A week in Retail

February 10th, 2012

Posted by: James Brown

EMEA Retail Research and Consulting

There are three stories in particular that have appeared in recent press that resonated with me. 

Unlocking the pipeline….

Firstly, Klepierre has said that it intends to sell €1bn of assets, to improve its financial position and to provide finance to support the development pipeline. As we suspected, developers will have to begin to sell off assets to raise finance in an environment where development finance is and will continue to be scare. This is likely to be the key for unlocking the development pipeline; expect more sales to come this year from other European developers.

Hotspots across Europe….

Another positive story is that Apple has announced that it is thriving in Spain. This is a positive story for two reasons. This is the ultimate example of survival of the fittest and testimony to the theory that the right product sells irrespective of market conditions. Apple have the right product, branding and service and continues to go from strength to strength. It is also positive because it also supports our view that irrespective of macro conditions at country level, there are pockets of resilience and strength across Europe. This proves that Spain, which has a weak economic and retail sales outlook like a number of other western European markets, provides some hotspots for retailers seeking to expand. Whilst having the right product is key, local market fundamentals are more important than the outlook for countries at a macro level. Plenty of opportunities exist across Europe for retailers with the right product.

A catalyst for regeneration…

And finally, Waitrose has announced it is looking to further expand its in town convenience offer. We all need to eat and food is a key footfall driver; convenience retail growth may be the catalyst needed for turning round a number of struggling retail high streets in the UK. Convenience retailing should be given the necessary planning support it needs to succeed in town.

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UK Retail Predictions 2012

January 4th, 2012

Posted by:

James Brown

Head of EMEA Retail Research and Consulting

Guy Grainger Jones Lang LaSalle

Guy Grainger

Head of Retail, UK

 

Summary:

  • Clicks’ drive retail growth at expense of ‘bricks’– for some time to come
  • Imminent lease expiries – a catalyst for swift change
  • ‘Protecting rental values’ becomes the new ‘rental growth’
  • Valuation adjustments – coming soon
  • Relative winners still emerging

‘Clicks’ drive retail growth at expense of ‘bricks’
Online retail to strengthen during 2012…
Online retailing has been the clear winner throughout 2010 and 2011, against a backdrop of a weak economy, stubborn inflation, unemployment, falls in real retail sales, and general uncertainty. The benefit of a wholly integrated online offer as part of an optimum retail model is clear, the effects of its impact on physical space will begin to hit home during 2012.

Occupational requirements fundamentally change …
Occupier requirements have fundamentally changed. By targeting growth through online sales and through international expansion, most mature, domestic non food retailers will be net reducers of space in the UK. For new expanding retailers it is simply a case of stores in fewer locations.

Too much space….
The result is a significant over supply of space in UK towns outside the top 50.

Imminent lease expiries – a catalyst for swift change…
50% of high street and shopping centre leases to expire by 2015…..
In shopping centres and on the high street we are coming to the end of the 80’s 25 year leases, the 90’s 10 year leases and sub 10 year leases of the last decade. According to our latest research, up to 25% of existing high street and shopping centre leases are due to expire by 2013 or 50% by 2015 (versus approximately 5% and 15% for retail parks by 2013 and 2015 respectively).
With a reduction in demand for physical retail space relative to 10 years ago, and retail requirements gravitating towards fewer retail locations, polarisation has been playing out, albeit relatively slowly until now. We have not yet seen the true effect of this shift in demand on our retail landscape, but the next 24 months are likely to see a swift and dramatic playing out of this polarisation as lease contracts expire.

Retailers to have more leverage on rent negotiations going forward…
These lease events will trigger a) rent reductions and b) increases in vacancy rates, as retailers walk away from sub-optimal stores. Long leases have protected rents in previous downturns, as retailershave had little chance to negotiate if more than 3-4 years from lease expiry. With shorter 5 year lease lengths and break clauses becoming the norm, upward only rent reviews could become the exception to the rule.

‘Protecting rental values’ becomes the new ‘rental growth’
Pockets of rental growth forecast for 2012 …
Average retail rents are still below peak levels. Demand is weak outside prime and is unlikely to return until fundamentals recover. In some instances, due to changing occupier requirements, retailer demand may simply not return.
As retailers look for good value rents, we will still see some growth on retail parks offering space at £15- £40 per sq. ft. often as a result of regeneration of DIY stores for value, food and non food retailers.
Restaurant demand is similarly strong, both in and out of town, as the distinction between retail and leisure becomes blurred.
Regional high streets and secondary shopping centres are most susceptible to significant rental income erosion, although London will continue to be a robust market as demand simply outweighs supply.

Business rates – a significant headwind in non prime…
Whilst new deals will reflect market value and will have to adjust downwards (or should), business rates remain the elephant in the room. Set at 2008 valuations, the 2010 rating revaluation is outdated and needs attention prior to the next VOA revaluation date of 2015. Based upon average rental declines from 2008 to end 2011, a 45% business rate contribution calculated at 2008 valuation now equate to over 50% of rent today. In harder hit markets, business rates will equate to 90% to 100% of adjusted market rents in 2012.
Market forces will come into play on rents – business rates remain a barrier and a significant headwind facing occupier affordability. The only way to address the imbalance without the VOA undertaking a whole re-rating exercise is to reduce business rate contributions from 45% (of 2008 rateable values) to a maximum of 30%.

Development to return, but not as we know it…
Whilst most commentary has focussed on the lack of town centre regeneration we are witnessing significant plans to redevelop older stock in the out of town market. Many original 25 year leases from the late 80’s/ early 90’s are coming to an end, which is coinciding with a change in planning landscape. Localism gives Local Authorities greater autonomy in determining how they generate new inward investment and income which is being reflected in a more commercial approach to granting planning permissions for retail and leisure development, sometimes to the detriment of the traditional retail centre.

Valuation adjustments – coming soon…
All of the above points to downward rental revisions for secondary locations during 2012. The degree of these rental adjustments will obviously depend on strength of the retail offer and occupier demand on a location by location basis.
So, whilst prime stock may be more resilient, secondary stock will see further investment yield decompression, to reflect: deterioration in rental prospects, capital expenditure assumptions, plus a continued absence of readily available bank debt, in order to achieve target IRR’s.

Conclusion – structural change about to play out….
So, quantitative easing and historically low interest rates in particular have provided a cushion for consumers and have softened the landing for UK retail over the recent years since the global economic downturn. Have we hit the bottom? We do not believe the structural and significant change facing aspects of our market have fully played out. 2012 will see more divergence between winners and losers and true values will be realised for secondary property.
Traditional and somewhat predictable retail real estate cycles are a thing of the past. 2012 will be a year of realisation and the first year of positioning for the new order.

Relative winners for 2012: London, prime, leisure, retail parks with development opportunities, convenience retailing.

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Growing interest in India

December 1st, 2011

Pankaj RenjhenPosted by: Pankaj Renjhen
Manging Director, Retail Services, Jones Lang LaSalle India

This was my second visit to MAPIC. From the moment I arrived there was significant interest towards retail in India. The session I moderated on Day 1 on emerging economies was extremely well attended and was an excellent showcase to demonstrate what growing economies can offer the global retail environment.

The India pavilion in the conference hall was also very busy throughout the conference. A high volume of service providers visited us, but what was especially pleasing this year were the increased number of retailers who were keen to establish new relationships. We saw 30 retailers such as Wagamama and La Tagliatella expressed interest in opening shops or franchises across India so I look forward to working on some exciting projects in the future.

Many of the retailers I spoke to also wanted to know how their peers or big names such as M&S, Zara were faring. What’s going right and what’s not? Meanwhile rumors were rife of other big names entering India soon like H&M, Uniqlo and other brands from the Inditex stable.

The overall impression I took away with me was that retailers had optimism about entering India. However, retailers need an element of caution – they need to think carefully because whilst the opportunities are large, one size doesn’t fit all. India is a great market but is different from other developed economies so clients will need advice on how to best adapt their strategy in order to maximize success.

I was also impressed with the Jones Lang LaSalle Retail Intelligence platform. It is a great differentiator for us in the market place and I am keen that we work to broaden the scope and make available additional India intelligence.

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Brazil on the radar

November 30th, 2011

Manuel Puig Jones Lang LaSallePosted by: Manuel Puig
Head of Retail Jones Lang LaSalle Brazil

The last two days at Mapic were extremely busy. I had back to back meetings with developers, investors and retailers, so I was left with no time to go around the trade floor area.

It’s amazing how Brazil raises the interest on this side of the Atlantic. I plan to be back at Mapic next year and hope to organize a cocktail at our booth to invite companies that are interested in Brazil. Most likely my colleagues Pankaj, from India, and Maxim Karbasnikoff, from Russia, will also join the initiative. Therefore, we will have a good team representing the BRICS.
 
This is my 13th consecutive MAPIC. The last 12 years I participated as a European representative of Jones Lang LaSalle Portugal. I couldn’t imagine being this busy representing a market so different from what I was used to, nevertheless very prosperous and exciting.

Brazil is on the radar for many reasons, such as:

▪ it has 200 million inhabitants and a considerable share of the population (40%) belongs to the emerging middle class.
▪ it is a political stable democracy.
▪ it has shown an average growth of 6% of GDP in recent years.
▪ its inflation rate is controlled.
▪ it is a major producer of commodities.
▪ it has a un-leveraged financial system.
▪ its currency is strong but undervalued.
▪ shopping center supply per capita is three times lower than the average of most developed countries.
▪ its shopping centre portfolio vacancy rate is 2.5%.
▪ low mortgage debt ratio per capita.

All of these factors have translated into a very favourable market condition for the development of shopping centers of all formats. These factors also encourage and enable retailers to satisfy the appetite for consumption of the emerging society.

However, the lower percentage of international retailers in the Brazilian market still concerns me.

Today, discussing with a fashion retailer, we came to the conclusion that taxation is extremely high and it has discouraged many retailers from expanding into Brazil. However, the potential of the market is enormous which should encourage companies to persist despite having retail prices higher than elsewhere in the world.

The climate difference between LATAM and Europe is also another big entrance barrier for European fashion retailers to expand across the Atlantic. We must take account of climatic differences and focus on manufacturing collections specifically for the LATAM market.

Establishing a relationship with local suppliers and reaching a number of 15 to 20 stores to justify the implementation of a local factory unit could be the solution for lower taxes and better retail prices. However, what to do until we get there?

Posted in BRIC, MAPIC 2011 | No Comments »

Retail maps of Brussels and Antwerp, the two main Belgian shopping cities, available now!

November 18th, 2011

Posted by: Walter Goossens
Head of Retail Leasing, Belgium

Jones Lang LaSalle Belgium just issued 3 retail maps: Antwerp, Brussels Uptown and Brussels Downtown.
Discover those exciting shopping areas and their retail offer by clicking on the maps.
 
Antwerp, the fashion capital of Flanders
Antwerp is renowned for its legendary expertise and know-how as a centre for the diamond industry but the fashion world discovered Antwerp thanks to the legendary creations of the Antwerp Six, who propelled the city to the forefront of the international scene with the reputation of being avant-garde and innovative. The studios of those Belgian designers are located in the fashion district between Groenplaats and the Museum of Fine Arts.
The stores of the international luxury labels are located in the Quartier Latin in Huidevetterstraat, Schuttershofstraat and Hopland. On the other hand, the larger mainstream brands such as Zara and H&M are to be found on the famous pedestrian Meir. [Click here for map]

Brussels, from Uptown to Downtown:
The Brussels retail scene is characterized by a very diverse consumer market with a large expatriate community from all corners of Europe. As such the city is often used by international retailers as a test case to launch new brands or concepts.
The retail market can be divided into two core areas; firstly the “Haut de la ville” – Uptown- comprising Avenue Louise, Avenue de la Toison d’Or and the Boulevard de Waterloo with the most high-end retailers such as Gucci, Dior, Louis Vuitton and famous Belgian designers. New luxury retailers such as Abercrombie &Fitch, and Jimmy Choo will be installing their brands on the Boulevard de Waterloo by the end of the year 2011.
The “Bas de la ville”- Downtown- features larger mainstream international and national retailers such as Zara, Mexx and H&M. These are largely concentrated in the Rue Neuve; the busiest shopping high street in Belgium. Around the southern end of Rue Neuve, the redevelopment of historical shopping galleries such as Centre Monnaie and GalerieAnspach are extending the retail-pull from the Rue Neuve further south to Rue des Fripiers.  [Click for Brussels Uptown and Downtown]

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Bringing a Brazilian perspective

November 17th, 2011

Manuel Puig Jones Lang LaSallePosted by: Manuel Puig
Head of Retail, Brazil

I am at MAPIC representing the newly formed Jones Lang LaSalle Brazilian Retail Division.  This event is of fundamental importance for my client activity as it brings together under one roof all the potential deals for the next few months.

There are several European retailers looking for information on the Brazilian market with the aim to expand into South America.  Just on the first day I met with three potential retailers.  I have a few shopping center greenfield projects to present to European developers and facilitate some partnerships with Brazilian developers.

It is gratifying to see so many colleagues at this event, I believe there are over 100 of us here, that makes me very proud!  It is clear that at Jones Lang LaSalle we offer more than retail integrated services, we offer what we call Retail Intelligence. It’s how we’ve earned our reputation for achieving real results for our clients. It means we have dedicated retail experts and research and consulting teams working closely, resulting in satisfied clients who have maximised the value of their portfolios and assets, wherever they do business.

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Getting together to discuss Retail Intelligence

November 16th, 2011

Adrian Peachey Jones Lang LaSallePosted by: Adrian Peachey
Director, Retail Investment, UK

After a swift check-in at the Majestic, one of the premier hotels in Cannes, it was straight into a team meeting with colleagues from across the Jones Lang LaSalle Capital Markets European teams. This was a great chance to catch up, talk about clients and share information and ideas. It was intriguing to hear the range of sentiment from different countries bearing in mind the summer that we’ve just had in Europe. Here are some of the more interesting points:

·         On a positive note, property values are going up in Turkey and Russia, with prime holding steady in Germany, France, Poland and (maybe) London.

·         However, a strong theme that came across is that secondary product is overvalued across Europe. Why? Firstly there is limited debt avaiilability. Secondly vendors are not adopting realistic business plans. However, in the UK, some vendors, for example banks, are adjusting prices quickly. Experience suggests value could adjust fairly quickly.

 ·         Although there is a shortage of debt in the market, there is a real depth of private equity for key locations in key markets. A glance at the delegate list would support the view that a good number of equity investors are in attendance this year. Unsurprisingly, available debt is focused on core markets rather than emerging markets. New develpoments in those emerging markets will be hard to fund – but there will be opportunities for buyers who have their equity and debt packaged.

·         Shelley Matthews in our International Capital Group reported that we continue to develop a range of new contacts with global investors looking at opportunities in EMEA. But it is worth noting entry cost of their money is high, so they are focussing on markerts where bond rates are low, such as Central London and Germany.

Two very good things were left until the end of the meeting.  The first is that client feedback suggests Jones Lang LaSalle continues to work together and dominate our country markets by taking a greater share of deal activity. Second, to enhance our client offering, we have also developed a new client information tool called Retail Intelligence Hub. Those in the know at MAPIC will be able to get a sneak peak of it in action if they come to our stand (20.01). This promises to be a great tool for working with our cross-border clients, whether delivering presentations, pitches or fee negotiations!

This intelligence sharing helps us work better as one team. Whilst most markets are tough, working together really helps us beat the competitor and deliver more value to our clients.

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Time of Whirling Dervishes

November 16th, 2011

Dr. Kıvanç ErmanPosted by: Dr Kivanc Erman
Director, Retail Capital Markets

The rush is back for Mapic again. It seems that we will be testing our own theses about our markets. It is one thing to say that Turkish markets are doing great and the only problem is liquidity, but putting into the international arena for pricing is another.

Yet, my preliminary indicators seem positive.  Despite the religious holiday and closed markets in Turkey last week, many investors called and asked for meetings and our Pan Euro colleagues set up meetings with investors new to Turkey.  This is something you did not have for Turkey 2 years ago. However, starting with MIPIM 11, the investors became more pro-active about Turkey and trying to understand the market dynamics at least. Yet it is still the locals who dominate the market, especially keeping low-profile.

It is also good to have such attention where the future of Eurozone is debated. For people interested in anecdotes, Turkey had its banking crisis in 2001-02 and thanks to the program set up by Mr. Kemal Dervis and continued without break by the current government; Turkish banks have the best capital ratio in Europe, with piles of cash fueling the economy. Now 2 Eurozone countries, Italy and Greece enjoy new hopes with their new governments, both to be set up by experienced technocrats, their own Dervishes.

Turkish experience showed that the technocrats are quite useful in such cases. I believe that both countries will take the necessary measures and jump back again. Yet, in the meantime I also believe that the Emerging Markets will close the gap very fast and our definitions will be changing quickly. Turkish PSBR is less than 40%, less than most of the Eurozone countries, and the current account deficit is a result of growth, as always is the case as seasoned Turkey followers know well. In our reports we have always stated that the volatility of €/$ is much worse than the volatility of TRL/€ or TRL/$ for the last 3 years. It is a big debate in Turkey right now if retail rents would be in TRL in the near future although this will technically be a disaster for retailers (yet they believe on the contrary) and financially a short position carrying for developers. I see no risk in saying that in a couple of years, we will be having though debates about the definition and contents of emerging markets, risk and volatility.

So it is time for whirling Dervishes again, this time for Eurozone economy. We will see the implications on Mapic as of tomorrow. Stay tuned for more….

Posted in MAPIC 2011, Turkey | No Comments »

Opportunity in Italy

November 15th, 2011

Davide_DalmiglioPosted by: Davide Dalmiglio
Director – Retail Capital Markets Milan

Italian expectations for Mapic are different compared to usual given the whole country is at the centre of attention of the European Community.

On one hand the reputation Italy has at the moment is not ideal. As Italian operators we are ready to get negative reactions from international markets and players.

On the other hand the positive economic fundamentals our retail schemes have had during 2011 in terms of performances, but more important the outcomes of the political situation likely to give a new government can give a new energy and more credibility to our market stopping the booming of the spreads of our bonds and the bleeding of stock indexes.

Mr. Mario Monti the proposed prime minister (formerly officer of the European committee) can grant a different reputation and reliability to Italy compared to our former prime minister.

The challenges are tough but now Italy has all the ingredients to solve the huge problems provided by high public debt and escape default (which is very far from reality).

Mapic will have an interesting participation of italian players, circa 10% of the total attendees, and more importantly Italy will be host of honour for 2011.

Despite our slowdown in the development process across the country and the drop of retail transactions we, as Jones Lang LaSalle continue to promote our services and our products trying to show the great value we provide to clients especially in challenging circumstances and with declining market climate.

We are aware that now the italian retail market in Italy cannot be considered “core” any longer – but we are confident in our ability to adapt and provide insight and opportunities to our clients in the new and changing environment.

Posted in MAPIC 2011, Retail 2020 | No Comments »

Two deals for day two and taking off at Gatwick

September 20th, 2011

Gould, Victoria Posted by: Victoria Gould
Director, Retail Agency UK

I start the main day at BCSC with a hearty breakfast, a bucket of coffee and the exciting news that we are on the verge of another two great brands for Standard Life Investments and Shearer Property Group’s Parkway Newbury – the third and final shopping centre to open in 2011.

So far so good – Parkway is bucking the shopping centre leasing market trend because it is the right size and scale for a market town and provides the appropriate blended tenant mix to meet the demands of the affluent demographic profile of West Berkshire. The future development pipeline is looking bleak – funding constraints, rapidly fluctuating capital values and an uncertain occupier market mean that only a handful of schemes on the horizon in 2000 will actually come to fruition. 2012 is looking very desolate, with the Land Securities development, Leeds Trinity being the bright spot of 2013.

We are looking at creative routes to providing new market channels and I am buzzing with news of our latest instruction – we are strategic and leasing advisors to the new owners of Gatwick Airport. I could bore you senseless with the facts and figures in terms of footfall, dwell time, number of passengers through security etc, but what retailers want to know (if they are not used to airport retailing) is what densities can they achieve and what is the best trading format to achieve and exceed these densities. Retailers that already trade from airports make out that it is a very complicated process and only specialist operators can actually make it work – this is a fallacy – they are just trying to keep one of retail ‘s best kept secrets -  [ it is not hard and  ] there is a huge captive audience with money to spend on products  and  services that they probably wouldn’t normally buy  or  use. Airports are the shopping centres of the future and we can’t wait to get started!

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