Consumer statistics for German city centres – A decision-making basis for the evaluation of prime city locations? (2014)

The battle for the best retail locations in Germany‘s pedestrian zones is turning out to be more and more complex. Because of centres opening or large stores closing and a lack of clarity in respect of subsequent usage, a previously prime, inner-city location can, in just a few months, turn into a problem zone in which only a fraction of the earlier returns can be generated. In this scenario, one would welcome taking recourse to any available basis for decision-making that might permit location evaluation or rental price estimation.

The online retail trade boom is already resulting in gloomy prognoses for inner-city areas because the shopping expedition of the future can be far better organised from the comfort of one‘s own home. Retail experts forecast a 30 % decline in over-the-counter retail trade, particularly in small and medium-sized towns with 30,000 to 60,000 inhabitants. When re-letting commercial premises, the tendency is to orientate oneself by means of the few available statistics in respect of purchasing power, footfall or the rental price slab. However, the explanatory robustness of such a database has increasingly been called into question in the recent past.

When the Cologne Institute for Economic Research recently expanded the definition of poverty distribution, which hitherto related exclusively to income, to include the aspect of regional price differences, the traditional East-West divide was barely in evidence. The shift in perspective to the „purchasing power poverty“ thus defined for the first time yielded completely new results in town and regional rankings. Because prices in cities are around 6 % higher than in rural areas, and are 7% lower in East Germany than in the West, the new „poverty strongholds“, adjusted for purchasing power, are predominantly to be found in West German cities. Cologne takes the lead in this with a quota of 26.4 %, closely followed by Dortmund (25.5 %) and Bremerhaven and Leipzig, each of which has a 24.3 % quota of purchasing power poverty. But the banking city of Frankfurt and the fashion hub Dⁿsseldorf, with quotas of 23.5 % and 22.7 %, respectively, also rank among the ten towns and cities with populations with the least purchasing power. By contrast, at the bottom of the league, larger southern German cities, such as Augsburg, Ulm or Ingolstadt, at 8.3 % to 9.5 %, have quotas that are as low, in terms of a low-purchasing-power populace, as parts of the supposedly underdeveloped Upper Palatinate region. Which are the conclusions that can be drawn from this for the expansion strategy of branch operations? Should one, for instance, intensify expansion towards Thⁿringen because, in terms of purchasing power poverty, this federal state unexpectedly ranks third best among the 16 federal states?

A further popular statistic when evaluating the location of commercial premises in pedestrian zones is the footfall measured in those areas. In terms of shopping zones in Germany, there are, to some extent, significant differences. While in Cologne, the „city with the lowest purchasing power in Germany“, traditionally the German peak values of over 12,000 to almost 15,000 pedestrians per hour are metered on the Hohe Stra e and along the Schildergasse by Jones Lang LaSalle (JLL), by contrast the record noted by competitor Engels & Völkers (E&V) in Munich along Kaufinger Strasse stands at over 16,600 pedestrians per hour. In Cologne, JLL meters only around 11,000 pedestrians, allowing the city to assume only seventh place in city rankings.

Similarly strange differences in footfall measurement (both carried out on Saturday – 29 March and 10 May 2014 from 12.00 p.m. to 1.00 p.m.) are also in evidence in other top rankings, as the table shows.

In the meantime, resistance to this has built in the Bundesvereinigung City- und Stadtmarketing Deutschland (bcsd e.V.) (Regd. Assoc.), which plainly states: „It is absurd that public perception of the high street in German inner-city areas and also farreaching business decisions are made contingent upon sporadically collated, completely unreliable figures. The bcsd requests JLL and E&V to review the research design of their survey and to refrain from compiling rankings“. But why do the responsible parties go to such lengths to carry out and publish such obviously misleading metrics? Because these figures are gratefully received by local news editors without seeing the bigger picture and thus provide free advertising for the data suppliers in the editorial section of newspapers? Because an intimate knowledge of the market specific to the local retail situation, which in actual terms does not exist, is thus to be suggested to establishment owners?

A similarly questionable instrument deployed as „proof of competence“ is the regular publication of rental indices for retail properties, which purport to be based upon figures currently compiled. In such tables, precise price brackets are shown for varying shop sizes up to a retail space of 5/m. In a serious study, each individual category should be accorded a minimum of three current negotiation outcomes. In a rent index for 200 selected inner-city areas, there were at least 600(!) shop mediations per year. And because, in the published tables, generally two or three different shop sizes are cited as references, logically any know-how should be yielded by a minimum of 1,200 or 1,800 annual property mediations.

But the reality is quite different: Not a single active brokerage firm in Germany manages this annual number of retail lettings in a prime location. And there is no platform for publishing rental fees actually achieved to which one might also refer. Conversely: The negotiation outcomes between the lessor and the renting branch operation are generally treated in confidence. A principle that is respected by Domino, at any rate. Further, the rent reflects only a portion of the material negotiation outcome: In the event that the retailer still has to carry out expensive building operations at that party‘s own expense, a lower rental price level is achieved compared to a scenario wherein the lessor carried out necessary building modifications on that party‘s own account or even paid a construction cost subsidy (CCS). In the latter instance, project developers that aim to increase the subsequent sale value of the property by way of paying a CCS and by way of correspondingly higher rental yields are preferred.

It is also no secret that the various industries in over-the-counter retail trade similarly incur differing proportions of their shop‘s turnover as rent, irrespective of what a recently published rental index might suggest. Ultimately, what counts in terms of achievable rent is always what the market allows at the time of the prospective reletting. If there are insufficient commercial premises available, the willingness to pay rent in the instance of re-letting is significantly higher than if, for instance, there is an over-supply of retail space in consequence of a centre having opened. After the last merger boom in the telecommunications‘ industry, the fallout in many cities was, for instance, an over-supply of shops of the same scale. In most cases, the previous high rents could not be achieved again.

The figures in the rental price indices therefore serve more as a preliminary orientation, in reality frequently deviating both up and down the scale. This is because the rent of a property continues to be individually determined on the basis of structural specifics within the context of the prevailing demand situation.

The bottom line

The lettings‘ market in prime city locations has always constituted a special market segment and will continue to do so in view of the structural changes in retail trade that are to be anticipated in the future. Footfall studies or rental price slab tables for commercial premises published in this context are more an editorial marketing instrument than a true reflection of prevailing market conditions. If all these statistics were to be truly valid, a large proportion of the mediation of commercial premises would already have been transposed online via corresponding logarithms. It is not without reason that the really interesting properties are found in prime city locations but not at ImmoScout.de or on websites of comparable online providers. In the instance of a re-letting, a personal consultation accompanied by a customised solution is, thus, always to be recommended. As always, what counts for properties in prime locations is: Shortage creates desirability û even in marketing.