THINK Europe: Retail

This document is solely for the use of professionals and is not for general public distribution.

THINK Europe: RetailAn overview of the European retail market

Data generating art

Using data from Fig.1 in this report, the graphic is an abstract representation of shopping centre transaction volumes across Europe from 2007-2014.

3THINK Europe: Retail

Introduction

This report discusses the attributes of the European

retail property market and explores opportunities that

the sector offers for investors. There is a sound research

case to support investing in European retail property, in

part for the diversification benefits that can be gained

through geography, sub-sector and risk profile, due to

the diversity on offer across the region. A successful

strategy acknowledges the significant differences in

prospects and performance characteristics, by country

and sub-sector, capitalising on these to maximise

performance and minimise risk. Capital should not be

deployed indiscriminately across this region; retail real

estate performance is highly dependent on local market

fundamentals, and requires ground-up analysis.

Retail, particularly prime core retail, is favoured for

its defensive qualities. The sector has historically

demonstrated relative resilience to market turmoil. In

addition to lower volatility, compared to offices, prime

European retail has also outperformed in a historical

context. This has been a result of stronger growth as the

sector continues to mature, and less yield movement,

both negative and positive, which has made it a better

target for long-term investment, rather than cyclical office

markets where performance relies heavily on the timing of

entry and exit. Equilibrium yields for European retail have

continued to fall, as the investment market has become

more institutional. The sector continues to attract growing

interest from international investors, who would previously

have favoured a gateway office market, but are now seeking

opportunities in a slightly less crowded market place.

The global financial crisis saw a marked correction in

retail property values across Europe, and a return to a

more sensible pricing to reflect risk. The pre-crisis period

arguably lacked adequate discrimination. Of course, there

has been a subsequent recovery in values, but this has by

no means been uniform, with investors largely focussed on

core markets and prime assets. Only in the past 12 months,

have we really seen investors casting their nets a little

wider to some of the more peripheral economies. Investors

accessing these markets now, can take advantage of the

full-rental recovery cycle. Some non-core markets may have

to wait a little longer to return to positive rental growth, but

investors should seek mis-priced opportunities, nevertheless.

Investors deploying capital across the European retail

market strategically, from a market, sub-sector and

timing perspective, should enjoy attractive medium-term

performance. We believe that over the medium to longer

term, retail should again prove to be less volatile than

offices. Rental growth may be modest, but is improving and

will not be short-lived. Investing in retail should complement

commitments to more volatile office markets. We expect

there will be further yield correction in some European

markets where, given the right asset, there will be strong

short-term returns. We believe, in the longer term, retail will

prove more defensive, offer diversification benefits, access

to excellent covenants and real long-term rental growth.

This report focusses on the shopping centre market in

the more mature European economies (where data is

extensively available). Large shopping centres are favoured

for their defensive qualities, and are very much the focus

for most international investors looking at European retail.

The European retail hierarchy is, however, comprised of

many retail sub-sectors, including smaller or secondary

shopping centres, high street retail, retail warehouses and

designer outlet malls which, at present, fall off the radar

of most international investors. These sub-sectors can all

produce compelling investment opportunities and can often

be purchased at more attractive prices (compared to prime

shopping centres).

Fig.1: Shopping centre transaction volumes ($bn)

0

10

20

30

40

50

60

200

7

200

8

200

9

2010

2011

2012

2013

2014

Key UK Germany France Spain

Italy Sweden Poland

Source: Real Capital Analytics, 2014


Markets at a glance

The UK, France and Germany are among the largest and

most established real estate markets in Europe, and have

mature retail economies. Investors in these markets

benefit from a solid domestic occupier base, with the best

locations benefiting from continued cross-border expansion

from international retailers. The French retail market is

notoriously tight, and opportunities to access the market

are infrequent. Those investors that do manage to secure

quality assets in France should enjoy some solid returns,

based on a healthy demand-supply imbalance in both the

occupier and investor market. Germany is a highly defensive

property market and, while it is not expected to be among

the top performers, it should offer low levels of volatility.

German shopping centres have not been particularly well

managed historically, and the upside potential from asset

management in this market is significant, particularly

as occupier demand continues to strengthen.

Fig.2: GDP: per capita and forecast growth (size of bubble represents size of economy)

0%

20%

40%

60%Fo

reca

st G

DP

gro

wth

(%

, 20

10-2

030

)

80%

100%

120%

140%

160%

0 20,000 40,000

GDP per capita ($)

60,000 80,000 10,0000

Austria

Bulgaria

Croatia

Czech Republic

DenmarkFinland

France

Germany

Greece

Hungary

Ireland

Italy

Netherlands

Norway

Poland

Portugal

Romania

Spain

Sweden

Switzerland

Turkey

UKEurope is a series of individual countries, each with its own law and customs. It is important to be aware of differing market practices, retail trends and consumer behaviour. For example, the German shopper is more cautious than the UK shopper, who happily loads up multiple credit cards. France and UK have similar amounts of floorspace of shopping centres, but the institutional market in France is very small, so it is difficult to access stock. The supply in France is heavily controlled by the key hypermarket groups, whereas in the UK, a food anchor is unusual.

Source: Oxford Economics, 2014


Markets at a glance (continued)

The Nordic retail markets (with the exception of Sweden)

are small, but mature and affluent. This region is believed

to offer a stable economic backdrop, and good retail

sales growth potential. Investor sentiment for the region

is relatively strong and investment activity is rising.

This region is expected to deliver stable, solid rental

growth over the next five years. While the outlook for

returns is weaker due to low yields, on a risk-adjusted

basis, the Nordics remains attractive; mature stock in

the region offers scope for driving performance through

refurbishment and repositioning.

Central and Eastern Europe retail markets are much less

mature, and spend per capita is modest. They are, however,

expected to see strong long-term sales improvement as

they enjoy structural growth. These markets are small,

though the outlier is Poland. Poland avoided recession

during the past downturn, and currently enjoys good

economic growth. Consumer confidence and retailer

demand is relatively strong. There has been strong growth

in shopping centre stock over the past decade, but this

has slowed markedly and retailers are now reported to be

queuing up for the best schemes. Good rental growth is

forecast (though a flood of new supply to the market would

dampen this) and yields are likely to harden, generating

good medium-term performance. Some investors will be

wary of this market due to its location, and they should be

mindful that planning legislation here is less rigid, but basic

fundamentals suggest that Poland is less risky than its

geography implies.

Fig.3: Retail sales: per capita and forecast growth (size of bubble represents size of retail market)

Austria

Bulgaria

Croatia

Czech Republic

Denmark

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Netherlands

Norway

Poland

Portugal

Romania

Spain

Sweden

Switzerland

Turkey

UK

0%

20%

40%

60%

80%

100%

120%

140%

5,000 10,000 15,000 20,000 25,000 30,000

Fore

cast

ret

ail s

ales

gro

wth

(%

, 20

10-2

030

)

Retail sales growth per capita ($)




Spain and Italy are the largest of the Southern European

economies. Both have been out of favour with investors for

the past five years, with demand concentrated on Northern

Europe. However, these markets, particularly Spain, have

enjoyed a resurgence in demand over the past 18 months,

as investors’ sentiment towards these economies has

improved. While yields have moved quite markedly over

the course of the past year, it is still possible to find long-let

covenant strong assets in these markets, at attractive prices.

To this end, we recommend these markets continue to be

monitored for opportunities, as they still offer the chance

to capture the full-rental recovery cycle. With rents having

fallen sharply, they offer potential for strong growth over the

medium term.

Fig.4: Global shopping centre space per capita (sq m per ‘000)

0

200

400

600

800

1,000

1,200

1,400

1,600

Sw

eden

Fin

lan

d

Irel

and

Net

her

lan

ds

Au

stri

a

Den

mar

k

Un

ited

Kin

gd

om

Po

rtu

gal

Sp

ain

Fran

ce

Ital

y

Cze

ch R

epu

blic

Po

lan

d

Hu

ng

ary

Ger

man

y

Bel

giu

m

Gre

ece

Au

stra

lia

Ho

ng

Ko

ng

Sin

gap

ore

Jap

an

Un

ited

Sta

tes

Source: TH Real Estate, 2014



Fig.5: Summary of markets

Source: TH Real Estate, Q1 2015

UK France Spain Germany Italy

Occupier summary

Strongest European economy

Weak economic growth Confidence bounced back H2 2014

Economic growth returningWeak economy

Primary target for international retailers Retail sales LFL growth in 2014 +1.3%

London major international centreStrong consumer confidence,

but reluctance to spendMarket remains attractive to

international retailers

Parent company covenant Consumer spend hampered by high unemployment Vacancy rates reducing quickly in core Strong retail demand driving rents up in core locations Investor focus on North Italy

Full occupancy and rental growth at coreLimited retail demand,

except for primary cities / mallsSecondary still suffering as retailers

rationalise storesKey European target for

international retailers after UKCovenants primarily franchises

with high credit risk

Main fashion occupiers

Zara/Inditex Zara/Inditex Zara/Inditex Zara/Inditex

Zara/Inditex

H&M

Abercrombie

Top Shop H&M H&M H&M Guess

H&M Primark Primark C&A Piazza Italia

Next Cache Cache Cortefiel Peek and Cloppenburg OVS

River Island New Look C&A Primark Bata

John Lewis Mango New Yorker Forever 21 Pittarosso

Typical lease structure

10 years

10–12 years Five years10 years

Five to seven yearsFixed rents

No breaks

Five yearly upward only rent reviews Break every three years Tenants break at year three Regular breaks, at least every five years

Tenant right of renewal Tenant rights of renewal Base plus turnover rentShopping centre and retail parks generally

no incentive or rent free periodLimited incentive in stronger locations

Indexation None

Fixed rent indexed annually in line with CPIFixed rent indexed annually

in line with CPIFixed rent indexed annually in line with CPI,

but uplift limited by regulationFixed rent indexed annually

in line with CPITurnover rent indexed

Shopping centre pricing

Prime 4.50% Prime 4.00% Prime 5.25% Prime 4.50% Prime 5.75%

Secondary 6.50% Secondary 6.50% Secondary 7.00% Secondary 5.50% Secondary 7.50%

Investor summary

Huge international and domestic investment appeal

Focus on main cities with highest purchasing power and in established centres

$5.5bn transacted in 2014

Recent pricing has compressed yields and investors now moving back to core+ for increased yield

Owners not selling big malls at current pricing

Very limited stock available Four fold increase in activityInvestor interest primarily

for larger malls

Strong transparent and long-term income $1.3bn on five large assets Need to trade by share deal


European retail investment styles: Core

High streets

The most expensive sub-sector of the European retail

markets is the high profile, prime high street. Units in these

locations are rarely traded and largely sit within private

ownership. Retailers will always seek representation on

historic high streets in gateway cities where tourist traffic is

high. Investors pay well for these units as part of their wealth

preservation strategies. While the risk profile is low, so are

returns, with deals commanding yields sub-3% in some

locations. This area might be interesting for institutions,

where a block of shops can be acquired and there are

opportunities for repositioning through tenant engineering.

Shopping centres

Consensus research predicts that shopping centres will

outperform the European property market average over

the coming five years. Shopping centres offer better scope

for asset management than unit shops, which can help drive

superior rental growth. Larger, dominant shopping centres

that are well-anchored, are expected to achieve high levels

of rental growth and will offer a more stable yield profile.

The Nordic region is expected to be the strongest

short-to-medium-term performer. Strong performance

is anticipated as markets are driven by strong rental

value growth in the medium-term, following the sound

economic fundamentals of the region. Our research case

advocates seeking opportunities in these markets now,

capitalising on their excellent risk-return profile and

ongoing rental growth recovery.

Shopping centres should be considered on an asset-by-

asset basis, and excellent schemes can be found in all

European markets.

“Super prime” regional centres

Yields for large “super prime” regional centres currently

stand at c.4.5% NIY. These relatively low yields are

typically driven by the strong rental growth prospects of

these centres and the larger potential to implement asset

management initiatives, coupled with the risk-adverse stance

of many investors. Accessing such stock in sole ownership is

only realistic under a large account. In many situations, joint

ventures are required to access this stock as investors and

developers look to reduce part of their exposure.

“Super prime” shopping centres in Spain and Italy may

still be available at marginally better prices than our other

“more core” markets, though this margin is quickly being

eroded as investor appetite for these countries is on the up.


European retail investment styles: Core-plus

Retail warehouse parks

While investor demand has largely focussed on a thin

slice of the market, opportunities ought to exist to secure

attractively priced, good assets that just fall off the radar

of international investors. To this end, we highlight the

retail warehouse sector. This sector suffered badly in

the downturn, quite rightly due to its ties to the housing

market, but hasn’t really recovered to the extent that high

streets or shopping centres have. While investor demand

for retail appears to be concentrated on large shopping

centres or prime shops, occupiers are less discerning and

more cost conscious. For the longer term, we think the

growth prospects for this sub-sector are excellent, with

rents offering good value compared to city centres or

shopping centres, and we believe there is scope for yield

compression as this sector matures. Investment in retail

warehousing is predominantly domestic, which reflects

the non-homogenous nature of the concept and a lack

of understanding, rather than — we believe — a greater

inherent risk. In most of the markets that we forecast,

retail warehousing is expected to outperform both shops

and shopping centres. Investors should seek well-located,

dominant fashion retail parks in core markets now, before

investor attention returns to this sector. Early movers ought

to be rewarded accordingly.

Outlet malls

A further sub-sector of the retail market that we believe

deserves attention is the outlet mall sector. Like retail

warehouse parks, this sector is less established as an

institutional investment class, and as such, is less liquid

than the traditional shopping centre market, and perceived

as being more risky. Many investors believe outlet malls

fall outside their area of expertise.

Outlet malls are purpose-built centres, where a range of

manufacturers and retailers offer stock at discounted prices

(not stand-alone factory stores). They are a relatively new

concept, but one that is growing in popularity. Landlords

will typically require retailers to offer minimum discounts

of over 30%, and shoppers and retailers benefit from the

managed environments and economies of scale.

Outlet centres have become an increasingly sought-after

asset class by investors. The popularity of these centres

is based on a mixture of retailer needs and consumer

requirements, with retailers requiring a suitable channel

of distribution for surplus stock, whilst discounted prices

make the brand available to a wider consumer base.

These schemes are extremely popular with retailers and

brands, providing a reputable channel to dispose of surplus

stock. They are equally popular with shoppers, seeking

quality brands at discounted prices. These schemes attract

high levels of tourist spend. Journey times, dwell times and

average spend at quality outlet malls, far exceeds those for

regular shopping centres. Furthermore, sales held up well

during the downturn, making this an economically defensive

investment class.

Successful investors in the sub-sector will likely have

partnered with a specialist manager, ie McArthurGlen or

Value Retail, who will manage marketing of the scheme and

alignment on landlord tenant interest.


European retail investment styles: Value-add

Recovering markets

Investors remain cautious about “non-core” markets, particularly those commonly described

as the ‘GIPS’ markets during the recession. However, recent evidence shows investors are

showing an interest in recovery markets again. Italy is hot on the heels of Spain in terms of

recovery, and we expect Portugal to follow suit. Greece has much deeper structural issues and

should not be treated as an imminent recovery play.

Good returns, that also carry a large risk, can be found in the less established European

markets in Central and Eastern Europe. The risk here relates to market size and liquidity,

rather than relying on recovery. These markets are expected to enjoy structural growth and

could produce some interesting opportunities as their retail economies evolve.

European retail investment styles: Opportunistic

Development

For property investors, one good thing to come out of the global recession is the virtual

disappearance of the development pipeline. So while demand has been weak, supply

has been constrained. In most markets, completions have fallen significantly and mainly

comprise extensions to existing schemes. This is a problem for retailers looking to grow their

businesses, and with demand picking up, rental levels at the best assets will be bid up. When

demand and confidence improve further, it is likely we will see another development cycle –

though it should be noted that planning legislation is generally restrictive in core Europe, and

we do not anticipate the market being flooded with new stock.

Investors looking to boost returns should include the ability to access development stock

within their strategy. As there are fewer investors willing to undertake direct development at

present, it could be smart to include a proportion of developments within an overall strategy,

ahead of the next development cycle. The type of development exposure we recommend,

typically includes refurbishing and extending existing stock, or developing new schemes that

are fully consented and have a high proportion of pre-lets. It does not include acquiring sites

at an early stage of the development process or speculative bets. Therefore the principal

risk is construction, which is manageable and can be reduced through the use of fixed price

contracts, for example.


Summary

The research case strongly supports investment in European

retail, but we believe money should not be deployed

indiscriminately, or indeed evenly, across the market, as

significant local and regional disparities in occupier demand

and market pricing will emerge as this market matures.

Investors can lower volatility through diversification –

either by geography or sub-sector. Larger portfolios will

be expected to enjoy lower volatility of returns through

diversification, in addition to superior performance through

the ability to pick stock from a bigger pool.

Historically, research shows that larger lot sizes, or at

least those that dominate their catchment area, have

outperformed in terms of rental growth. Larger schemes

have also produced lower volatility of overall returns.

The most dominant, prime assets tend to have low

leasing risk, low market risk, limited defensive investment

expenditure, low vacancies and better tenant covenants.

Furthermore, larger assets also offer greater scope for

asset management, driving rental growth and capital

appreciation. With consumers, retailers and investors

increasingly favouring bigger assets, we believe that larger

lot sizes will continue to outperform and prove more

defensive. It is, however, very difficult to find stock that

has substantial growth potential, due to a combination of

restrictive planning controls and lack of available land.

It is important that any investment strategy is elastic

enough to be able to respond to market conditions, and

has the flexibility to be overweight to the most attractive

market rapidly; the ability to mobilise capital swiftly

will help enhance performance by taking advantage of

attractive market opportunities. We do not recommend

making restrictive allocations to markets and sectors. Our

recommendations reflect our view of markets and their risk

profile today, and we would expect this to broadly remain

the same over the short term. We do, however, review these

on a regular basis and might expect some change as we

move through the next market cycle.

Although most European investment markets are generally experiencing greater liquidity, the supply of good quality, “interesting” stock remains tight. It is therefore important that any investment strategy is elastic enough to ensure it has the greatest chance of meeting its investment objectives.

Appendix 1: European retail sub-sector focus


Fig.6: Summary of sub-sector differences


High streets Shopping centres Retail warehousing Outlet malls Multi-channel

Physical attributes

Single shop unitsVaries significantly but typically

covered malls with an anchor store plus unit shops and car parking

Out-of-town big-box units, either solus sheds or

purpose built parks

Typically open-air village-style centres, clean modern

shopping environment

Online retailing with physical collection points

becoming important

Location Town and city centresIn-town and out-of-town locations,

close to shopper populationsAccessible locations close to

suburban populations

Located some distance from city centres to avoid cannibalisation of sales,

accessible locations on motorway networkCyberspace

Attraction to retailers

Loyal local shoppers, public transport

Modern floorplates, sales enhanced by asset management and

tenant engineering

Affordability, flexible floorspace,

doorstep car parking

High sales volumes, strong footfall, channel for

disposing of excess stock

No catchment or shelf-space constraints

Tenant baseNeeds based shopping, banks,

travel agents, mainstream fashion, independent retailers

Predominantly domestic, mainstream fashion and comparison goods

Bulky goods, electricals, furniture, DIY,

discount fashionInternational, aspirational brands

Music, books, electricals, food, retail services (ie travel,

banking), mainstream comparison goods

Asset management potential

Weak – fragmented ownership Good – improves with size of schemeModest – improving as depth

of occupier market growsStrong n/a

Growth phase

Mature/Shrinking

Established/Polarisation

Expanding Expanding Structural growth

Role in retail hierarchy

Daily/weekly needs based shopping

Convenience

Discretionary, comparison goods shopping

Comparison

Predominantly bulky goods shopping, as

and when neededConvenience

For those that love to shop, a day out, bargain hunters, tourists

Experience/leisure

Convenience of 24 hour arm chair shopping, home delivery,

price comparison, customer reviews and choice


Sub-sector highlights

High streets

High streets are the most traditional, well-established part of the European retail hierarchy.

They are at the centre of most towns and cities, and service local populations and office

workers. High streets in capital cities, and attractive, historical centres remain some of

the most sought-after locations by international retailers for flagship stores, attracted by

high footfalls and tourist spend. Prime retail pitches in leading cities will typically have an

upmarket, international fashion bias. Beyond major cities, the high street offer is more mass-

market with a high representation of retail services, ie banks, travel agents, hairdressers,

all catering for needs-based shopper requirements. Indistinguishable high streets have

suffered from the growing influence of shopping centres in recent decades, and more recently

the impact of the internet. Some high streets in secondary locations are thought to be in

irreversible decline.

Shopping centres

Shopping centres have become an increasingly important component of the retail hierarchy

in recent decades. Their physical attributes vary by country, and they range in size from

small, convenience-led district centres or precincts, to major regional malls over 200,000 sq m

GLA. Good shopping centres will have one or more anchor stores, which would usually be

a hypermarket or department store. Shopping centres are more mature and established

in northern Europe, while in southern Europe stock is more modern, and supply per capita

tends to be lower. Shopping centres are dominated by mainstream fashion and are used by

shoppers for weekly or monthly comparison shops. The diversion of sales to the internet, the

increasingly mobile consumer, and consolidation in the occupier market, means we are seeing

polarisation of shopping centre performance with an increasing proportion of sales being

captured by fewer centres – those with critical mass, strong anchors, good car parking and a

strong catering/leisure offer.

36–48 Argyle Street, Glasgow, UK Bullring, Birmingham, UK


Sub-sector highlights (continued)

Retail warehousing

Retail warehousing is a less established shopping concept (with the exception of the UK) and

typically comprises large out-of-town sheds, housing bulky goods, furniture and DIY stores.

They are located in accessible, out-of-town locations close to suburban populations, the

attraction being the ability to carry goods to the car easily. In the mature retail park markets

in northern Europe, the range of retailers on parks is much deeper and includes some

fashion, sports, children’s goods, and health and beauty retailers. Shoppers would typically

use retail warehousing for non-speculative trips to buy large items, as and when needed;

the journey is more about convenience than the experience. This concept is still maturing in

many European markets.

Outlet malls

Outlet malls are usually village-style, open air, attractive schemes. They are strategically

located close to the motorway network and sufficiently far from city centres to avoid

cannibalisation of sales. Retailers at outlet malls must sell goods at a discount, and provide

a channel for disposing of surplus stock. Tenants are mostly international, upscale brands.

Shoppers travel from large distances, lured by the range of brands not found at traditional

shopping centres, the discounts available and the clean, safe shopping environment. This is

a concept for people who enjoy shopping and is complementary to other more needs based,

regular shopping trips. Dwell times are longer than average, and while it is a speculative

shopping journey, average spend levels are high. This experience cannot be easily replicated

online, for either the shopper or the retailer. This concept is immature with room for

expansion, as demand from retailers and shoppers grows.

Wellington Retail Park, Waterlooville, UK McArthurGlen Serravalle Designer Outlet, Italy


Sector focus: Retail warehousing

Since the first park was developed over 30 years ago,

retail warehousing in Europe has evolved rapidly as a

trading format, and now accounts for a significant share

of both retail floor space and sales volumes. Initially, retail

warehouses were developed to service the needs of “bulky

goods” retailers, however, the attraction of easy access

and convenient free parking soon registered with other

retailer groups. Increasingly, fashion, footwear, sports and

household goods retailers have committed to out-of-town

formats where planning conditions permit.

The evolution of the sector has resulted in the creation

of several distinct retail warehouse types representing the

different generations of development. These include:

• “First generation” industrial units converted for retail use;

• “Second generation” purpose-built freestanding “solus”

retail warehouse units;

• “Third generation” multi-unit retail parks; and

• “Fourth generation” fashion parks, dominated by a mix

of “high-street” style retailing and often developed to a

higher specification than the standard retail parks.

Across Europe, the retail warehouse market has evolved at

different rates. The UK is by far the most mature, and on

prime parks, you will often find a similar tenant line up to

that in shopping centres. Well-established fashion retailers,

such as M&S, Next and Gap, are all well represented within

the UK retail warehouse sector. German and French retail

warehousing has also evolved and “fourth generation”

parks have begun to emerge, with retail occupiers including

Stefanel, New Yorker and H&M. The depth of the retailer

base across countries varies significantly, which will have

an impact on future rental growth potential. There are a

number of tenants with pan-European portfolios that are

found in many European out-of-town markets; these include

DIY store Leroy Merlin, electrical retailer MediaWorld,

sports retailer Decathlon and a number of discount brands

such as Takko.

As the sector has matured, the different scheme types have

developed their own investment characteristics in terms of

lot size, liquidity, sustainable rental levels and pricing, with

the latest generation schemes usually commanding the

highest rental levels, and occupier and investor demand.

Clean, modern retail warehouse floorplates provide retailers

with efficient trading space, compared to town centres

where units are sometimes awkward and often historical in

nature. The flexibility of retail warehouse units has provided

good opportunities for driving sales densities through the

reconfiguring of stores (smaller store sizes have become

more popular as demand from traditional high street

retailers has grown). Despite rising rental levels as the sector

has matured, retail parks (with the added benefit of low

service charges) offer good rent affordability for retailers –

particularly higher margin “high street” operators.

We are wary about generalising, and there are retail

warehouse locations that are sub-optimal in terms of

location and where the shopping experience is far from

good. We favour “next generation” retail parks that

will meet the requirements of tomorrow’s increasingly

discerning occupiers and consumers. We also support

investment in early generation parks, that dominate

their catchment area and can be repositioned through

refurbishment and re-branding.

While we believe the sector remains fairly priced, medium-

term performance will not be driven by asset repricing and

weight of money, but instead by property fundamentals as

the economy improves and we return to a stable occupier

market and improved rental growth opportunities.

Our forecasts highlight disparities among the different

retail warehouse typologies; secondary parks are projected

to outperform as a result of higher income returns, but

carry a significant downside risk on the occupational side.

On a risk-adjusted basis, prime fashion parks continue to

provide the best opportunities with rental growth forecast

to outperform.

The Fort Shopping Park, Manchester, UK


Sector focus: Outlet malls

Designer outlets have been one of the most widely

misunderstood, but strongest performing, real estate

sectors in Europe over the past decade and, relatively

speaking, they thrived during the global economic

downturn. This is a specialist division of the retail market

and relatively immature — as both a shopping concept and

an investment opportunity. But this is changing as retailing

becomes more international, and demand for luxury goods

grows in line with the burgeoning middle classes. The sector

is already popular with shoppers and tourists, and the best

schemes generate among the strongest sales densities

of any retail destination. Retailers, enticed by the strong

footfall and sales, are increasingly including outlets in

their portfolio strategy. In turn, the sector is attracting the

attention of a wider pool of investors.

Despite the sector being considered niche as an investment

class – a word often associated with risk — it is underpinned

by very sound drivers of performance, and should continue

to enjoy structural growth globally. In fact, unlike other core

real estate sectors, where market cycles have become more

pronounced, designer outlets have proved to be relatively

immune to cyclical economic and real estate market swings.

Not only can outlets generate sales densities that are

superior to traditional shopping centres or high streets, they

have a relatively cheap entry cost and low rental burden,

with turnover-based leases giving tenants the comfort of

on-going affordability. The flexible lease structure means

that outlet operators can respond rapidly to both structural

changes in the global retail market and very specific local

retailer requirements. This is key to optimising tenant mix,

the shopper experience and performance.

While this is a small, specialist part of the retail market,

investors should not be deterred by perceived risk or

illiquidity; the good investment value it offers, compared to

traditional shopping centres, does not reflect inherent risk.

The sector offers some of the most attractive risk-adjusted

returns in the European real estate market, as long as a

reputable operator is in place. Perhaps most importantly,

this is a retail investment which is defensive in light of the

ongoing diversion of sales to the internet; it is a shopping

experience that is very difficult to replicate online.

Strong demand from international retailers means the

occupier base is broadening and covenant quality is

improving. Constrained supply, coupled with growing

demand, should see continued rental growth and a long-

term structural improvement in investment pricing for the

sector globally. In Europe, for the short term, we expect

the strongest performing markets to be those enjoying

economic recovery, and where real estate demand is

focused. Longer term, we expect the strongest performance

to come from markets where the demand supply imbalance

is most favourable, and from economies that will benefit

from structural growth.

Roppenheim The Style Outlets, France

Appendix 2: Key markets overview


Key markets overview: UK

Demographic and economic context

The UK economy saw strong growth in 2014 at 2.6%,

with further outperformance expected this year as GDP

is forecast to grow by 2.6%. Longer-term growth will

be supported by improving demographics, as the UK is

projected to see its working age population expand. This

is driven by natural increases, net inward migration and

further rises in the state pension age.

UK consumers should benefit from real income growth of

3.2% in 2015, and growth is expected to average 2.2% over

the medium term. Research shows a strong correlation

between incomes and retail spending power, meaning that

higher salaries will translate into higher retailer turnovers.

This should have a knock-on impact for rent levels at the

best trading space.

It should be noted, that relatively high levels of household

debt will hinder retail market growth, and households will

need to tackle their debt levels over the long term to create

a sustainable consumer economy.

By 2030, 23% of UK households will have incomes greater

than $100,000; this is 10% higher than the European

average. Of this 23%, a significant proportion, approximately

2.5 million households, will reside in London. The UK and

South East of England benefit from lower unemployment

rates and a greater proportion of ‘thriving’ towns.

Fig.7: Age profile (% population by age band)

Fig.8: Income (% households by income bracket)

0-4 10-14

20-24 30-34 40-44 50-54 60-64 70-74

80+

-8% -6% -4% -2% 0% 2% 4% 6% 8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

European average 2030

2030 2010

Key UK

European average


Key $0–20,000 $20–35,000

$35–70,000 $70–100,000

$100,000+



Key markets overview: UK (continued)

Retail supply

The UK has the largest volume of shopping centre space in Europe in absolute terms, though

in terms of space per capita it is less well-supplied. Trading over a lower quantum of floor

space means that retail spend is spread over few locations and produces better densities. UK

comparison goods sales densities are often quoted as 40% higher than Germany, for example.

Stock is more mature than average and the occupier base more established than in many of

its European peers.

The UK benefits from a sophisticated retail warehouse sector which remains the most mature

in Europe. The sector has evolved as a trading format over the past 30+ years and now

accounts for a significant share of both retail floor space and sales volumes, attracting high

street retailers, and is increasingly developed to a high specification.

The UK’s shopping centre development pipeline remains below the European average but

there are a number of schemes marked for redevelopment, including St James Shopping

Centre in Edinburgh.

Fig.9: UK retail stock


UK Rank European countries

Number of shopping centres 817 1

Shopping centre stock (‘000 sq m GLA) 17,896 1

Shopping centre stock per capita

(sq m per ‘000)286 7

UK market conditions

Fig.10: Shopping centre vacancy rates by type (% of units)

0

5

10

15

20

25

Source: TH Real Estate, Q2 2015

Key Prime

Standard

Secondary

Dec

07

Mar

08

Ju

n 0

8

Sep

08

Dec

08

Mar

09

Ju

n 0

9

Sep

09

Dec

09

Mar

10

Ju

n 1

0

Sep

10

Dec

10

Mar

11

Ju

n 1

1

Sep

11

Dec

11

Mar

12

Ju

n 1

2

Sep

12

Dec

12

Mar

13

Ju

n 1

3

Sep

13

Dec

13

Mar

14

Ju

n 1

4

Sep

14

Dec

14

Mar

15

Ju

n 1

5

Fig.11: Shopping centre rental growth (% pa, nominal)

-6-5-4-3-2-1012345678

Source: IPD, 2014

Key UK

European average

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014


Fig.12: Mall investment volumes ($bn)

Fig.13: Progression of shopping centre prime yields (%)

Q4

20

05

Q4

20

06

Q3

200

7

Q1 2

00

8

Q3

200

8

Q1 2

00

9

Q3

200

9

Q1 2

010

Q3

2010

Q1 2

011

Q3

2011

Q1 2

012

Q3

2012

Q1 2

013

Q3

2013

Q1 2

014

Q3

2014

Q1 2

015

Q2

2015

4

5

6

7

8

200

7

200

8

200

9

2010

2011

2012

2013

2014

0

2

4

6

8

10

12

14

16

18

20

Source: CBRE, Q2 2015


Key markets overview: UK (continued)

UK market outlook

The retail sector accounts for over 50% of institutional investment in the UK and has

historically rewarded investors with both outperformance and lower volatility of returns.

Investors in the UK retail market benefit from a solid domestic occupier base, with the best

locations further profiting from continued cross-border expansion of international retailers.

Large, dominant shopping malls in the UK offer investors access to an excellent quality

of income, in terms of covenant strength and lease length. Constrained supply of quality

assets, coupled with good demand from shoppers, occupiers and investors alike, means we

expect demand for this product to remain strong, putting further pressure on yields.

IPD data indicates the retail warehouse market has historically outperformed All Property

over its 14-year history. The long-term outperformance has been supported by the maturing

of the sector, as both a shopping format and investment class. However, the characteristics

which supported this change remain relevant today, with continued demand from retailers for

efficient, flexible floor space within accessible locations.

Prime shopping centres and retail parks are expected to see annualised rental growth

recovery of 2.6% and 2.4% respectively, over the medium term. Asset management

strategies can help support further uplifts in rents.


Key markets overview: Germany


The fundamentals for German consumer spending are now

better than at any time since reunification. Employment

levels are at an all-time high, and many sectors are enjoying

real wage growth. Retail sales increased by about 1.7% in

2014, and are expected to average 1.5% pa growth over

coming years. These relatively low growth levels, compared

to many other markets, can be explained by high saving

rates and the low propensity of German consumers to spend

additional income in the retail sector. A focus on travel,

cars and services means only 28% of German consumer

spending is captured by the retail sector, compared to 36%

in France or 31% in the UK.

The German unemployment rate fell to 6.5%, another

record low. The annual fall in the number of unemployed

actually rose to a near three-year high. Although the

pace of employment growth may slow in response to

rising labour constraints, this will be partially offset by

rising inward migration. Labour market tightness and the

imposition of a minimum wage at the start of this year

should also boost workers’ incomes, adding to the windfall

from the oil price decrease.

Fig.14: Germany demographic and economic stats


GermanyEuropean

averageRank European

countries

Population (million) 82 - 1

Population growth (2010–2030, %) -1% 5% 16

GDP 2014 ($bn) 3,597 - 1

GDP per capita 2014 ($) 43,742 32,162 9

GDP growth (2010–2030, %) 34% 40% 16

Retail sales 2014 ($bn) 1,702 - 2

Retail sales per capita 2014 ($) 20,699 17,355 5

Retail sales growth (2010–2030, %) 30% 39% 18

Clothing & footwear sales 2014 ($bn) 81 2

Clothing & footwear per capita 2014 ($) 991 901 6

Clothing & footwear sales growth (2010–2030, %) 11% 47% 23

% population under 65 79% 83% 26

Number of households with income >$100,000, 2030 (‘000) 5,340 4


Key markets overview: Germany (continued)

Oxford Economics expects real incomes to rise by 2.6% this

year, the largest annual gain since 1992. Additionally, low

household indebtedness will help consumers, but it is by no

means inevitable that households will use the rise in their

real incomes to buy more goods and services. Over recent

years, German households have saved a lower proportion

of their incomes than the historic norm and we have to

assume that some of the rise in incomes will be saved.

Given that household debt as a share of disposable income

has been on a downward trend for over a decade, the

transmission to increased spending will be stronger than it

would be in other Eurozone economies, where household

debt is often significantly higher.

Longer term, Germany is among the most demographically

challenged countries in Europe. The working age population

has already peaked, and this process will constrain

economic growth rates, and hence retail sales, over the

long term. However, 2014 migration figures show net

immigration of around 400,000 mainly young people per

year (the highest inward migration after the USA), which

demonstrates that job growth may be able to mitigate the

low birth rate.

The key feature of German real estate is a striking market

stability. With property valuation focused on long-term fair

values, the rental and investment market has historically

experienced very low volatility. Cross-border investors

should target German retail to provide a stable anchor in

their portfolio, rather than excess returns.



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

European Average 2030

2030 2010

0-4 10-14

20-24 30-34 40-44 50-54 60-64 70-74

80+

-8% -6% -4% -2% 0% 2% 4% 6% 8%

Key UK

European average


Key $0–20,000 $20–35,000

$35–70,000 $70–100,000

$100,000+



Germany retail supply

Germany has the smallest shopping centre stock per capita among developed economies.

However, in terms of turnover per sq m, Germany ranks at the bottom in Western Europe. The

reason for this is a large stock of high street retail and retail warehousing, which is diluting

sales in shopping centres. German consumers’ spending power is only slightly above average,

but a larger proportion than in other countries is not spent in the retail sector.

Relatively low average sales densities mean that average rents are lower than in other Western

European countries, however it has not affected occupancy rates. With 4.0% in 2014, German

shopping centres have the lowest vacancy rate in Europe, falling to c.2.5% in dominant

shopping centres. These favourable supply conditions are set to last as the pipeline of new

space is only 10 sq m per 1,000 population, the lowest construction level in Europe, compared

to the European average of 38 sq m per 1,000 population. The majority of space will be added

in medium sized centres between 15,000 and 40,000 sq m GLA, which fits the large number of

medium sized towns in Germany.

The retail planning regime in Germany is among the strictest in the world. Local and regional

authorities are very reluctant to allow new shopping centres; in particular, large-scale out-of-

town retail tends to face strong resistance, which in particular has held back the development

of outlet malls. Traditional high streets are protected, which means shopping centres, which

are integrated into an existent city centre high street, are viewed more favourably, and are

therefore more common.

Fig.17: Germany retail stock


Germany Rank European countries




(sq m per ‘000)146 15


Germany market conditions

Fig.18: Rental growth (% pa, nominal)

Mid

-siz

e re

tail

Mid

-lar

ge

reta

il

Larg

e re

tail

Sm

all r

etai

l

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Source: IPD, 2014

Key 2004–2014 (end) 2011–2014 (end)


Fig.19: Mall investment volumes ($bn)

Fig.20: Progression of shopping centre yields (%)

4

5

6

7

8

Q3

20

06

Q4

20

06

Q1

200

7Q

2 2

00

7Q

3 2

00

7Q

4 2

00

7Q

1 20

08

Q2

20

08

Q3

20

08

Q4

20

08

Q1

200

9Q

2 2

00

9Q

3 2

00

9Q

4 2

00

9Q

1 20

10Q

2 2

010

Q3

20

10Q

4 2

010

Q1

2011

Q2

20

11Q

3 2

011

Q4

20

11Q

1 20

12Q

2 2

012

Q3

20

12Q

4 2

012

Q1

2013

Q2

20

13Q

3 2

013

Q4

20

13Q

1 20

14Q

2 2

014

Q3

20

14Q

4 2

014

Q1

2015

Q2

20

15

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14 0

2468

101214161820

Source: CBRE, Q2 2015


Key Prime

Secondary


Germany market outlook

Around half of the retail property transaction volume generated over the course of the year,

has come from international investors. Due to the severely limited availability of core product

in the top locations, investment volumes in second tier locations and regional markets are

increasing. As a result, yields have been hardening over the course of this year, with prime

shopping centres now trading at 4.25-4.5%, after 4.75% in 2013 (net).

The largest deal was the share acquisition by Unibail-Rodamco in both CentrO Oberhausen

and the shopping centre developer mfi AG. Other high volume transactions in this segment

included the purchase of the Christie portfolio, by a joint venture of Morgan Stanley Real

Estate Investing and Redos Real Estate in the first quarter, and the sale of the Düsseldorf Kö-

Galerie by Blackstone to Allianz Real Estate. The latest notable deal of 2014 was Wiesbaden’s

Lilien-Carré, sold out of a troubled situation by TJ O’Mahony to Orion Capital Managers.

The low interest rate environment will most likely push yields further down in 2015 and 2016.

However, once interest rates start to normalise, there will be upward pressure on yields.


Key markets overview: France


France’s GDP per head is relatively low on a pan-European

basis, estimated at c.$40,000 in 2014, adjusted for

purchasing power. The number of households earning

$35–70,000 is expected to rise by 0.7% pa over the period

2016–2030, according to Oxford Economics, adding a

further 1.4 million households into this income bracket.

France’s demographics are not favourable, with a shrinking

of 4 percentage points in working age share of the total

population over the next 15 years. Rising participation

should partly offset the situation, but overall the labour

supply will be broadly stagnant. Stronger population growth

is expected in the Ile de France and South of France.

Household indebtedness had risen to 100% of household

disposable income by 2013, albeit not too excessive

relative to many other Eurozone countries. It is expected

to deteriorate slightly over the next decade, and this will

maintain the savings ratio at a higher level than might

have been the case. The personal sector savings ratio

was 12.3% in 2014, and is expected to fall gradually to

11.6% by 2024.

High structural unemployment is part of the reason for high

precautionary savings among households. Unemployment

is currently 10.3% compared with the long-run average of

8.9%. It has turned the corner, but is expected to remain

above the long-run average over the next decade.

Fig.21: France demographic and economic stats


FranceEuropean


countries


Population growth (2010–2030, %) 8% 5% 10

GDP 2014 ($bn) 2,708 - 2

GDP per capita 2014 ($) 40,987 32,162 12

GDP growth (2010–2030, %) 31% 40% 21

Retail sales 2014 ($bn) 1,229 - 4









Key markets overview: France (continued)

Prospects for France have improved in recent months, and

GDP growth is expected to gain momentum, such that the

growth deficit with the Eurozone average narrows in coming

years and nearly closes by 2017. Low oil prices, the weaker

euro and cheap finance, will all boost consumer confidence,

while low inflation will boost incomes, despite the sticky

unemployment rate.

Consumer spending will be the main driver of growth in

the short term, rising to 1.9% in 2015 against 0.7% in 2014.

Recovering house prices will assist household confidence.

House prices are forecasted to grow by 2.0% pa over the

next five years, despite rapid growth since 2000 and the

absence of any substantial correction during the GFC.

The economic risks are largely confined to the public sector

deficit, which could well drift upwards in coming years,

especially if there was a spell of price deflation. Structural

reform is very much needed to improve France’s long-term

competitiveness and to bring down the unemployment rate,

but a recovering economy might allow politicians to limit

their ambitions with regards to the reform agenda.


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


2030 2010

0-4 10-14

20-24 30-34 40-44 50-54 60-64 70-74

80+

-8% -6% -4% -2% 0% 2% 4% 6% 8%




Key France European average

Key $0–20,000 $20–35,000

$35–70,000 $70–100,000

$100,000+


France retail supply

France has 685 shopping centres, incorporating 15.5m sq m, compared with the 17 country

average of 314 centres and 6.4m sq m. The stock is relatively mature with almost half

having been constructed prior to 1980. However, the amount of space per head is in line

with the average. Half of mall space is in mid-size schemes and nearly one-third is in very

large schemes.

Development has been steady in recent years, although there are significant regional differences.

After the high level of completions in 2009, 2010–2013 witnessed a fall-off in projects, as the

leasing and funding environment became restrictive. The more affluent Ile de France region has

witnessed the delivery of many schemes, including large-scale destination centres. Future pipeline

space per head, either under construction or with full planning consent, at 2.75m sq m, is more

than double the 17 country average.

The largest pipeline, adjusted for population, is in the southern and western regions, with

Provence-Alpes, Aquitane and Midi-Pyrenees particularly affected.

Fig.24: France’s retail stock


France Rank European countries




(sq m per ‘000)238 10


France key market conditions

French schemes tend to enjoy relatively low vacancy compared with the European average,

although vacancy rates have been creeping upwards in recent years. They are currently

around 5.0%; they are only lower than this in Germany. Of the biggest cities, Marseille has the

highest vacancy at 7.0% and Strasbourg the lowest at approximately 2.0%.

Churn rates, when analysed at city and asset size level, are generally healthy. Like-for-like

income has been increasing for most of the listed companies, with tenant revenues benefiting

from indexation and new lettings at higher rents.

Retailer confidence has improved in recent months, with the general turnaround in the

economy. Inflation has slowed and fallen much faster than income growth, and consumer

loans have started to see the first signs of positive growth in years.

Rental growth is likely to be below its long-run trend over the medium term, and will

underperform the average of key markets. Mall rents are barely expected to rise in 2015

and 2016, but then improve over the medium-term outlook.

Fig.25: Like-for-like net income (% change, pa)

-5Klépierre Corio ECP U.Rodamco Hammerson Altarea

-4-3-2-1012345678

Source: Company Accounts, 2014

Key 2011

2012

2013

2014


France market outlook

French shopping centres typically account for a small share of overall investment volumes,

but have seen rapid growth in recent years. Total mall transactions accounted for c.$4bn

in both 2012 and 2013, but 2014 saw a number of significant large transactions which took

the total for the year to $7bn, marginally higher than Germany and second only to the UK.

Core shopping centres are rarely traded and demand is intense, despite a cooling in investor

sentiment in 2012 and 2013.

CBRE estimates the prime shopping centre yield at 4.0% (Paris), in line with its low of the

last cycle, pre-GFC. Although prime yields are higher in the regions at 4.5% plus, the net

initial yield on the average portfolio of malls is close to 5.0% and, with modest growth in

rents, we expect returns to average 7.0% pa over the next five years. This easily exceeds the

return required to cover key aspects of real estate mall market risk, notably transparency,

liquidity, volatility in returns and security of income. Prime malls are assumed to be held long

term, and the liquidity and volatility risk is lower than for office assets. French malls have the

second lowest required return of all key European markets, including the UK. This is partly

because the bond yield is currently exceptionally low at just 59 bp (at the end February 2015).

Forecasts for bond yields end-2019 are 1.78%, suggesting a defensive yield profile over the

medium term.



Key markets overview: Spain


Spain’s GDP per head is relatively low on a pan-European

basis, estimated at $28,000 in 2014, adjusted for

purchasing power. The number of households earning

$35–70,000 is expected to rise slowly over the period 2016–

2030, according to Oxford Economics, adding a further

64,000 households over this period. Spain’s demographics

are not favourable with a shrinking of 3 percentage points in

the working age population share of the total, over the next

15 years. However, this is relatively less problematic than for

most other European countries.

Household indebtedness is high, at 125% of household

disposable income in 2013, the second highest in the

Eurozone. It is expected to improve to 112% over the next

decade, and this will maintain the savings ratio at a higher

level than might have been the case. The personal sector

savings ratio was 9.2% in 2014 and is expected to fall

modestly to 7.5% by 2024.

High structural unemployment could affect household

security. Unemployment is currently 23.8% compared with

the long-run average for Spain of 15.2%.

Fig.26: Spain demographic and economic stats


SpainEuropean


countries


Population growth (2010–2030, %) -3% 5% 20

GDP 2014 ($bn) 1,324 - 5

GDP per capita 2014 ($) 28,343 32,162 15

GDP growth (2010–2030, %) 33% 40% 18

Retail sales 2014 ($bn) 855 - 6









Key markets overview: Spain (continued)

Spain is outperforming the wider Eurozone, and only Ireland

is expected to grow at a faster rate. Spain’s economic

growth was 1.4% in 2014, and the forecast for GDP growth

in 2015 has been revised up from 3.2%. Households are

benefiting from an improving labour market and will see

real income gains this year – partly the result of the sharp

fall in energy bills. Oxford Economics believe the labour

market will improve vigorously over the medium term and

unemployment will fall to 18.5% by end-2018.

Consumer spending growth was strong in 2014, growing

by 2.4%. The forecasters expect an acceleration to 3.3%

in 2015 and 2.6% by 2016. Recovering house prices will

assist household confidence. House prices are forecasted

to grow by 4.0% pa from 2016 to 2020, the fastest of any

Eurozone country.

The near-term economic risks are persistent deflation and

the popularity of the anti-austerity party, Podemos, may

lead to a change of direction. On balance, the risks facing

the economy should subside over the medium term. High

levels of debt in both the public and private sectors means

the economy remains vulnerable to external shocks.



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


2030 2010

0-4 10-14

20-24 30-34 40-44 50-54 60-64 70-74

80+

-8% -6% -4% -2% 0% 2% 4% 6% 8%

Key Spain European average

Key $0–20,000 $20–35,000

$35–70,000 $70–100,000

$100,000+




Spain retail supply

Spain has 537 shopping centres, providing some 12.5m sq m gross leasable area, the vast

majority of which completed in the past two decades. Completions fell sharply after 2009, but

the short-lived improvement in the economy in mid-2010 led to a number of schemes starting

or re-commencing in Spain. Spanish completions therefore rose sharply again in 2012 at the

height of the Eurozone debt crisis. 2014 was a record low for mall development and there is

little under construction to complete in 2015 and 2016.

The Catalan region has low provision of space and an affluent catchment, and the Balearics

Islands, an even lower provision and higher level of retail spending per head. Other regions

have low retail spending per head but very low provision (eg Extremadura) and look better

placed than affluent Madrid, with the third highest provision of space of any region. Asturias

combines high provision of space with relatively low retail spending per head, so looks less

appealing, while Aragon also has high provision relative to the level of retail spend. Galicia

looks reasonably well-balanced between provision and retail spending. In reality, the focus

should be on micro-location and asset quality. Broad assumptions about a particular region is

not always helpful, as there are wide variations between provinces within a region, and also

mall schemes within a province.

Fig.29: Spain retail stock

Spain Rank European countries




(sq m per ‘000)271 9


Spain market conditions


H1

20

12

H1

20

13

H1

20

14 -15.0

-10.0

-5.0

0.0

5.0

Key Unibail-Rodamco Corio Klepierre




Spain market outlook

Retailer confidence gained momentum in the latter half of 2014, despite an easing in

consumer confidence in the same period. Vacancy rates have been declining in prime and

super prime schemes, in contrast to rising vacancy in secondary schemes. The market

remains highly polarised, with prime high streets in Barcelona and Madrid, and large,

dominant and well-established malls, proving most resilient in terms of rents and vacancy.

Vacancy rates have fallen on prime schemes but continue to rise on secondary. Klépierre

and Unibail Rodamco reported growth in like-for-like income in H1 2014, but other landlords

admittedly continue to face a squeeze on margins. Following such a deep recession,

rationalisation among some retailers is bound to continue for a while, but the positive news, at

least for now, seems to be outweighing the negative. Mall fashion sales are proving resilient,

but retailer churn rates are high at malls and still rising, particularly in Madrid and Barcelona.

While super prime malls in Spain have registered positive rental growth in recent years, rents

in the majority of the market have only recently stabilised after experiencing significant rental

falls, amounting to around 40% in total since 2009. The improving consumer demand climate

suggests future rental growth will be reasonably strong, particularly from this low base.

What will be the “new normal” for bond yields? Fig.31 contains a forecast of 2.5% for Spain’s

10-year sovereign bond coupon at end-2019, which is still substantially lower than the long-

run average yield of 4.43%. In addition, rental growth will still be expected as the consumer

recovery consolidates into the next decade. Considering these factors, current pricing

appears relatively defensive.

Prime malls are assumed to be held long term, and the liquidity and volatility risk across

countries is lower than for office assets. Prime malls will have lower rates of depreciation

and expected returns should be higher.

Fig.31: 10-year sovereign bond yields (%)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

UK

Spa

in

Po

rtu

gal

Net

her

lan

ds

Ital

y

Irel

and

Ger

man

y

Fran

ce

Bel

giu

m

Au

stri

a

Source: Bloomberg as at 27 February 2015, Oxford Economics as at March 2015

Key Average 2000–2014 February 2015 Forecast 2019



ItalyEuropean


countries



GDP 2014 ($bn) 1,972 - 4

GDP per capita 2014 ($) 32,872 32,162 14

GDP growth (2010–2030, %) 12% 40% 26

Retail sales 2014 ($bn) 1,087 - 5




Clothing & footwear per capita 2014 ($) 1,270 901 3

Clothing & footwear sales growth (2010–2030, %) -10% 47% 25



Key markets overview: Italy


Italy has been suffering from a structural growth problem

since the early 1990s. Silvio Berlusconi’s three premierships

and short-lived governments with weak mandates have

had limited success with economic reforms. Italy has done

much less than the other peripheral economies to improve

its competitive position. The reform impetus of the current

government appear more promising than previous attempts.

However, Italy started from a more comfortable position

than Spain: it was spared a housing boom (and bust);

ran only a modest current account deficit; benefits from

Europe’s third largest industrial base (after Germany and

France but ahead of the UK), and has accumulated a huge

savings pile in the private sector (government debt is one of

the highest in the OECD).

The Italian economy continues to suffer from a host of

domestic social economic risks, which are undermining

investment, spending and market confidence. Italy is

projected to emerge from recession in 2015, but lingering

market uncertainties, linked not only to Italy’s tight credit

conditions and a lack of domestic demand, is likely to curb

Italy’s expansion to 0.6% this year, rising to 1.0% in 2016.

As such, attention will remain focused on policy measures

by Prime Minister Matteo Renzi, in conjunction with the

European Central Bank, to try and re-engineer growth and

financial market confidence. Record low Italian gilts are

reflective of ultra-low inflationary and growth prospects,

and the actions of the European quantitative easing

programme.

Fig.32: Italy demographic and economic stats



Key markets overview: Italy (continued)

Whilst incomes are under pressure, Italian consumers have

strong balance sheets. Housing owner occupation is high,

with 73% of the population (82% of households) living in

their own house. More importantly, most people own their

house without debt and only 15% of the population has a

mortgage. As a result, Italy has the lowest household debt

level in Western Europe, amounting to only 59% of GDP (for

comparison: Germany 59%, UK 99%).

Italy is an economically divided country: in the South,

income levels are as low as in the less affluent regions

of Spain, whereas in the North, income levels are on par

with German and UK regions. Over the past two decades,

this polarisation has shown no signs of closing, but quite

the opposite; with people gravitating north for better job

opportunities, many southern provinces are suffering from

declining population.

Despite its challenging economic performance, Italy has

seen very few retailer insolvencies. Most major domestic

brands have manageable levels of debt, and in the fashion

sector, the market share of international brands is high. In

addition, the still sizeable sector of independent retailers

has been suffering disproportionately higher declines in

sales, compared to modern chain retailers. Retailers remain

highly selective in terms of locational preferences. Most

retailers remain focused on the North and Centre, and some

have retreated from the South altogether.



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


2030 2010

0-4 10-14

20-24 30-34 40-44 50-54 60-64 70-74

80+

-8% -6% -4% -2% 0% 2% 4% 6% 8%



Key $0–20,000 $20–35,000

$35–70,000 $70–100,000

$100,000+

Key Italy European average


Italy retail supply

Italy has 766 shopping centres, with 13.7m sq m GLA (as of 2014); on average the stock is

more modern than in more mature markets, such as Germany and the UK, with about 90% of

shopping centres completed in the past two decades. Due to local planning approaches, there are

significant regional differences in provision, with younger stock more concentrated in the South.

The focus of development is on medium-sized schemes, and in particular, very large projects,

as the existing stock is concentrated in smaller and medium sized schemes. There is a growing

number of shopping centre projects focused on urban regeneration, where malls form part of

wider, mixed-use developments. Some areas may still see a significant increase in stock per

capita, and there is a potential threat of over-supply in some regions. The bulk of the pipeline

is focused on affluent Northern Italy, particularly around Milan and Rome further south.

Investors have very limited appetite for the South, which also reduces development activity in

Southern Italy.

Out-of-town shopping centre vacancy rates are typically higher than those of the city centre

in the major urban markets, and there are also significant regional variations; vacancy

rates have increased from around 3% prior to 2007, to 6–10% in 2014. The good news is

that vacancy rates have stabilised; since 2013, void rates have remained stable. However,

at around 16%, churn rates are higher than in Northern Europe, but lower than in Spain,

Portugal and Poland.

Fig.35: Italy retail stock

Italy Rank European countries



Shopping centre stock per capita (sq m per

‘000)235 11



Italy market conditions

The retail market is sharply polarised along the lines of location quality. Falling sales and,

much less so, growing stock, continue to put pressure on rents, and retailers are getting

into the habit of asking for rental discounts. At the top end of the market, things look much

better. Prime shopping centre and high street rents have remained stable since 2007, as many

international retailers continue to expand and compete for the best space.

Polarisation between locations is typical for contracting markets, but in Italy, tourism

reinforces the trend in favour of top high streets, shopping centres and outlet malls. About 44

million people travel to Italy each year, compared to c.60 million to the US or 28 million to the

UK. Lately, European tourist numbers were weaker, but vacant hotel rooms have been filled

with newly travel and spending-hungry Asians and Eastern Europeans. A bias towards prime

centres is supported by tourists and Italian shoppers. In the fashion sector, the market share

of value retailers in Italy stands at 36%, compared to 59% in Europe. Aspirational retailers

take 15% of space (Europe 8%) and luxury retailers take 7% (European average 3%).

The composition and tenant mix of Italian shopping centres continues to evolve: food

anchors, especially hypermarkets, are downsizing to improve efficiency, whereas some non-

food retailers (eg Apple, Hollister) are emerging as footfall-generating junior anchors. Food

courts are also becoming an increasingly important element of shopping centre provision.


Corio Eurocomm. Klépierre -2

-1

0

1

2

3

4

5

Key 2012 2013 2014



Italy market outlook

Consumers will benefit from the sharp reduction in oil prices and low core inflation, and they

will probably try to continue rebuilding their financial situations, reducing the positive impact

on spending. The unemployment rate shows no signs of falling, and the labour market is

expected to improve slowly. As a consequence, private consumption is forecast to increase by

just 0.4% in 2015, rising to 0.8% in 2016, unless reforms surprise on the upside.

In contrast to Spain, Italian shopping centres have seen limited declines in headline rents. A

large part of the downward adjustments in the recession were implemented via more generous

incentives, packaged for retailers. The flip side is a much weaker rental rebound expected in

Italy, compared to Spain. Before successful economic reforms indicate a stronger economic

growth outlook, the expectation for expansion in the retail sector remains subdued as well,

resulting in moderate returns going forward.

While total returns include very limited income growth, the total return for Italian shopping

centres is aided by higher initial yields. The time of bargain yields in Italy are behind us, but in

contrast to Sweden, Germany or the UK, investors can enter the market at a sustainable yield

level, not having to account for negative yield impact.

International investors’ appetite for Italian retail is back, highlighted by rising investment

sentiment indicators, putting Italy among the most sought after investment destinations.

However, this has only translated into small increases in investment volumes. Investors are

ready to deploy capital in Italy, but are waiting for clearer signs of recovery. In addition, the

market is constrained by lack of available product.



Key markets overview: Sweden


Over the past 15 years, Sweden’s economy has grown by

2.2% pa outperforming Europe, which averaged growth

of 1.3% pa. Going forward, Oxford Economics expects

Sweden to outperform with 2.2% pa over the next five

years to 2019, compared to Europe at 1.9% pa. Retail sales

are expected to average 2.5% in real terms over the next

five years, which puts Sweden at the upper end of the

growth league in Western Europe. In 2015, the outlook

for domestic demand remains solid. Consumer spending

is expected to increase at a healthy pace as the labour

market recovers, while negligible inflation will aid growth

in real disposable incomes.

These growth numbers underline the fact that Swedes have

a high propensity to spend their disposable income in the

retail sector. In 2012, retail spending in Sweden accounted

for 38% of private consumption compared to Germany at

28%, France at 36% and the UK at 31%.

The only significant risk to this favourable consumer

environment is the strong housing market, while house

price increases, to a significant extent, are justified by

supply shortages, and household income growth sections of

the market look overheated. A housing market adjustment

as a result of rising interest rates, would have a negative

impact on consumers.

Fig.37: Sweden demographic and economic context

SwedenEuropean


countries



GDP 2014 ($bn) 541 - 9

GDP per capita 2014 ($) 55,973 32,162 4

GDP growth (2010–2030, %) 45% 40% 11

Retail sales 2014 ($bn) 191 - 12







Number of households with income >$100,000, 2030 (‘000) 317 16



Key markets overview: Sweden (continued)

Population growth is forecast to average 0.4% pa (source:

Oxford Economics) over the next 10 years, and the total

population will not peak until the 2030s (source: UN), later

than most other European countries. Importantly, the

working age population will grow marginally until 2040,

when most of the developed world countries are expected

to see significant declines. The combination of low level

public debt, and the favourable demographic makeup of the

country, is likely to keep Sweden in a leading position for

the long term.

Sweden continually achieves high scores in competitiveness

rankings. The extensive survey, published by the World

Economic Forum, placed Sweden in fourth place globally

in 2012. The country is seen as particularly strong in

technology and the quality of public institutions. The

efficiency of the public sector, the education system, use of

talent, and research and development, are among the main

contributors to Sweden’s outstanding business profile. This

academic analysis is verified in practice by productivity

growth and the success of Swedish products abroad.

Geographically, Sweden is about 25% larger than Germany,

but due to its comparatively small population, the majority

of the larger towns and cities are clustered in the south

of the country. After the capital Stockholm, the next two

largest cities are Gothenburg and Malmö, which are located

in the south west of the country. Next in the hierarchy are

18 university towns, boasting a young population and

a vibrant local economy, which lends them well for

institutional retail investments. 14 of these have a

population of around 100,000 people. The majority are also

located in the more densely populated southern part of the

country, with only three in the north.


Fig.38 : Age profile (% population by age band)

2010 2030 European average 2030

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

-8% -6% -4% -2% 0% 2% 4% 6% 8%

Key $0–20,000 $20–35,000

$35–70,000 $70–100,000

$100,000+

Key Sweden European average




Sweden retail supply

Unlike other European countries, Swedish local authorities do not generally impose trading

restrictions in their zoning for retail areas. This is a very positive characteristic for investors

as it allows landlords to manage their assets unhindered. When restrictions are applied,

they normally relate to the trading of food, large volume trading, environmental impact,

infrastructure solutions, and more recently, for the preservation of vibrant city centres. Due

to this relative relaxed planning approach, Sweden has one of the highest per capita shopping

centre stock provisions in Europe, and one of the larger development pipelines. The high

stock levels in shopping centres have to, however, be seen in context: Swedish consumers are

among the most affluent in Europe, and due to the colder climate, the high street sector, and

to a lesser extent the retail warehouse sector, are unusually small. As in any other mature

market, there are obsolete schemes, and investors need to target locations with a high degree

of local market dominance.

Fig.40: Sweden retail stock

SwedenRank European

countries


Shopping centre stock

(‘000 sq m GLA)4,721 8

Shopping centre stock per capita (sq m per ‘000) 499 1


Sweden market conditions

The high stock levels in shopping centres have to be analysed in context: Swedish consumers

are among the most affluent in Europe. The key variable to determine whether stock levels

are appropriate, is space productivity. GfK data reveals that average retail sales densities in

Sweden are among the highest in Europe, averaging €6,000 per sq m pa, compared to €5,000

per sq m pa in the UK, €4,000 per sq m pa in Italy, and just €3,000 per sq m pa in Germany.

The shopping centres’ segment can be divided into “in-town” and “out-of-town” centres,

offering different characteristics for investors and shoppers.

Most Swedish cities tend to have several in-town shopping centres, rather than one large

dominant scheme. As land is more restricted and constrained by historical buildings, rivers

etc, the shopping centres are multi-levelled and sometimes compromised from a design

perspective. The dominant schemes will, however, trade well and form the focus for the city.

Most Swedish cities will also have out-of-town shopping centres which, if large enough, will

act as a regional scheme for the wider catchment. The retail offer may be similar to the

town centre but they will nearly always have a major grocery retailer anchor. With fewer land

constraints, such centres tend to have more efficient designs arranged over one or two floors,

and large car parking provisions. They also regularly offer the owner the ability to add value

through carefully planned extensions.


Unibail Rodamco Citycon Klépierre ECP -2.0

0.0

2.0

4.0

6.0

8.0

Key H1 2010

H1 2011

H1 2012

H1 2013 H1 2014




Sweden market outlook

The Swedish retail market is mature with professional retailers and landlords. A speciality of

Sweden is the fact that several large chains have developed a variety of brands, to take advantage

of their consumer knowledge and establishment expertise. This strengthens their position towards

landlords, and allows them to quickly analyse and adapt to specific locations, by opening their

most appropriate brands. Working with multi-brand chains can also be beneficial to landlords as it

provides the opportunity to agree package deals and more easily implement asset management

initiatives. Five of the chains represent 28 active retail brands in Sweden. Although Sweden is

dominated by strong Nordic brands, international brands are slowly increasing their market share.

The steady entrance of these international brands is considered a positive characteristic, as it

increases competition in the Swedish retail market

Sweden benefits from above-average rental growth, both in past performance as well as

forecasts over the next five years. The market is very polarised due to the high provision

of retail stock; at 7%, the shopping centre vacancy rate in Sweden is below the European

average of about 10%. Only strong centres will experience good rental growth, driven by

buoyant retail sales, while weaker centres will show lacklustre performance.

Prime net initial yields across sectors are currently at a similar level to those in Germany,

reflecting both countries’ “safe haven” investment status. While yields for prime assets

appear relatively low, current pricing reflects the high demand from risk-averse investors in a

low interest rate environment.

The widely quoted prime shopping centre yield at 4.0-4.5%, is for inner Stockholm schemes,

which are rarely traded and as such, often demand a premium. Outside of this sub-market,

yields are typically 5.0% to 5.75%. Further inward yield shift is to be expected in 2015 and

2016; long-term yields will soften when the interest rate environment changes.

Sweden investment market

In contrast to the emerging markets in Central Europe, which are being driven by foreign

investors due to a small domestic investor base, Sweden boasts a mature market dominated by

sophisticated domestic investors. The funded pension system in Sweden has constantly channelled

institutional capital into the property market, giving rise to a well-functioning, listed and unlisted,

property investment sector. As a result, owner-occupier rates are low, and the stock of assets

managed by professional investors is large relative to the size of its economy. IPD estimates the

size of Sweden’s institutional grade stock to be $113bn compared to the UK, the largest European

market, at $296bn. Sweden has established itself as the fourth largest investment market in

Europe, ahead of the Netherlands, Spain and Italy, and is the second most transparent market

after the UK. Swedish retail has shown the same high level of liquidity as the markets in Germany

and the UK, with 9% of retail stock traded over the past five years.

The proportion of cross-border investors has varied considerably from year-to-year. At the peak

of the market in 2007, leveraged investors from outside the Nordics dominated activity (several

in partnership with Lehmans who had a significant presence in the region at the time). The office

and residential sectors are the traditional focus of domestic investors, with prime yields currently

being too keen for most international investors. International investors are spreading their

capital more evenly, but with a clear preference for retail attracted by pricing, strong underlying

fundamentals and accessibility to high quality stock.


This document is intended solely for the use of professionals and is not for general public distribution. Any assumptions made or opinions expressed are as of the dates specified or if none at the document date and may change as subsequent conditions vary. In particular, the document has been prepared by reference to current tax and legal considerations that may alter in the future. The document may contain “forward-looking” information or estimates that are not purely historical in nature. Such information may include, among other things, illustrative projections and forecasts. There is no guarantee that any projections or forecasts made will come to pass. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and are not guaranteed. Rates of exchange may cause the value of investments to go up or down. Any favourable tax treatment is subject to government legislation and as such may not be maintained. The valuation of property is generally a matter of valuer’s opinion rather than fact. The amount raised when a property is sold may be less than the valuation. Nothing in this document is intended or should be construed as advice. The document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. TH Real Estate is a name under which Henderson Real Estate Asset Management Limited provides investment products and services. Issued by Henderson Real Estate Asset Management Limited (reg. no. 2137726), (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3BN) which is authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored. COMP201500231

Alice Breheny

Global Co-Head of Research

T: +442037278122

E: [email protected]

Angela Goodings

Associate Director Of Research

T: +442037278147

E: [email protected]

threalestate.com

[email protected]

Follow us on Twitter @THRealEstate14

Contact us

Documents

THINK Europe: Retail