets and retail parks. In terms of offices, this asset class has been significantly affected by uncertainty on how remote working and physical occupation will evolve, and is also being highly contaminated by more underperforming markets, which are clearly oversupplied and present weakening market fundamentals, such as the US, UK and Germany.

While we do not anticipate that 2024 will launch the recovery of office investment, the opposite is true for retail investment. Indeed, this year is expected to be the best of the last four years for retail, and the best year for shopping centres in the last five years.

This does not come as a total surprise. Indeed, we were already anticipating growing investor appetite for this asset class, particularly shopping centres, since mid-2023, as a couple of the deals concluded indicated that retail investment was making a comeback. In 2023, Mitiska REIM acquired a portfolio of five retail parks for approximately €100 million and La Vie Funchal was sold to Square Asset Management for €60 million. Additionally, the beginning of 2024 saw the sale of Sintra Retail Park to AM Alpha for around €50 million. These successful transactions, combined with a more favourable macroeconomic environment, good performance of the assets and greater alignment in terms of pricing expectations/returns between sellers and buyers, created the perfect setting for retail transactions to increase, especially deals involving shopping centres.

Indeed, in 2024 four shopping centres have already been traded, namely Project Trio (comprising Loures Shopping, Rio Sul Shopping and 8 Avenida Shopping) sold by Harbert and acquired by Castellana Properties Socimi; and Alegro Montijo, sold by Ceetrus and acquired by Lighthouse.  Until the end of this year, three more deals are in the pipeline, altogether representing more than 50% of the total retail investment volume. We have gone from almost zero shopping centre transactions in five years, to potentially seven shopping centre deals in 2024, and several more are anticipated for 2025.

It is evident that the real estate market has been adjusting and is now offering good opportunities in the retail sector, especially in shopping centres. There is a clearer view where returns stand at this stage in the market and yields are now stabilizing, after expanding slightly since 2019 and even more since 2021. We expect prime retail yields to remain stable during the next couple of months, not only because the macroeconomic outlook is more stable (interest rates are expected to decrease further) but also because forecasts indicate that 2025 will feature an increase in investment in the commercial real estate sector as a whole.

Artigo original publicado na Revista Iberian Property