Press release

Food retail continues to offer real estate investors attractive opportunities

- New research study by bulwiengesa embraces recent market data

- Constant increases in turnover in conjunction with higher productivity per square metre

- The process of concentration will continue over the next few years

- The online share of food retail is still very low at 1.5%

- High stability and long-term security are the main factors for investors

Berlin, 23 June 2017 - Despite the interim decline in returns, food retail in Germany continues to offer real estate investors attractive investment opportunities. This was the finding of the recent market study "Food Retail in Germany - Market Structure Data 2016" carried out by bulwiengesa for TLG IMMOBILIEN AG. The trends most relevant to the evaluation of investment opportunities in this segment are a relatively constant supply of selling space, generally increasing turnover, a persistently low share of online turnover and the ongoing process of concentration that favours the business types relevant to investors.

The initial situation: a relatively constant supply of space with increasing levels of turnover

The area of selling space in the retail sector in Germany currently amounts to around 123.7 m sqm (2015). This corresponds to retail space of 1.51 sqm per person, placing Germany fourth in a Europe-wide comparison. In this context, around 35.6 m sqm of selling space is attributable to food retail. The amount of available selling space has increased by just 1.8% since 2010, having remained relatively constant in recent years. In contrast, retail turnover has increased by around 13.1% since 2010, reaching EUR 483 bn in 2016, with the share of online retail at 10.9%. In food retail, at 16.6% the increase in turnover was even higher, whereas the share of online retail in the turnover of the food segment was significantly lower at just 1.5%.

Relative to the total consumer spending of private households in Germany, the share of spending on food, drink and tobacco products was 13.7%. This represents a slight proportionate decrease as spending on these goods made up 14.3% of the total private consumer spending in 2015, yet the total of this spending increased significantly in the same period. Whereas it totalled EUR 180.0 bn in 2015, it reached EUR 215.2 bn in 2016, which represents an increase of 19.6%.

General demographic conditions are causing regional divergences

With the proportion of people over the age of 65 in Germany currently at 21.4%, it is expected to increase to 33.7% of the total population by 2060. Retail will therefore have to focus increasingly closely on the requirements of older people and, for example, provide for wider aisles, lower shelves, larger product labels and more seating. At the same time, regional differences will also intensify in future. Whereas the population in densely populated areas is expected to remain stable, the population in many rural regions and in areas of eastern Germany is expected to decline considerably by 2060.

Positive outlooks for almost all business types, except small shops

The generally positive development of turnover in the food retail segment will cause turnover to increase for almost all types of business; only small food shops are experiencing declines in turnover. Supermarkets and organic grocery shops have proven to be the biggest winners in recent years. This underlines the willingness of consumers to spend more on higher-quality food. The market shares of major supermarkets and supermarkets have increased by around 25% and 14% respectively since 2007. With a market share of 45.4%, discounters still represent the largest group of providers in food retail. In contrast, the restructuring process is still ongoing for the major operators of hypermarkets. For one, this shows that the number of hypermarkets has fallen from 875 in 2014 to just 851 in 2016, whereas the amount of selling space has remained largely constant overall. Small businesses in the food retail segment have lost a remarkable degree of significance; their number has declined by over 40% since 2007. This trend can be expected to continue over the next few years.

Positive rent development - returns are falling due to demand

Rents in the food retail segment have developed positively since 2000 and have increased by 25.5% overall in western Germany and 24.9% in eastern Germany. In this regard it is noteworthy that, until around 2014, rental growth was consistently stronger in western Germany than in eastern Germany. Between 2015 and 2017, however, rents in western Germany remained stable whereas rents in eastern Germany increased from 10.60 EUR/sqm to 11.70 EUR/sqm in the same period.

Due to strong investor interest in retail properties, returns have decreased in almost all locations in recent years. This effect has been strongest in Berlin, where returns declined from 6.4% to 5.1% between 2008 and 2016. At 6.7% in 2016, the highest returns were in C and D-rated cities in eastern Germany. Compared with other asset classes, however, despite the decreases the level of returns from retail properties remains attractive to investors who value investments in convenience shops and food retail due primarily to their relatively high stability and long-term security.

The outlook remains positive

There are essentially three factors behind the stability and long-term security of food retail properties, which are key aspects in the eyes of many investors: Germany's restrictive building laws protect existing retail spaces, especially in central supply areas, against new competitors. Secondly, rental agreements that are normally very long-term and partially indexed provide landlords with a relatively high degree of security. Finally, the food retail segment in Germany is mostly characterised by creditworthy anchor tenants. The willingness of anchor tenants to enter into agreements with terms often in excess of 15 years is just one result of the strong ties to locations that result from a short supply of locations due to restrictions. Rental agreement terms of up to 10 years, including extension options, are often even agreed with supplementary tenants such as health and beauty retailers, non-food discounters and textile stores. Overall, therefore, convenience shopping locations in good micro-locations offer secure, long-term rental income and continue to represent attractive investments.

You can download the study here:

www.tlg.eu > Media > Publications

Contact bulwiengesa AG
Dr. Joseph Frechen
Phone: +49 40 42 32 22 25
E-mail: [email protected]

Contact TLG IMMOBILIEN AG

About bulwiengesa AG
bulwiengesa is one of the major, independent consulting companies in continental Europe. For over 30 years we have supported our partners and clients in real estate related questions. We offer sound data services, provide strategic advice and conduct bespoke surveys, analyses and valuations. Our clients are, among others, real estate developers, contractors, institutional investors, banks, local communities and asset managers.

About TLG IMMOBILIEN AG
TLG IMMOBILIEN AG is a listed leading commercial real estate company in Germany that has been synonymous with real estate expertise for over 25 years. TLG IMMOBILIEN AG generates stable rental income and exhibits low vacancy rates, very good building stock and profits from its local employees' excellent market knowledge. As an active portfolio manager, TLG IMMOBILIEN AG is specialised in commercial properties for office and retail use: it focuses on managing a high-quality portfolio mostly comprising office properties in Berlin, Frankfurt/Main, Dresden, Leipzig and Rostock. The company also has a regionally diversified portfolio of retail properties in highly frequented micro-locations. The portfolio also includes seven hotels in Berlin, Dresden, Leipzig and Rostock. TLG IMMOBILIEN AG's properties stand out not only due to their excellent locations but also because of their long-term rental or lease agreements.

As at 31 March 2017, the property value amounted to EUR 2.2 bn. As at the same reporting date, the EPRA Net Asset Value per share amounted to EUR 18.62.

This publication contains forward-looking statements based on current views and assumptions of TLG IMMOBILIEN AG's management and made to the best of knowledge. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause TLG IMMOBILIEN AG's revenues, profitability or the degree to which it performs or achieves its targets, to materially deviate from what is explicitly or implicitly stated or described in this publication. Therefore, persons who obtain possession of this publication should not rely on such forward-looking statements. TLG IMMOBILIEN AG accepts no guarantee or responsibility regarding such forward-looking statements and will not adjust them to future results or developments.