Global Retail Banking – Prepare today or fail tomorrow

July 12th, 2012

Posted by: Colin Burnet

Retail Research & Consulting

EMEA Retail Research and Consulting 

We live in a world of economic uncertainty and marketplace volatility. Weakening growth in the developed world, allied with a lack of political leadership is unnerving markets and business leaders alike. As this blog is published, the eurozone crisis rumbles on (or even worsens). Meanwhile, the political stand-off in America is adding to the sense that leading authorities will make a fatal miscalculation.

At the heart of all of this, still, are the banks. Despite the stress tests, there are too many unknowns for any complacency. How many toxic assets still sit on bank balance sheets? How far will slow economic growth or any rises to interest rates, cripple the banks’ loan books? What are the counterparty risks? How quickly could sovereign insolvency and bank illiquidity lead to a meltdown of confidence, a drying up of the interbank market and a second credit crunch? To what extent will regulation force restructuring in the banking industry? Which bank is the next to fail or to need government support?

Meanwhile, the picture in the developing nations and frontier markets could not look more different. By and large we are looking at an increasingly decoupled world where Asia (and other emerging markets like Brazil) are reaching a self-sustaining cycle with far less dependency on the USA and Europe. On-going trade surpluses are raising domestic demand little by little. Economic growth has recovered quicker and to much higher levels than in the developed world. Meanwhile, banks in China, India and beyond, cleansed a lot of their bad debts in the 1990s and capital ratios are in better financial shape than in the West. Despite occasional nervousness about bad loans (e.g. in Chinese local government), and a marginal weakening in economic outlook, the still strong GDP expansion means that, overall, banks in developing countries are looking forward to a decade of profitable growth.

With such macro-economic instability (and divergence), geo-political and balance sheet uncertainty, who’d be a forecaster? And yet it is vital to get our hands around the future. Yes, the exact future is unknowable, but it is possible to anticipate plausible outcomes which can then inform decision making today. Better to predict, assess probabilities and prepare than sit back and become the victim of future changes.

It is in this spirit that Jones Lang LaSalle we have written a report on Retail Banking, 2020. Using desk research, expert interviews and industry round tables across three Continents, we have taken a 360° tour of the horizon. We have looked at political, economic, technological and socio-cultural trends. Bringing this together, we have then analysed the knowns, taken a view on the unknowns and derived a plausible vision of where retail banking is going internationally, and what the knock-on effects will be for real estate markets. Read Global Retail Banking 2020 to find out more

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Who will win gold in 2012’s summer of fun?

June 4th, 2012

 

Julie Collins Jones Lang LaSalle

Posted by: Julie Collins
Retail Research

Jones Lang LaSalle EMEA Research

With less than 70 days to go now until the London Olympics, retailers will be hopeful that the combination of the Queen’s Jubilee (and a welcome additional bank holiday); the Euros and the Olympics will lead to an increase in consumer spending. Pub and restaurant operators will also be looking to the summer festivities to make up for what has been a soggy start to the early summer.

The key questions are whether, given all the hype, spend will increase, and who will benefit?

Undoubtedly grocery spend will increase as a result of Jubilee street parties, Olympics bbqs and football gatherings. Sainsbury’s and Waitrose are currently looking well placed to take advantage of this additional spend.  Their recent form suggests that customers are happy with the service and quality provided, and many non-shoppers will see the summer celebrations as a perfect opportunity to trade up from Tesco, Asda and Morrisons. Whilst Tesco have replaced their ‘Tesco Value’ range with ‘Everyday Value’ and have brought back their Clubcard Exchange promotion, they have limited time to change their poor customer perception, and gain sales from their competitors.

John Lewis is likely to continue its run of form with strong sales of TVs and merchandise for both the Jubilee and the Olympics.  The windows of John Lewis Oxford Street currently show a strong Cath Kidston / Emma Bridgwater focus and a key highlight on all things ‘Union Jack’.  British retailers will benefit from the surge in patriotism associated with the summer events, for example, the ‘Corgi’ women’s tops in Next and the Jubilee tea cosy’s currently on sale in M&S.

Who will struggle to benefit from the ‘summer of fun’?  Well, big ticket retailers are likely to continue to suffer.  If grocery, TVs and Jubilee / Olympics merchandise spend are all set to increase, then spending elsewhere simply has to be squeezed with the economic climate as it is.  With shoppers at Jubilee parties, watching the football or at the Games, spending on DIY or new sofa purchases will be less likely this summer.

Summer 2012 offers a number of retailers a real prospect to grow sales.  Availability of products is imperative for supermarkets, and the weather will no doubt play its part in sales.  Retailers at Westfield Stratford City have an amazing opportunity to convert visitor numbers into actual spend; appealing window displays and short queues will be fundamental for this.  It remains to be seen how successful Team GB and England will be, but retailers will certainly be hoping for a golden summer.

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Retail and The Black-Hole Effect

April 4th, 2012

Posted by: Colin Burnet

Retail Research & Consulting

EMEA Retail Research and Consulting

What was the average size of the Welsh backline in the Six Nations? According to various estimates, somewhere between the size of my shed and my house. My initial reaction was that I’m glad my playing days are long gone. But it also seems to be indicative of a wider trend, towards size, power, scale in everything.
In retail property, the trend is undeniable. We term it  ‘black hole retailing,’ whereby prime, dominant centres suck in so much of the spending in their regional catchments, that they leave increasingly little for former prime, secondary and tertiary locations. To illustrate, Westfield announced recently that it’s two London flagship malls will sell an astonishing £2bn worth of merchandise this year. Westfield also announced that it is selling three of its minor UK shopping centres to free up cash to fund a share buyback and to ‘expand its global reach in primary markets.’
Across Europe, major players are selling either non-core or secondary stock to focus on their existing larger centres, or to buy new absolute prime stock or to fund their prime development pipeline. Notably;
• Unibail-Rodamco is selling some of its smaller centres in a bid to focus on its larger centres
• Klépierre plans to sell €1 billion of assets by the end of 2013 to finance its prime development programme (no doubt a factor in Simon Property Group’s recent weighty investment in Klepierre)
• Corio is selling €670 million worth of properties to help finance a €2.5 billion pipeline of shopping-centre projects
• Hammerson is selling its office stock to concentrate on its major retail assets
• British Land will invest primarily in locally dominant retail assets amid increased polarisation between prime and secondary in the sector.
What this confirms is that the major developers, investors and retailers alike appear to be backing the ‘size is everything’ mantra. We explore this, and other hot topics, in more detail in our Retail 2020 series. It’s gratifying to see that the Welsh rugby team, for one, have taken the message onboard!

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Structural change playing out, but still some way to go

March 26th, 2012

Posted by: James Brown

EMEA Retail Research and Consulting

Peter Lowry, CEO of Westfield and Sir Philip Green of Arcadia shared the platform this morning for the opening of the Bank of America Merrill Lynch Real Estate Conference 2012. This much anticipated and attended session, in my mind, set the tone for another day in a retail market that is facing significant structural change.

Westfield’s success is in place making and the ability to provide a differentiated mixed use offer to compete in an increasingly competitive retail market; this was clearly laid out by Peter. Sir Philip was clear that as a retailer they would be investing more in fewer, better stores (Westfield Stratford being an example). Both sides played to the tune of continued polarisation.

The retailer session later in the morning touched upon portfolio optimisation and ‘cross border’ as opposed to ‘domestic’ expansion strategies and saw unanimous agreement from panellists (including our very own pan Euro retail specialist, James Dolphin) that retailer requirements have fundamentally changed. We heard about healthy demand for the ‘right space’ in the ‘right place’ but also about the tumble weed that is likely to enter some weaker secondary locations across Europe. 

This discussion continues on from our Retail 2020 debate (www.retail2020.com) and will continue to roll for some time. Rest assured, the retail and retail property market is changing at a rate we are not accustomed to, and imminent lease expiries will be the catalyst for much change. Until some of these leases expire however, it is simply a waiting game.

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The German Shopping Center Investment Market Outlook 2012

March 5th, 2012

Post by：Anke Haverkamp

Team Leader Shopping Center Investment Germany

In 2011 the commercial property investment market in Germany was clearly dominated by the retail sector, which accounted for around 45% of the total transaction volume of €23.5 billion. This positive trend is also evident with shopping centres. The transaction volume in 2011 grew by around 54% to €4.8 billion, meaning that shopping centre transactions accounted for around 45% of all retail property transactions. What are the main trends on the shopping centre investment market in 2012? 

Stable prices but little demand in the middle risk segment

Investor demand for Core products will continue to dominate the market situation in 2012. It is more likely that there will be a greater scarcity of high-quality products in 2012 than in the previous year, however. For this reason, we expect to see either stable or slightly higher prices in this segment. At the same time, demand for Core+ properties remains very limited. This is due less to a lack of interest or the non-availability of capital, but more to a prevailing sense of great uncertainty on the market. The majority of investors behave in accordance with the general market sentiment, and demand disproportionately large risk premiums for shopping centres that do not fulfil all aspects of the desired profile. This means that sellers and buyers rarely agree on price. We observe strong demand for value-add properties and opportunistic investments. In contrast to 2006/2007, “opportunistic” no longer means uncritical buying behaviour that is focused only on price. On the contrary, a credible story has become decisive for a successful sale. The expected market development in terms of yield compression is no longer enough on its own. 

Sellers in 2012

In 2012 we expect banks to continue the process already partially started in 2011 of cleaning up their balance sheets. Core properties are more likely to be sold off in individual transactions. On the other hand, it often makes more sense to sell value-add or opportunistic properties as part of a portfolio in order to increase the investment volume and optimise both time and resources. Furthermore project developers, but also asset managers in particular, will typically continue to exploit the good market environment for sales. It is not yet clear to what extent the German open funds will emerge as sellers. We will certainly see a sale or two on the market based on the fact that open-ended funds are increasingly focusing on active asset management. May 2012 will represent a decisive point in time, however: four of the currently closed funds will then have to decide whether to reopen or liquidate.

Trends among purchasers

The capital structure of large property transactions, which regularly take place in the shopping centre category as well, is becoming increasingly diverse with the development of more complex forms. Equity contributions and alternative financing channels are gaining in importance in this area.

Local expertise

Investors have recognised that shopping centres are a very complex product. Against this background, we are increasingly observing that international capital is joining forces with local retail specialists. This is happening in two ways: first, investors identify a suitable product and bring in an established market player early on during the examination phase. This player later takes on the asset management and frequently buys a minority stake in the investment; second, investors participate in project developments that have already reached a certain stage (e.g. pre-lettings, building permits etc.). For players such as ECE, this approach is not new. What is new is that the circle of the local partners has expanded, as have the number and origin of the investors that are searching specifically for these investments. This type of cooperation was first evident on a larger scale at the beginning of 2010, and has continued steadily since then. Local players with very good development know-how will particularly profit from this evolution. In this way they will be able to cover funding shortfalls with the required additional equity.

Shareholdings/partnerships

A further trend that is becoming increasingly apparent is the flow of capital from global and European sources that want to invest directly in property, rather than indirectly as in the past, and enter into long-term partnerships. As a rule, they aim to establish joint ventures with equal shares and seek partners that have an equally long-term view. This development opens up interesting possibilities for property owners. Property companies are able to sustain their asset management role and release capital at the same time. A positive side effect is that property investments are also increasingly becoming liquid in Germany, as long as the underlying joint venture agreements fulfil the demands of international and institutional investors. The fact that most sales of investments are not subject to land transfer tax also makes this investment structure very attractive commercially. This has particularly been the case since the land transfer tax was increased in several federal states.

All in all we expect a further interesting year on the German shopping centre investment market. Apparently, the market conditions remain good and shopping centre transactions will account for the majority of the complete retail investment volume once again.

Link to report:

http://www.joneslanglasalle.de/ResearchLevel1/Shopping%20Center%20Report%20-%202011_EN.pdf

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Top Ten Most Attractive Cross Border Retail Destinations in Europe

March 5th, 2012

Posted by: James Brown

EMEA Retail Research and Consulting

Here at Jones Lang LaSalle we have analysed the presence of 150 leading international retailers within 55 European markets and created an index of the top ten most attractive cross-border retail destinations in Europe. The index reveals that London attracts the greatest number of international retailers, whilst the USA ranks number one as the biggest exporter of retail formats. Against the backdrop of a volatile economic climate, retailers’ expansion strategies have sight on the longer term and targeted expansion is still underway.

According to our Cross Border Retailer Attractiveness Index, the top ten most attractive cross-border retail destinations in Europe are;
1.       London
2.       Paris
3.       Moscow
4.       Madrid
5.       Milan
6.       Prague
7.       =Munich, Istanbul, Barcelona
10.     Rome

This polarisation of the retail market, which is occurring both at a national level and within city markets, is being exacerbated by the constrained shopping centre development pipeline, particularly in more mature Western markets. The supply of truly modern space that is suitable for top tier retailers remains tight in most markets. New city schemes that have opened, such as Westfield Stratford in London and Marmara Forum in Istanbul, have proved to be hugely attractive, both to new and existing brands, and consequently to the end consumer. These schemes have also been responsible for ‘importing’ new international brands into their respective markets.

The constrained pipeline is also contributing to cross-border retailer expansion, as Western retailers look outside their home markets for more space and greater sales potential. European retailers such as Desigual, Inditex, Fast Retailing, Bestseller, H&M, G-Star and Superdry have all been in expansive mode over the last 12 months, whilst the USA is now the dominant exporter of retailers, accounting for almost 20% of all international retailer presence. Long established brands such as Starbucks, Timberland and Gap account for a significant proportion of this presence; it is, however, the likes of Forever 21, Hollister, Apple, Disney and Abercrombie & Fitch which have led the Americans almost by ‘stealth’ to pole position. The UK is the second most popular origin of international retailers, followed by Germany, Spain and France.

The top ten largest exporters of retail formats across Europe are;
1.       USA
2.       United Kingdom
3.       Germany
4.       Spain
5.       France
6.       Italy
7.       Sweden
8.       Denmark
9.       Netherlands
10.      Canada

Interestingly, we have identified certain European cities which have both strong market fundamentals and currently, a relatively low international retailer presence. In particular, the Scandinavian markets of Oslo, Helsinki, Gothenburg and Malmo, in addition to some UK, French and German regional cities. These will no doubt begin to feature on the radar for retailers seeking further international expansion.

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Chilly retail winds forecast

February 15th, 2012

Posted by: Jennie Beattie

Jones Lang LaSalle EMEA Research

Following some festive cheer, January saw consumers seek to tighten their spending belts once more. December sales were boosted by a level of pent up demand which was driven in part by “austerity exhaustion”, but with 2012 came a slowdown as we again returned to our cautious ways. According to the latest figures from the British Retail Consortium, sales declined 0.3% on a like-for-like basis, the second worst January performance since the survey began in 1995. As demand slowed, any sales that were made last month are likely to have been driven by aggressive discounting through sales, promotions and incentives. 

It is difficult to see strong rays of light for the year ahead and so we must consider what this will mean for administrations and retail space being returned to the market.

A report by the Local Data Company points out that shop vacancy rates remained stable at 14.3% during the second half of last year. Good news. However, with a bleak outlook for consumers, it is unsurprising that the research group has forecast an increase in vacancy for the year ahead. Rising unemployment in the short term, growing online sales and a significant number of retail leases ending in 2012 will all add to the woes of the high street.

In response to the recently completed ‘Portas Review’, the Government has announced its first initiative to address the problems facing UK high streets. Fledgling town centres have been given the opportunity to bid for a share of a £1million prize fund and the chance to have a dedicated support team, including Ms Portas herself, help revive their fortunes. The scheme has been described as the ‘golden ticket’ for struggling town centres, but £1million will not go far. Although it is positive to see some action being taken by the government to make some of Portas’ recommendations a reality, only time will tell if this latest scheme goes far enough to turn-around some of the UK’s worst affected high streets in these testing times.

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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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