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March 2011 Retail Investment Report 1

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Key Points: …

Key Points:

- Four shopping centre transactions took place in 2010, reaching a total volume of approximately 314 million Euros.

- The first quarter of 2011 has already seen Doughty Hanson purchase two shopping centres from Sonae Sierra for 120 million Euros.

- Additionally, there has been much interest surrounding schemes such as San Cugat and Puerto Venecia as well as the Royal Bank of Scotland loan portfolio.

- Continual demand from international and pan-European investors as well as opportunistic funds is leading to fierce competition for prime assets.

- The sustained gap between purchaser and vendor price expectations, together with a general lack of product in line with investor criteria, is resulting in a continued absence of investment activity.

- Unstructured and badly managed sales processes have damaged the marketability of many good products, leaving them loosely hanging on the investment market whilst investors have moved on to new opportunities.

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  • 1. Research Spanish retail market march 2011 investment report a NEW PARADIGM for 2011 This crisis has represented not only a turbulent time but also fundamental change in the way this industry will be driven in the coming years. Indicators towards the new environment will be: • Shopping centres are meeting points: it is not only about creating a purchasing experience but also a social experience. • Tenant´s interest to be part of a scheme will be a fundamental key driver for its survival. • Scheme´s stakeholders need to learn to live with higher vacancy ratios: transform vacancy into an opportunity to differentiate in tenant-mix. • Purchase/sales processes with a different approach: equity buyers make the rules. • Tenancy schedules already reflect all the bad news: incentives are no longer incentives, they are new rent levels.
  • 2. Spanish retail marketmarch 2011 investment reportKey points Figure 2• Four shopping centre transactions took place in 2010, Consumer confidence index reaching a total volume of approximately 314 million Euros.• The first quarter of 2011 has already seen Doughty Hanson purchase two shopping centres from Sonae Sierra for 120 million Euros.• Additionally, there has been much interest surrounding schemes such as San Cugat and Puerto Venecia as well as the Royal Bank of Scotland loan portfolio.• Continual demand from international and pan-European investors as well as opportunistic funds is leading to Source: ICO fierce competition for prime assets. Figure 3• The sustained gap between purchaser and vendor price Evolution GLA expectations, together with a general lack of product in line with investor criteria, is resulting in a continued absence of investment activity.• Unstructured and badly managed sales processes have damaged the marketability of many good products, leaving them loosely hanging on the investment market whilst investors have moved on to new opportunities.Outlook Source: AECCSales Vacancy ratesAccording to Spain´s National Statistics Institute (INE), the fall The general increase in vacancy over all shopping centresin sales continues to slow which is reflected in the stabilization means that only very prime centres are able to boast the highof consumer confidence, a positive sign that the worst is over. levels of occupancy that investors were used to seeing before 2008. This is equally reflected in new projects where it is now commonplace to see shopping centres open with vacancy rates in the region of 20%.Figure 1 Changes on the Spanish market over the last few years haveRetail Sales 2007-2010 uncovered what can be perceived as real structural vacancy; a vacancy that is likely to remain uncovered into the medium term until the Spanish economy recovers. In today´s climate, shopping centres with vacancy rates of between 5% and 10% can now be considered the norm and not necessarily an indication of poor performance. At the same time, schemes with up to 18% vacancy can be considered as in need of management and only those with over 18% as really problematic. This structural vacancy raises issues for investors when bench marking the quality of a centre and capitalising rental income. Investors are finding new formula for assigning value to vacant* Without petrol stations. space based on higher yields, sustainable ERV (EstimatedSource: INE Rental Value) and offsetting with deferred payments dependent on future letting. 2
  • 3. www.knightfrank.esRent levels RetailersAs the Spanish market moves towards stabilization, in general Knight Frank believes that retailers will drive the future successrental discounts, despite their continual presence, are of schemes, choosing only those centres that meet criteria inbecoming less weighty in terms of both value and duration. terms of location and catchment area and those which offer complementary operators and attractive rivals, hence,Knight Frank estimates that over half of all existing lease commercial mix being as important as ever.contracts have been reviewed over the last 36 months meaningthat income from at least 50% of shopping centres has now Many new international brands such as Apple, Deichmann,been adjusted to market rent. Investors ready to invest over the Ardene, Butlers, Hollister, Abercrombie & Fitch, Cos, Forever 21,next year will do so off lower adjusted rents, offering potential Aldo, amongst others have sought to benefit from adjustedincreases dependent on market recovery and centre rent levels in order to enter the Spanish market. However, manyimprovements. of these brands are having difficulties in finding units that fit space requirements in their first preference locations, as theThe table below shows the average rent levels registered in most prime centres continue to boast high occupation levels.2010 according to different activities. This has created an opportunity for managers of well-located, but less prime shopping centres to offer attractive incentives to Table 1 these new operators, who due to lack of space in the very prime Average rent levels schemes, are now beginning to consider more secondary centres where space is available. This is allowing managers to Category Average 2010 ERV €/sq m/month substantially improve commercial mix by offering a differen- Auto Center 12 - 13 tiating element in terms of new brands in order to compete with Cinemas 10 - 11 the more prime and fully let schemes. DIY 10 - 11 The experience and capacity to manage vacancy correctly can Electronics 12 - 13 create an excellent opportunity to improve the attraction power Fashion 20 - 22 of the scheme, through the introduction of new anchor tenants Food 10 - 11 and original retailers, specialization or refurbishment. The opportunity to specialize in specific activities is a concept that Gym 16 - 17 has been little developed on the Spanish market, but one which Household 15 - 16 allows the creation of a highly differentiating element. Equally, Jewellery 53 - 59 refurbishment which permits the centre to offer a more modern Leisure 9 - 10 and user friendly design, can allow smaller schemes to offer customer convenience as a way of competing with larger Phone 54 - 60 centres. Both new projects and refurbishments need to take Restaurants 23 - 25 into account that shopping centres need become meeting Services 25 - 28 points: it is not only about creating a purchasing experience Sports 13 - 15 but also a social experience which is increasingly important to consumers. Toys 14 - 15Source: Knight Frank 3
  • 4. Spanish retail market2011 investment report Investment Demand The continued absence of investment activity is by no Many investors consider means attributable to lack of demand, as despite the this year as a window of country-risk perceived outside of Spain, international and opportunity to invest in pan-European investors remain interested in seeking well Spain, taking advantage of consolidated, dominant shopping centres, located in the lower rents and with the larger Spanish cities, whilst opportunistic funds continue to expectation of being able to be in pursuit of discounted prices. purchase off higher yields than those now available in Despite the continuous, albeit gentle, decline in sales, the other traditional European general view is that shopping centres remain a good long markets. term investment option, particularly in times of recession, as although private consumption remains lower than in Some investors are previous years, consumers do continue to shop. beginning to readjust investment criteria to the This has been seen throughout the rest of Europe where new market situation to shopping centres remain a key investment. Direct include centres with investment in retail assets in Europe has been estimated to vacancy that offer value be up by almost 70% compared to 2009 which has resulted added opportunity. in a general yield compression across European markets However, it remains difficult over 2010. for investors to obtain adequately priced finance for the purchase of non- core products to be worthwhile.Figure 4Prime Shopping Centre Yields in Europe (%)Source: Knight Frank 4
  • 5. www.knightfrank.comSupply Transactions and YieldsChanges on the Spanish retail market mean that only very Four shopping centre We should also note theprime centres are able to boast the occupancy rates transactions took place in sale and lease backgenerally sought by investors. This is creating fierce 2010, reaching a total transactions carried outcompetition for this type of product. An example of this is volume of approximately by Eroski, amounting tothe frustrated sale of prime shopping centre San Cugat in 314 million euros which is over 245 million euros toBarcelona, owned by Altarea. This deal has generated down by almost 40% in investors WP Carey, AEWmuch interest amongst traditional Spanish shopping terms of volume when Europe and Tristan Capitalcentre investors as well as new players. However, despite compared to the four Partners, and Rockspring.aggressive offers reflecting yields in the region of 6%, the transactions which took These transactionstransaction has not yet been completed due to the price place in 2009 (500 million included the transfer ofgap that still exists between vendor and purchaser euros approx.). almost 50 supermarketsexpectations. as well as 2 retail In addition to shopping warehouses.In general, lending banks have not created the distressed centre transactions twoopportunities that opportunist funds have been expecting retail parks changed The first quarter of 2011and have opted to refinance debt before foreclosing on ownership in 2010 has seen the purchase ofassets. However, as refinancing could become more amounting to a further two shopping centres byexpensive, this could lead to a change in the dynamics of investment volume of Doughty Hanson for 120the market with banks increasingly considering the sale of approximately 53 million million Euros from Sonaeexisting loan portfolios at discounted prices and vendors euros. It is worth noting in Sierra. Plaza Eboli ishaving to take steps towards closing the price gap. particular the transaction located in Pinto in the of the Meixueiro retail South of Madrid and has aThe exchange of outstanding loan portfolios is providing a park in the north western GLA of approximatelyplatform opportunity for new funds and international town of Vigo en Galicia 31.000 m², including theinvestors looking to enter the Spanish market or to increase which was purchased by owner operated Eroskitheir exposure in Spain; their secondary aim, in many cases, Henderson for approxi- hypermarket (11.400 m²being to recover possession of the asset in the future. mately 35 million euros at approx.). El Rosal isDespite the complicated legal process involved in this a yield in the region of located in the town ofrepossession, this type of process has created speculation 7%, confirming the Ponferradaconcerning potential direct asset transactions. demand for this type of (northwest of Spain) with product. a GLA of approximatelyThere still remain value added opportunities for experienced 51.000m² and is anchoredinvestors to invest in well located secondary centres with by a Carrefourpotential to improve tenant mix via re-letting and moderni- hypermarket. The twozation management plans. schemes are fashion based and include brands from the Inditex and Cortefiel groups, as well as H&M and C&A. Both suffer from vacancy rates of between 15-25%. The blended yield for the two assets is estimated at 7.75%. 5
  • 6. Spanish retail marketmarch 2011 investment reportTable 2 This transaction shows thatTransactions 2010 experienced investors remain confident in the Spanish retail market and are seeingShopping Centres opportunities to acquire value added assets involvingVendor Purchaser Shopping Centre Location GLA Volume* secondary cities or second-Multi Corporación Corio C.C. Espacio Torrelodones Torrelodones, Madrid 18.970 65.000.000 tier shopping centres whichAvantis Alpha Tiger Centro comercial H2Ocio Rivas Vaciamadrid, Madrid 49.516 83.300.000 require management,Eroski ING Centro comercial Bilbondo Basauri, Vizcaya 37.834 50.000.000 particularly with regards toEroski Deka Centro comercial Ballonti Portugalete, Bilbao 52.523 116.000.000 vacant space.Retail Parks Additionally, Eroski are currently in advancedVendor Purchaser Shopping Centre Location GLA Volume* negotiations with rivalFamily Office Confidential Parque Ronda Sur Murcia 9,247 18.000.000 supermarket operator Leclerc for the purchase of 7Confidential Henderson Meixueiro Vigo 18.200 35.000.000 supermarkets in Madrid,* Knight Frank estimated volume whilst there continues to be much interest surroundingTable 3 deals such as San Cugat,Transactions 2011 Puerto Venecia, both still pending closure, as well asShopping Centres the Royal Bank of Scotland loan portfolio.Vendor Purchaser Shopping Centre Location GLA Volume *Sonae Sierra Doughty Hanson Centro comerical Plaza Eboli Pinto, Madrid 31.000 35.000.000** In the latter, Knight FrankSonae Sierra Doughty Hanson Centro comercial El Rosal Ponferrada 51.000 85.000.000 advised an international* Knight Frank estimated volume financial services firm in their* * Transaction does not include Eroski hypermarket or cinemas – GLA transaction estimated at 17.600 m² Due Diligence, providing opinion and advise on over 12 Figure 5 retail assets, held as loan Investment volumes securities, located throughout Spain, with a total GLA exceeding 185.500 sqm. These movements, together with the transaction carried out by Doughty Hanson and the purchase of the Ballonti scheme in Bilbao by Deka at the end of last year, underline the renewed interest and confidence from International and German funds for Source: Knight Frank Spanish retail.6
  • 7. www.knightfrank.es Figure 5 Yield differentialsAs in our previous report,Knight Frank predicts thatyields will continue toremain stable, prime yieldscontinuing at 7% andsecondary at 8%. Returnson 10 year governmentbonds compared to returnson commercial propertyshow that the spreadbetween debt and realestate assets is narrowing.The expected rise ininterest rates will againdecrease this gap. A lessermargin between bonds andprime office yields makes Source: Knight Frankthe purchase of retailassets increasinglyattractive. 7
  • 8. Spanish retail marketmarch 2011 investment reportAs we have seen, increase Figure 6 Prime Yields - 10 years government bonds yieldin investment activity hasalready led to yieldcompression throughoutEurope, making Spanishreturns increasingly moreappealing. This willcontinue to generatesufficient interest to keepyields stable and couldeven lead to yieldcompression over the next12 months particularly inlight of the competition forprime assets. Potential forasset management,alignment of priceexpectations and finance Source: Knight Frankwill remain key totransactions over 2011. Investment Retail Mario Verdyguer Duo José Díaz Mérediz-Hevia www.knightfrank.es Head of Retail Investment - MRICS Retail Partner Suero de Quiñones, 34-36 mario.verdyguer@es.knightfrank.com jose.diaz-merediz@es.knightfrank.com 28002 - Madrid T: +34 91 59 59 000 F: +34 91 575 73 23 Elaine Beachill Rosa Madrid Investment Retail - MRICS Retail Partner elaine.beachill@es.knightfrank.com rosa.madrid@es.knightfrank.com © Knight Frank 2011. This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no Mario La Piedra legal responsibility can be accepted by Knight Frank Retail or Knight Frank Spain for any loss or damage Valuations Retail resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank Spain in relation to particular properties or projects. Reproduction of this report in mario.lapiedra@es.knightfrank.com whole or in part is allowed with proper reference to Knight Frank Spain.