PRINT THIS STORY:

CHANGE TEXT SIZE:

HEADING TO GERMANY

U.S. developers are undeterred by slow economy and restrictions

By Molly Knight

Germany, once Europe’s economic powerhouse, continues to struggle with sluggish growth. Nevertheless, several foreign investors are among those that see retail development opportunities there.

Germany’s aging population in combination with high unemployment (10.4 percent last year) has resulted in social security output exceeding worker input. To compound matters, estimated 2004 GDP real growth at 1.7 percent placed Germany 181st out of 214 countries, according to the CIA’s World Factbook.

Despite these troubling statistics, U.S. retail real estate investors General Growth Properties, The Mills Corp. and Simon Property Group, and Canada’s Ivanhoe Cambridge are said to be banking on the beleaguered country’s ability to bounce back in a big way.

“There’s a bit of an investment frenzy here right now, because interest rates are very low and the initial yield is very high,” said Uwe Wegner, head of retail investment at Jones Lange LaSalle in Berlin. Interest rates are between 3.5 percent and 3.75 percent, Wegner says, with investors enjoying returns of over 30 percent. “Mills has centers in Glasgow, Madrid, Spain — and they’re in negotiations to develop here now,” Wegner said. “They are very keen on getting the first major American investment here.”

In October Ivanhoe Cambridge acquired 94.8 percent of Germany’s largest shopping center the Leipzig-based Paunsdorf Center, plus a 92.5 percent stake in the Zwickau (Germany) Arcaden. The firm has also formed a partnership with the formidable German retail developer MFI AG to develop and manage Wilmersdorfer Arcaden, a shopping center slated to open in Berlin in 2007, and future retail centers. But observers say there are pitfalls for investors to look out for when entering Germany.

Before reunification in 1990, strict expansion laws and a governmental emphasis on city centers supressed growth in the West German retail sector. But when the Berlin Wall toppled, the former West Germany relaxed regulations to promote growth and help the former East Germany’s transition from communism to capitalism. The government has pumped roughly $70 billion into the East, according to the CIA’s World Factbook.

“After the wall fell, the country was faced with the great responsibility of resurrecting the East German economy,” said Wegner. “There really used to be nothing there.”

The biggest development boom occurred immediately following the wall’s collapse in the early to mid-1990s when investors saw huge growth potential in the underdeveloped country. According to a market study conducted by Cushman & Wakefield Healey & Baker in Berlin, 465 shopping centers currently operate in Germany, comprising some 120 million square feet (11.3 million square meters) of retail space. Of this total, a little less than half opened between 1990 and 1997.

But despite the fact that the country boasts Europe’s largest economy, its 1,485 square feet of shopping center space per 1,000 people still falls well below the European average of 1,785 square feet. And even the 5.4 million square feet slated for development this coming year is less than half the total retail space that was built at the height of shopping center development in 1995, the report says.

Most of that boom occurred in the East, of course, which had little retail during, and immediately following, communist rule. But it has caught up. “There are almost no differences between both parts of Germany,” said Robert Heinemann, a spokesman for Hamburg-based ECE Projektmanagement, the leading German retail development firm.

Nevertheless, it remains a risky place for investors, says Wegner. “It takes a minimum of 10 years to see good returns in East Germany,” he said. “Foreign investors looking at Germany tend to find the West more appealing because it’s possible to exit in less than five to seven years.”

Nevertheless, even the western part of the country is no easy place to be a retailer, despite the relaxing of some laws after reunification. Pricing regulations, land-use restrictions and shortened store hours make building and sustaining a successful store exceptionally difficult, says Frank Badillo, a vice president of Columbus, Ohio-based consulting firm Retail Forward.

“With all these expansion limitations and the government’s belief that stores should close early and workers should have Sundays off, it’s fair to say that Germany has the toughest development regulations and restrictions of any country in the world,” Badillo said.

One of the major challenges for developers is the country’s renewed emphasis on bringing shopping centers into inner cities to spur urban renewal. Such big boxes as Wal-Mart are having difficulty securing retail space within areas where development is permitted. Nevertheless, ECE has found creative ways to overcome these building restrictions.

“We’ve developed shopping centers in existing railway stations in the past,” said ECE’s Heinemann. “We’re currently rebuilding an old palace in Brunswick, which had been destroyed by the war, into a shopping center.”

Currently, the ECE group manages some 26 million square feet of retail space in 82 shopping centers across Germany, the Czech Republic, Hungary, Poland, Turkey and Qatar that generate annual sales of €9.8 billion ($11.8 billion). And despite Germany’s slumping economy, ECE’s portfolio has achieved sales growth each year. Its formidable Potsdamer Platz Arkaden is what Wegner calls a “fantastic, ideal shopping center, in the heart of Berlin, that is unparalleled.”

Heinemann says the 430,500-square-foot center, built in 1998, remains one of Germany’s most successful. “The Potsdamer Platz Arkaden has a state-of-the-art location and architecture and is embedded into a unique environment,” he said. “It has everything we expect for a good location — the infrastructure is excellent, famous architects have designed the architecture so that the Potsdamer Platz has become a brand, and the Arkaden has the right size to offer a broad variety of shops and restaurants for the customers. Potsdamer Platz Arkaden is a real urban entertainment center, which attracts a lot of tourists as well.”

Though the government is making it less difficult for developers to build within city limits, breaking ground is still no easy task even in these areas, says Martin Muehler, a Frankfurt-based researcher at Cushman & Wakefield Healey & Baker. “Laws say that large shopping centers are only permitted in special areas defined by each municipality,” Muehler said. “It’s quite difficult to get anything built, because German city planners want to be able to protect existing High Street and mom-and-pop stores. They think developing shopping centers will be dangerous for business.”

Another German quirk is hurting the expansion plans of big-box retailers, says Badillo. “You aren’t allowed to sell things below cost, so that changes Wal-Mart’s whole promotional scheme,” he said. “They can’t offer deals the way they do in the U.S., so they’re getting killed.”

Ironically, though, Germany’s retail scene is dominated by the discount sector. Discount chains sidestep the government by creating their own private labels that are not subject to the same restrictions and by setting the value of their goods and services as low as possible.

“This brand development has contributed to a retail environment that is far more price-sensitive than anywhere else in the world,” said Badillo. “Department store chains are on the rocks, for example, losing shoppers to other formats. Discounters like Aldi and Lidl are doing what Wal-Mart does in the U.S. by offering food to lure people that way.”

This competition has moved Wal-Mart to create its own brands too, but Badillo says that so far that has not been enough. “To turn things around, Wal-Mart needs to push private brands across all categories,” Badillo said. “Shoppers are very receptive to high-quality goods, but private labels are the key to remaining competitive.”

Muehler has his own theory on why the Aldis and Lidls thrive. “The discount sector is growing because bargaining is very popular in Germany,” he said. “Unlike in the U.S., you have a ton of very high-income people here shopping discount for their food and basic needs. This has been a considerable trend for the last five years or so.”

While mid-range stores struggle to compete against discounters, the luxury sector continues to prosper.

“There are always people that have a lot of money who are going to buy high-quality products even in times of economic difficulty,” said Muehler.

Said Wegner: “The high-end and discount services match their customers’ needs and are very well organized. They enjoy very good proportion between costs and earnings, and they match demands.”

Heinemann says he does not expect the middle sector to become competitive anytime soon. “It is almost impossible to turn this trend around,” he said. “The competition in Germany is very tough. Middle-of-the-road stores don’t have focused marketing, and they have neglected to build up a brand. The only way to survive is to offer the goods at a low price or to concentrate on branded goods.”

Heinemann also cautions that foreign investors enter at their own risk. “It’s quite difficult for them to develop centers on their own, as the German market is very special and requires a lot of local know-how.” (Heinemann had no comment on word that ECE is currently working on a joint venture with General Growth to build a major shopping center in Germany.)

If Wegner were to give General Growth investment advice, he would urge them toward immediate action. “The low-interest-rate bubble will burst very, very soon,” he said. “Interest rates will increase in the next month. Investors need to be active right now.”

But with no lifting of the country’s harsh planning restrictions or easing of the highly regulated market expected anytime soon, it remains to be seen whether foreign investors will take ECE’s path of finding suitable existing urban spaces and turning them into successful shopping centers, or whether they will experience Wal-Mart’s difficulties.

“There is growing sentiment that Germany needs to do away with these protections to boost the economy, to boost unemployment, to boost morale,” said Badillo. “But I just don’t see that happening.”

So far Simon has made no announcements about activities in Germany. “Nothing has come across my desk indicating that anything is imminent in Germany,” said Simon spokesman Les Morris. General Growth had no comment and neither did Mills.

© 2010 ICSC. All rights reserved. | Terms and Conditions | Privacy Policy | Contact ICSC | ICSC Home |