The ongoing structural shift from in-store to online shopping across Europe, and the consequent drop in investor interest in retail property, is driving up yields and lending margins in the retail sector, according to CBRE.
“One of the most notable features of the last two years is the extent to which retail margins have diverged from office margins,” the consultancy said of its European Debt Map data series.
It added that, on average, the largest increase in the spread between office and retail margins covered by its data was in the G7 member markets, at 30 basis points, followed by the Nordics at 20bps and central and eastern Europe at 18.13bps.
CBRE pointed out that there were notable market variations in the spreads between office and retail loan pricing. Although London and Milan have seen sizeable relative margin shifts over the two-year period, of 60bps and 50bps respectively, there was less of a divergence in the Paris market – at a 10bps spread at the end of 2020 – and Frankfurt, where margins were in tandem between the sectors.
CBRE pointed out that, in some markets, office and retail debt margins had diverged faster than yield movements or changes in investment volumes could explain.
However, the consultancy added that relative margin spreads are correlated with relative yield spreads and with relative investment volumes across its sample.
“One explanation for the divergence of margins is that as retail’s share of total investment decreased, and as the retail-to-office yield spread widened, so too would the retail-to-office margin spread,” CBRE stated.
The consultancy plotted a scatter chart to examine the relationship between the yield spreads and margin spreads between office and retail for the December 2018 to December 2020 period. The horizontal axis plots a rank of the relative yield shift and the percentage points decrease in retail’s share of total investment. The vertical axis shows relative margin shift.
“In most markets, the relationship holds well,” CBRE said. “In London and Milan, relative margins have shifted more than can be explained by falling retail investment volumes and/or relative yield shifts; though in London, retail investment volumes and values began declining before 2018.”
CBRE added that, in contrast, Lisbon’s margin spread had narrowed over the period, despite retail’s share of total investment falling and the retail-to-office yield spread widening.