The Profitable Niche of Small Retail Properties

DEFAMA Deutsche Fachmarkt AG, Berlin, is a real estate company with a focus on small retail properties in small and medium-sized cities, mainly in northern and eastern Germany. DEFAMA seizes particular opportunities in this niche because the properties DEFAMA focus on are too small for most institutional investors. This opens up buying opportunities at low prices.

Experience has shown that sellers are essentially two groups: private individuals and closed funds. The former usually only realize after the purchase that the management of increasingly older retail properties is considerably more complex and entails completely different challenges than a residential portfolio. That is why they often part with after a few years. Closed funds are dissolved after a certain period of time when the planned term has passed.

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While properties in well-known cities are in high demand and are usually relatively easy to sell – at good prices and correspondingly low returns – retail properties in little-known locations often fail to find buyers for years. It is not uncommon for them to be offered at lower and lower prices until the return is so high that it entices a bidder.

There are hardly any studies on the size of this particular market niche. However, DEFAMA estimates that several hundred properties in this segment are offered for sale every year. DEFAMA gains access to such investment opportunities through an network with excellent contacts to banks, real estate agents and investment companies.

The be-all and end-all of any retail property is that tenants are satisfied with the location. Only then is it possible for the dealers to remain in the property in the long term and thus ensure its sustainable profitability.

DEFAMA therefore attaches great importance to the opinion of the existing tenants when purchasing the property. In addition, regular personal contact with the large chain stores and good care of our own properties is very important to us. In this way, DEFAMA can identify and implement necessary maintenance or renovation measures at an early stage.

According to Matthias Schrade, CEO and founder of the company group, many of the objects that are offered to DEFAMA for sale show traces of years of neglect: “It is evident that no letting efforts have been made for attractive vacant spaces, requests for renovation or expansion by the anchor tenant have been ignored, the building services have not been properly maintained and modernized, etc.”

In many cases, this makes it possible to develop additional earnings potential and / or to reduce non-apportionable costs. DEFAMA’s primary goal, however, is to maintain the profitability and thus the value of the property. In view of the apt adage “Trade is change”, this is a challenge that should not be underestimated.

In addition to the quality of the location, a low purchase price is the decisive criterion for DEFAMA: “We only acquire properties with a double-digit net rental return. When calculating the return, we also take into account, on the one hand, non-apportionable additional costs to be borne by the landlord, and, on the other hand, the ancillary purchase costs. As a rule, this leads to a purchase price below 9 times the annual net rent.”

In this context, it is also important to have a lease structure that allows the property to be financially viable. An anchor tenant with a good credit rating is required for this, whose remaining term is over 5 years or should be renewable. Furthermore, a maximum of 10 tenants is desired, which mainly includes chain stores.

Published by:

Dr. Oliver Everling

Independent since 1998, he is Managing Director of RATING EVIDENCE GmbH. As visiting professor of Capital University of Economics and Business in Beijing, former chairman of the supervisory board of a rating agency, advisory board member, advisor, member of rating committees, chairman of ISO-TC Rating Services, author or publisher of books and a magazine, Independent Non-Executive Director under EU Regulation on Credit Rating Agencies, he has been or is involved in ratings from a variety of perspectives. Previously, he was for 6 years department director at Dresdner Bank and, until 1993, managing director of the Projektgesellschaft Rating mbH after a doctorate at the banking and stock exchange seminar of the University of Cologne.

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