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European retail volumes in the first half of 2014 were 16.4bn, up 44% on the same period in 2013, with 73% of that figure shopping centres, according to data from JLL. Southern Europe saw a 399% increase, by far the largest.

And as investors look to take on more risk, development becomes more of an option to boost returns. Global investors including Qatar Investment Authority, Abu Dhabi Investment Authority and the Canadian Pension Plan Investment Board have all recently committed to back shopping centre developments in Italy, France and Spain.

But with economic growth and consumer confidence still low in many European countries, and several markets still suffering an overhang of supply due to the twin forces of growing internet sales and overdevelopment during the last boom, the interplay between the pipeline of new centres being built and the density of existing supply is crucial in terms of deciding where to invest. There are some obvious places to avoid, a few obvious places to invest, and a lot of tricky decisions in between.

Data from broker Harper Dennis Hobbs, which acts solely for retailers, shows that Russia and Turkey are the two countries with by far and away the highest volume of new shopping centre development scheduled over the next five years.

Low Density Country
Given the current political situation in the country, avoiding Russia might not seem to be a difficult decision at the moment- but HDH's data also shows that Russia currently has one of the lowest densities of existing stock. Turkey also has a delicate balance between high new supply and low existing stock.

Jonathan de Mello, head of HDH's retail consultancy, says that, while investors like to focus on big cities with growing populations, in Russia and Turkey it is these markets which are experiencing the largest oversupply.

"We are seeing the biggest oversupply in Russia in Moscow and St Petersburg." says de Mello. "In Moscow there are more than 50 malls of more than 500,000 sq ft, partly because the weather means that everyone shops in covered malls. A lot of the first and second generation malls have been superseded, and it makes retailers wary - if someone like Nike or Mac comes in and then a new mall opens up nearby they can see their sales drop by 10% and that hits margins. There is a much better balance in cities like Ekaterinburg.

It is a similar situation in Istanbul - we think that market is already at capacity. There have been some centres built there, particularly at the luxury end, which have not performed as well as people hoped, but the picture is a lot better in places like Ankara or Izmir."

One company that is putting its money into Moscow and Russia is Ikea. Its Ikea Shopping Centres Russia division already owns 14 shopping centres under the MEGA brand across Russia, and it is now committing 260m to build MEGA Mytischi, a new 215,000 sq m centre in north-east Moscow.

Armin Michaely, general director of Ikea Shopping Centres Russia, says the company is looking beyond the current political situation and supply issues.

"The political situation is an issue for the short term, but we are an investing for the long term," he says. "For retailers that are not already here, it is probably putting them off entering Russia - it is a hard decision to justify to their shareholders. But if you want to be a big retailer you have to be here, and those that are already here are looking to expand.

In terms of the supply, it has one of the lowest densities of any country, Moscow is 60% below equivalent European cities when you look at sq m per head of existing space. And e-commerce is having less of an effect, because the delivery infrastructure is not in place around Moscow."

Second tier opportunities

In Turkey, investors have mixed views on the balance between the pipeline of new stock and the level of existing stock. Alison Rehill-Erguven, managing director and head of Pradera's Turkish office, agrees with de Mello that second tier cities offer the best prospects.

"When you go into emerging markets, you have to accept that development is not as regulated, and planning and zoning laws are not the same as elsewhere, so you have a large pipeline of potential schemes, even if not all of them come through," she says.

"In general the picture in Turkey looks good, and of course the demographic picture for Istanbul is good, but it is a city with a lot of supply, and there are micro markets of real oversupply. You sometimes have two centres on either side of the same highway. You are seeing a lot of malls fail, or not even getting to the point of opening.

But regional cities offer good prospects, there has not traditionally been any development in many cities. Our stance is that existing schemes provide a better opportunity for investment over new developments; they have made it through the crisis, generally have solid cash flows and are usually in a prime location already. The opportunity for investors lies in the fact that many of them are still under-managed from an asset management perspective."

Jaap Blokhuis, chief executive of Multi Corporation, one of the biggest owners of malls in Turkey, is confident of its prospects.

"It is one of the strongest parts of our portfolio, and will continue to be so," he says. "Vacancy is low, footfall is growing, and we are planning to build two further centres there."

Other countries with a difficult to negotiate balance between supply and demand, include Spain, in spite of recent transaction growth, and the UK.

"If you look at Spain, the fundamentals are still not great," says Florencio Beccar, head of retail at CBRE Global Investors, which owns 12bn of retail assets across Europe. "You are not seeing massive sales growth - it will become more positive over the next three to four years, but you will still see low growth. Coupled with that you have an above average level of stock per capita, a vacancy rate of 10% compared to the average in Europe of 6%, and rents are higher than average compared to sales."

Beccar adds: " The UK is also looking oversupplied compared to the Continent - it has a postive growth, but a lot of secondary stock has struggled with performance, and there is more stock than places that have seen more regulation."

This regulation is a key factor for countries with a positive story to tell, says Beccar. As a result countries like France, Belgium and particularly Germany have a low density of existing stock, and little new stock being built. "Places like Germany are structurally undersupplied because it is so difficult to develop there. Investors are willing to take more risk, and look at development again, but there is very little stock coming through, so the situation is beneficial in these places."

So while investors may be looking to take on greater risk as a result of more competition and higher prices, the best performance is still likely to come from traditional core markets.

Source: EuroProperty, November 2014

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Ragusa: Ibleo Shopping Centre