28 July 2015

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Market concerns over a projected surge in the development pipeline for Dutch retail real estate is keeping risk premiums for quality assets in sectors and locations insulated against this oversupply at too high a level, offering attractive opportunities for investors able to access these properties, Bouwinvest’s latest white paper concluded.

Robert Koot, Head of Research at Bouwinvest, said: “There are fears that investors in Dutch retail property are going to repeat the past mistakes in the office market, which earned the moniker of ‘European office graveyard’ due to its high vacancy rates. But these concerns are keeping retail yields relatively high – on average around 7.0% — and creating mispricing opportunities for canny investors able to step into those types of ‘Convenience and Experience’ assets in the main urban centres that are dominant in their own locations and so ‘future-proofed’ against an overall surge in supply. Now is actually a great time to step into the right niches in Dutch retail.”

Koot suggested investors target convenience grocery shopping based on local demand and retail assets located in the main centres of the Randstad urban conurbation whose populations are still expanding and where economic growth is most dynamic. Investments should be focused on larger cities that offer a wide range of other experiences such as restaurants, cafes, entertainment and tourist attractions, around the retail component, and that can therefore compete against expanding e-commerce. These would include cities such as Amsterdam, Rotterdam, The Hague and Utrecht. The great financial crisis revealed the resilience of defensive investments in convenience grocery retail assets, while non-food stores outside core prime shopping districts suffered disproportionately. The volume of empty retail space is still on the rise in the Netherlands. After bottoming out at the peak of the last boom in 2006/2007, the trend has been on an upward trajectory and rose above 7% of the total market at the start of 2015. With projected future planned new build retail space in the pipeline at as much as 3.0 million m2, or around 10% of the total existing Dutch stock, there seems to be a worrying disconnect between the market’s fundamentals and the signals being received by investors and developers. Although market balances differ widely between locations and retail sectors, making stock selection critical. The total Dutch consumer market was around €285 billion in 2013, of which about a third (€86 billion) is accounted for by the retail sector, including online. The largest portion of retail sales (€42 billion) is in food and medicines, with clothing and shoes at €14 billion. With online retailing now accounting for roughly 10% of the total Dutch market, it is possible that this sector could experience exponential growth over the long-term to maybe a 30% or even a 50% market share. This scenario, if it materialised, would have significant consequences for retail real estate investors not positioned in the right defensive assets.

Robert Koot concluded: “Dutch city and provincial councils should adopt strict planning policies for new retail development, but also be flexible in allowing alternative uses for empty space, such as ‘pop-up’ stores. Investors need to continue to invest in the quality of their shopping centres and to do this close cooperation with local government and retailers is necessary. There also has to be more room for the owner to influence the ‘retail mix’ of his shopping centre, which is often prevented by the strong legal protection of the sitting tenant. Greater differentiation in the type of tenants with the most appropriate profiles for the market positioning of a shopping centre, improve its ambience and also widen the opportunities for local retailers to move in.”