BROLL RETAIL BAROMETER

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1 BROLL RETAIL BAROMETER MAXIMISING PROPERTY POTENTIAL Review of Fourth Quarter 2011 RESEARCH Key facts Prime shopping centres Gross rentals Cap rates Vacancies Prime high street Gross rentals Cap rates Vacancies Economic overview Globally, we are finding that corporations are shifting their focus to include Asia, Latin America and Africa in their medium-term expansion plans. The complexity and variation of the diverse region means that a uniform approach would not be successful, as corporates would face considerably different and unique challenges in each region. Broll s international affiliate, CBRE, states that widespread global social, political Retail capitalisation rates and economic unrest does not deter companies from locating in challenging markets; the key is to have the right strategy in place to ensure a balance between risk controls and getting things done. Broll has received renewed interest from a variety of foreign and local retailers looking to expand into Africa. This year will be a very interesting one to monitor how this interest translates into action. Nominal retail sales Q % Prime Yields for Retail Properties in Europe 14% Highlights Sales growth in Europe remained flat at 0.1% Eurozone* countries remained under pressure, with negative sales growth of 1.6% South African nominal retail sales figures showed growth of 11.4% for Q4 compared y-o-y Gross rentals in street- front shops remained flat Movement in capitalisation rates remained limited Yields 12% 8% 6% 4% 2% 0 London West End Amsterdam Zurich Brussels Frankfurt Paris As is the case in South Africa, European prime goodquality retail stock continues to be in high demand with investors. The focus remains on key markets and Global retail sales growth Berlin London City Barcelona Rome Prague Warsaw Dublin Cape Town Johannesburg Tel Aviv Istanbul Dubai Durban St Petersburg Source: CBRE and Broll areas/countries that have more stable economies. In South Africa, capitalisation rates remained flat over the last quarter of Overall in South Africa, the nominal sales growth in centres managed by Broll that are larger than m 2 has been fantastic, averaging 11.4% for Christmas trading across Europe (EU-27) remained lifeless, with an increase of only 0.1% y-o-y however, the Eurozone* had even worse results with a negative growth of 1.6% for the same period. 1 PART OF THE CBRE AFFILIATE NETWORK

2 Russia showed buoyant festive-season retail sales growth of 9.5%, due mainly to that country s growing middle class. Poland also performed well, with 8.6% growth for the same period. Italy, Portugal and Spain showed the worst results, with a negative growth rate of, 8.8% and 5.3% respectively. Some new market trends that have developed in the Eurozone include extended trading hours as a proposition to compete for the increase in consumer shoppers. In the countries that have allowed for this, there has been an increase in interest from international retailers wanting to enter the markets. However, it is doubtful that extended trading hours will boost the sales levels in Italy and Spain. Another trend is the continued failure of retailers, with a variety (most of them UK based) having to close shop in this tough economy. This was due mainly to strong competition in the market, high occupation costs and the demands of private-equity ownership of retailers. Retail sales vs online sales Retail sales and online sales/mail order sales EU % 12% Yields 8% 6% 4% 2% 0% -2% -4% Nov 05 Nov 06 Nov 07 Nov 08 Nov 09 Nov 10 Nov 11 All retail Online/Mail order Source: Eurostat (3-month rolling average) In Europe, the main driver of retail sales growth was ecommerce, which grew at 8% compared to The main drivers were the UK, Sweden, Russia and the Czech Republic. Research produced by CBRE and affiliates investigating the transactional capabilities of more than 300 global retailers online showed that there are still big differences by country, but also that the number of retailers that offer a transactional website increased substantially over the last 12 months. The CBRE survey showed that the UK (44%) has the highest proportion of retailers that can deliver goods to consumers, followed by Sweden with 35% and Poland at 34%. A survey conducted by Romir, an independent research company, showed that during the last two weeks of December online sales increased by 30-40% compared to the same period in It is also interesting to note that retailers in the UK did not show an increase in transactional capability. This could be an indication that these retailers moved their focus to other markets in 2011, mainly because of the low consumer expenditure growth in the UK. Some European retailers have indicated that crossborder expansion is the key to achieving their growth targets, and, for most, an online transactional offering is a key element of this expansion plan. The latest research produced by Internet World Stats has indicated that Africa represents 6.2% of world internet users. The top internet user countries in Africa are Nigeria with 45 million, followed by Egypt with 21.7 million, Morocco with 15.7 million, Kenya with 10.5 million and South Africa in the fifth place with 6.8 million users. Most of the national retailers in South Africa now offer a transactional website. The success of these sites and the influence they will have on total retail sales still needs to be determined. Broll Research has tested a variety of these sites and are happy to report that they have been very effective and that delivery was prompt and efficient. It will be very interesting to see what role online sales will have in retail sales in the future, with more and more South Africans getting access to the internet and the number of smartphone users increasing daily. 2

3 Nominal retail sales Thanks to the performance of Men s Fashion at 16.7% growth, nominal sales for Apparel grew by 10.3% in the fourth quarter of 2011 buoyed by an 11.3% spurt in December when compared y-o-y. Accessories were the worst performer over the Nominal Sales Growth in Apparel y-o-y (%) same period and remained in a negative growth rate of 0.2%. This is an indication that this section of the merchandise category remains under pressure and we predict that this trend will continue in % 25% 20% 15% 5% 0% - -15% Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Children s fashion Accessories Men s fashion Ladies fashion Unisex fashion Source: Broll Food accounts for approximately 19% of all space occupied in Broll-managed centres. Bottle stores had the highest monthly sales growth at nearly, followed by Food Services (7.2%), Grocery/Supermarkets (6%) and Food Speciality (4%) compared to December In his 2012 Budget Speech, Minister of Finance Pravin Gordhan announced R9.5 billion in personal tax relief to private individuals, with most of this aimed at the lower LSM groups. The question remains how this will influence shopping patterns for retailers aiming at the lower end of the market. The financial results of these retailers has shown that this section of the market has performed very well and is set to continue on a similar trend for Rentals Gross High Street Prime Rentals 400 Rand per m 2 per month (R) Durban Johannesburg Cape Town Pretoria Bloemfontein Source: Broll (These rentals are gross and reflect prime 80m 2 to 100m 2 space) 3

4 High Street gross prime rentals remained fairly stable during 2011, with the exception of Bloemfontein, which experienced a very active period with vacancies declining remarkably Prime Retail Rentals in Rand/m 2 per Month The rental increase is due to the supply of space declining and continued increase in demand. Rand per m Amsterdam Barcelona Berlin Brussels Cape Town Dubai Dublin Durban Frankfurt Istanbul Johannesburg London City London West End Paris Prague Rome St Petersburg Tel Aviv Warsaw Zurich Source: CBRE and Broll This trend is similar to that in Europe (EU-27), where the CBRE High Street Retail Index had hardly any movement in the last quarter of High Street continues to be the prime retail space in Europe and demand for such space remains high. However, in some areas retailers continue to negotiate lease terms and push for higher incentives such as increased tenant installation allowances, and this is influencing the time it takes to conclude deals. The graph above gives an indication of the prime rental levels achieved across Europe Middle East and Africa, London s West End has the highest rental rate, in excess of R6 400 per m 2. Gross Shopping Centre Prime Rentals 600 Rand per m 2 per month (R) Durban Johannesburg Cape Town Pretoria Bloemfontein Source: Broll (These rentals are gross and reflect prime 80m 2 to 100m 2 space) Shopping centre gross rentals in Durban have followed a downward trend since the second quarter of 2011, due mainly to the increase in new stock coming online over the last 24 to 36 months. Weak economic conditions in the region, leading to a reduction in disposable income, has resulted in a lowered demand for goods and space. However, Bloemfontein experienced an increase in rentals over the same period due to an increase in demand for space and retail offerings with limited prime space available. Smaller retailers continued to be under pressure and, based on current trends in Europe, South Africa could see the closure of some of these stores as the weakening of the global economy continues. 4

5 In conclusion Nominal sales growth continued to be positive for the fourth quarter of Capitalisation rates of prime retail properties remained stable for the same period. Globally and locally, gross prime rentals remained flat, with very little movement, and this is set to continue for the next six months of Operating expenses continued to be a point of discussion, with both landlords and tenants feeling the effects of the increases. Effective management of this is becoming a priority in all shopping centres. Retailers are more educated about the costs involved and are demanding that management agents and landlords make sincere efforts to effectively reduce the costs to both parties. Online retail sales are increasing in popularity and contributed towards retail growth in Europe. It will be noteworthy to see the effect online sales has on South Africa s retail sales figures in the future. *The Eurozone is an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro as their common currency and sole legal tender. The Eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Sources: Oxford Economics, CBRE, Broll, Eurostat FOR MORE INFORMATION CONTACT Sanett Uys - GM Group Research and Marketing 14th Floor, The Terraces, 34 Bree Street Cape Town 8000, South Africa t: +27 (0) e: suys@broll.co.za For more information on market characteristics and trends, read our reports at Disclaimer Broll Property Group has taken every care in the preparation of this report. The sources of information used are believed to be accurate and reliable, but no guarantee of accuracy or completeness can be given. Neither Broll Property Group, nor any CB Richard Ellis company, nor any director, representative or employee of Broll Property Group, accepts liability for any direct or consequential loss arising from the use of this document or its content. The information and opinions contained in this report are subject to change without notice. No part or parts of this report may be stored in a retrieval system or reproduced or transmitted in any form or by any means, electronic, mechanical, reprographic, recording or otherwise, now known or to be devised, without prior consent from Broll Property Group. 5