June 211 Shopping Centre Report 21 Q1 211 The tendency to postpone openings continues, due to the aftermath of the economic crisis, as well as to the difficulty encountered by tenants and developers in securing loans from banks. As a result, the majority of projects are on standby. Many retailers have expressed interest in the new opportunities on the market, particularly primary projects, but development activity, which has slowed during the last two years as a result of economic events, is having trouble getting back on track. Investors interest in the Italian market remains constant, but they continue to be extremely selective in choosing investments, preferring consolidated assets with a history.
2 Shopping Centre Report 21-Q1 211 June 211 Shopping Centre Report Economic overview in Europe According to the International Monetary Fund, global expansion has slowed, mainly due to several risk factors that have emerged in the more developed economies. While vigorous growth has been confirmed in the emerging economies and, among advanced countries, in Germany, forecasts on the economic performance of the United States and of the peripheral European countries indicate a worsening trend. Consumer inflation in the advanced countries has been suffering from the effects of hikes in raw material prices since autumn, predominantly fuelled by growing demand from the emerging economies; however, it is contained by the ample margins in unused capacity, leading to only moderate price variations net of the energy components. Monetary policies continue to be expansionary, with further increases in interest rates by the ECB envisaged for 211. Growth continues in the Euro Zone. According to Eurostat, GDP was up.8% during first quarter 211 compared to the prior period and 2.5% compared to the same period in 21. The professional operators surveyed by Consensus Economics in 21 indicate 1.7% growth in GDP for the Euro Zone, with a slightly higher growth rate expected during the year, in line with recent projections by the Eurosystem. Consumer inflation increased to 2.7% in May, mainly due to the increase in energy prices. Indicators on inflation forecasts for the year remain higher than the 2% target rate set by the ECB. Economic overview in Italy According to ISTAT figures, gross domestic product (GDP) at the end of 21 increased.1% compared to the prior quarter and 1.5% over fourth quarter 29. Forecasts for 211 call for.9% growth, slightly below the EU average. Consumption by households recorded a slight recovery, returning to a positive variation (+.6% in 21 compared to 29), also as a result of a still moderate increase in prices, 1.5% compared to the prior year. Industrial production recorded positive results at the end of the year, with 5.4% growth in 21 compared to 29. However, this growth is more fragile as a result of the lack of increase in new jobs, a phenomenon emerging in the post-crisis recovery of all Western countries (jobless growth). In fact, Italy recorded an unemployment rate of 8.7% at the end of 21, the highest in recent years. Forecasts for 211 confirm this trend, leading to doubts on the likelihood of growth in consumption 1. Confirming the trends underway from the beginning of the crisis, the decline in employment is sharper among the younger segment. With expectations of a slow return to pre-crisis production levels, companies prefer more flexible contracts rather than full-time permanent ones. The real estate investment market showed some recovery in 21, albeit slight and with numbers that are a far cry from the pre-crisis boom. Investor sentiment with respect to our country is improving, although foreign investors are still finding it difficult to trust investments in Italy, due more to the political and regulatory uncertainty rather than to the economic situation. Stock and new openings At the end of 21, there were slightly over 1 retail complexes in Italy, for a total GLA of nearly 16 million sqm. Traditional shopping centres account for a very high percentage of stock, with 14 million sqm or approximately 88% of the total. The remainder consists of factory outlet centres (56 thousand sqm or 3.5% of the total), retail parks (1,19 thousand sqm or 7.5%) and other types (1%), including leisure. A total of 18 new centres were opened in 21, for a total of approximately 415 thousand sqm of new GLA, down 47% in terms of sqm compared to openings in 29. Of these new centres, 13 are traditional shopping centres that combine a food anchor and a gallery of shops, while one is a factory outlet centre, 3 are retail parks and 1 is a leisure centre. The density of shopping centres in Italy has grown over the years to approximately 268 sqm per 1 inhabitants. However, this figure differs from region to region. The northern regions in particular still have a higher density than the Italian average, with 34 sqm per 1 inhabitants. Regions in Central Italy have a density of 254 sqm, while those in the south have a density of 177 sqm, showing slow but steady growth. The Italian market continues to be dominated by small retail centres (between 5, and 2, sqm of GLA) and, after several years of increases in the average area, the opposite trend is now underway. While the average area was approximately 18, sqm per centre at the end of 27, today it is approximately 16, sqm. The pipeline shows a decline in larger projects, as the primary catchment areas 1 Source: Consensus Forecast, January 211
Shopping Centre Report 21-Q1 211 June 211 3 have nearly reached saturation and there is little room for new regional centres. However, these are still lacking in some areas, like Milan, which does not yet have a large regional centre, despite the ample supply of centres of various sizes and types. Figure 1: Density of retail schemes by region Mq/1 ab. 45 4 35 3 Average Italy 269 25 2 15 1 Retailer demand The overall demand for new space grew at a significant and steady rate throughout the year, also thanks to the arrival in our country of large international companies that introduced new brands (for example, the recent opening of C&A in I Gigli shopping centre in Florence, Hollister at the Orio Center, Le Gru and Euroma2, and Gap and Banana Republic on Corso Vittorio Emanuele in Milan). This provided an incentive for Italian companies to resume growth, in order to avoid losing the best locations to these foreign brands. New openings focused on existing centres, as there are few large projects among the new developments and, with a view to reducing risk, on locations with a consolidated history. 5 Basilicata C alabria Campania Em ilia R om agna F riuli Venezia Giulia Lazio Liguria Lombardia Figure 2: Density sqm of GLA per 1 inhabitants Marche M olise Piemonte Puglia Sardegna Sicilia Trentino Alto Adige Toscana Trentino Umbria Valle d'aosta Veneto Many retailers have demonstrated interest in new opportunities on the market, particularly in major projects, but development activity, which has slowed over the last two years as a result of the economic crisis, is having a difficult time picking up speed. As a result, many retailers are forced to settle for space that is not in line with their requirements, due to the lack of new and more appropriate premises. Shopping Centre Density >4sq.mt 3 4sq.mt 2 3sq.mt 15 2sq.mt 5 15sq.mt Valle d Aosta Piemonte Retail Schemes Density sq.m/1 inhabitants, Q4 21 Lombardia Friuli Venezia Giulia Veneto Emilia Romagna Marche Toscana Abruzzo Umbria Molise Lazio Campania Sardegna Sicilia Basilicata Calabria Puglia As mentioned above, several new international brands (predominantly North American) opened up retail locations around the end of 21, confirming the continued interest in high street locations. However, the demand for space is concentrated in Northern Italy (apart from Milan, the areas of Bologna and Florence are also of interest, followed by Rome), while locations in the centre and south are less appealing. Retail parks are the focus of attention by retailers specialised in the medium-low level furniture and fashion segments. The secondary do-it-yourself brands are developing new sales points in areas not directly covered by market leaders but sufficient to justify a mediumsized store.
4 Shopping Centre Report 21-Q1 211 June 211 Figure 3: Retailer demand by type of scheme Retailers demand on prime SC Retailers demand on secondary SC The following graph shows the maximum, minimum and average values by size, for a representative sample of prime and secondary centres: Very strong Good Stable Retailers demand on prime RP Retailers demand on secondary RP Difficult Poor Rents Rents recorded throughout the last year at the European level showed overall stability, in terms of both large-scale retail as well as the high-street segment of historical centres. This stability continued during first quarter 211, and we expect it to keep up over the next few months, as operators, backed by newfound contractual power, are not willing to accept rent increases at the moment. Instead, landlords have now reduced the incentives requested, no longer providing contributions for fit-out costs if not to large international groups. The graph below illustrates the European situation of rents for prime shopping centres in Q1 211. Figure 4: Prime rent in European shopping centres, Q1 211 1272 Finland 825 296 Russia 1,2 Sweden 2824 77 Ireland United Kingdom Netherlands 18 1,6 18 1,2 Belgium Poland Czech Republic Germany 2, 1, 6 Austria France Hungary 9 18 9 Romania 1,2 Italy Portugal Spain 96 Turkey Prime Shopping Centre Rent / sq m per Annum Q1 211 Figures 5: Rents for shopping centres in Italy /sq.mt/year 11 15 1 95 9 85 8 75 7 65 6 55 5 45 4 35 3 25 2 15 1 5 985 757 588 579 467 389 723 585 52 59 37 35 <1sqm 1-3sqm 3-1sqm >1sqm What emerges is substantial variability in rent from centre to centre, despite having taken into consideration structures of similar quality levels for the survey. The misalignment is particularly evident in the category of small shops (under 1 sqm), as there are numerous variables to take into consideration (layout of the centre, position of the unit, type of goods sold, type of shopping centre, etc.). Developments 464 49 296 223 21 164 156 98 The tendency to postpone openings continues, due to the aftermath of the economic crisis, as well as to the difficulty encountered by tenants and developers in securing loans from banks. As a result, the majority of projects are on standby Despite this, the pipeline in Italy is substantial, with completion of some 1.4 million sqm of GLA envisaged for 211, while forecasts call for an additional 2 million by the end of 212, subdivided between traditional shopping centres, retail parks and factory outlet centres. These values are clearly a result of the postponement of openings that had been envisaged for prior years. Therefore, it is now more than ever necessary to keep a close watch on the market and bear in mind that many projects may undergo further postponement in the years to come. Although they already boast the highest GLA density per 1 inhabitants, the northern regions 297 329 186 114 Maximum Average unweighted Minimum Prime SC Secondary SC
Shopping Centre Report 21-Q1 211 June 211 5 account for the largest portion of the total pipeline up to 212, at 49%, followed by the south with 34% and the centre with 17%. The brisk demand at the beginning of this year by retailers for space in quality centres is still seeing a lack of adequate supply, while it is fundamental for developers to have solid support from pre-letting activities in order to minimise risk. This lack of supply is forcing operators to consider space in secondary locations and in regions of the south, a trend that was absolutely unforeseeable at the beginning of the crisis. Figure 6: Pipeline by region 21 (+21%), due to the completion of several key transactions, such as the purchase of the Trafford Centre in Manchester (United Kingdom) by Capital Shopping Centres for over 1.8 billion. A total of 12 transactions with values of over 1 million were completed in Europe during the quarter. Investment activity focused predominantly on the United Kingdom and Germany, which accounted for 77% ( 6.2 billion) of the total volume transacted in Q1. The German market continues to be one of the most sought after markets by investors, with over 2 transactions completed, including acquisition of the 42 Metro Cash & Carry wholesale chain properties by private American investor Cerberus for 7 million. Mln di Mq 4 4 3 3 2 2 1 1 Stock Pipeline al 214 The issuance of new bank loans and the collection of equity have injected new liquidity into the market, and this has driven crossborder investment. We expect the current positive trend at the European level to continue throughout the region, with a consequent increase in the volume of capital going towards the European markets. Abruzzo Basilicata Calabria Campania Emilia Romagna Friuli Venezia Giulia Lazio Liguria Lombardia Marche Molise Piemonte Puglia Sardegna Sicilia Toscana Trentino Alto Adige Umbria Valle d'aosta Veneto Figure 7: Retail investment in Europe by country, 21 Sweden 4% Italy 5% Spain 3% Other 8% UK 31% Poland 6% Investments Direct investment in the European retail sector amounted to 2.7 billion in 21, up 68% compared to the 29 total. A total of 436 transactions were completed, with an average volume of 47 million. Most of the activity was recorded in the core markets of Western Europe, driven by a constant focus on liquidity, stability and transparency. The United Kingdom continues to be the largest retail investment market, with 6.5 billion transacted, followed by Germany with 4.7 billion, representing the largest market in continental Europe. Direct investment in retail properties in Europe during the first three months of 211 reached 8.4 billion, +48% compared to the same period in 21 ( 5.4 billion). The volume of investments during the first quarter of the year also exceeded the value recorded in Q4 Netherland 8% France 12% Source: Jones Lang LaSalle Research Germany 23% The Italian retail sector recorded 1.7 billion in investments in 21, corresponding to 27% of the total invested in all sectors and down 23% compared to retail investment in Italy in 29. Two large transactions accounted for a very sizeable portion of the total: the sale of the Porta di Roma shopping centre and the transaction involving Le Vele shopping centre in Cagliari together amounted to approximately 54 thousand or half of the total. Private investors in Europe were the most active, accounting for 75% of the total volume. In Italy, we are seeing only a few international investors. Furthermore, Italian REITs generally prefer
6 Shopping Centre Report 21-Q1 211 June 211 to focus their investments on the office sector, which is easier to manage and understand. The type of investor in 21 was varied, ranging from property companies to institutional investors and funds. Activity by private investors is also worthy of mention, particularly as regards high-street properties (such as the sale of Coin in Piazza V Giornate in Milan and Zara in Corso Vittorio Emanuele, acquired by the Ponte Gadea Group). billion Figure 9: Growth in retail investment in Italy 3 2 1 5 25 n. of transactions Figure 8: Retail investment in Italy by investor type, 21 Unlisted REIT 7% Third Party Managed Fund 14% Institution 28% Unknown 1% Private Property Company 46% While investors initially focused their attention on areas situated in the north and centre of the country, with a steady waning of interest in the south, transactions involving southern locations were recorded during the second part of the year and the beginning of the current one, leading to hopes for greater interest in this area, which offers good quality assets with good performance (income), albeit still lower, in absolute terms, than locations in the north. There is a continued lack of quality product across all regions, especially in the north, where it is increasingly difficult to identify investment opportunities with the above-mentioned requirements and characteristics. The lack of quality supply and the continued scarcity of investment products in the pipeline have reshaped this segment. The traditional shopping centre is the product most appealing to investors, who are seeking a prime product with low risk and, in general, defensive investments in highly-liquid products. The lack of prime assets has resulted in a squeeze on yields for this type of property and a decompression for secondary assets, less in demand. Figure 1: Italy - Investment by sector 29 21 2 18 16 14 12 1 8 6 4 2 22 23 24 25 26 27 28 29 21 Q1 211 volume number 29 21 Office Retail Logistics Hotel Other The trends that emerge from the observation of investment activity show market polarisation (prime vs. secondary) and the absence of investor attention in the south of Italy. A new element on the market is the establishment of operative partnerships with retail specialists, especially for complex assets (for example, the Allianz Corio JV for Porta di Roma, or the JV set up in Molfetta between Orion Capital Managers and Foruminvest).
Shopping Centre Report 21-Q1 211 June 211 7 First quarter 211 began on a very positive note compared to performance during the same period of the prior year, with approximately 213 million invested, compared to 13 in Q1 21. High-street properties (not included in the numbers and graphs reported) account for a very substantial portion of this amount, approximately 56 million, headed by the sale of Milan s Rinascente for over 47 million. Prime net yields underwent a slight decline during the last year, particularly as regards shopping centres (down to 6% from 6.25% of the prior year), while the decompression of yields for retail parks and leisure products continues. Figure 12: Supply of prime product on the market Very strong Good Stable Difficult Poor Figure 11: Growth of Prime Net Yields 8,8% 8,3% 7,8% 7,3% 6,8% 6,3% 5,8% 5,3% 4,8% 4,3% 26 27 28 29 21 211 Centri Commerciali Retail Park Leisure Centre There is growing interest by international investors in the Italian market, despite continued selection of target products, which significantly narrows the range of investment opportunities. In fact, numerous secondary products remain unsold, despite the sharp reductions in asking prices by sellers. Investors are seeking mainly core products and, in any case, existing shopping centres dominant in their catchment areas and backed by solid economic and financial data. Consequently, a development, and any newly-constructed centre in general, is considered to be a risky investment product, and only few investment opportunities in this category succeed in attracting international investors, mainly frightened by future performance and sustainability of rents and operating expenses. Retail parks are considered risky investments, but the sale of the Romagna Retail Park in Savignano sul Rubicone, which took place at the beginning of this year, represents an important transaction for the Italian investment market. First, because retail parks have been a particularly penalised asset during the recent market crisis phase (the last transaction involving a retail park dates back to the end of 28), but also because it demonstrates that there is always a market for quality products and, if properly managed, consolidated and positioned with respect to their catchment area, they are able to attract the interest of institutional investors who perceive the value created and adequately appreciate the strategic choices made during the years. Outlook What does the sector hold in store for the upcoming months? From a development point of view, we will continue to see a slowdown in openings this year. It will be a year of transition, with demand for new space picking up, no change in supply and stabilisation of rents, particularly for prime and subprime products. Investors will focus their attention on active management of properties, in order to ensure returns through development of the assets, as these will not be provided from the compression of yields or from growth in rents. The trend of establishing JV and partnerships between retail specialists and pure financial investors will continue in upcoming years, as already partially occurred in 21.
8 Shopping Centre Report 21-Q1 211 June 211 Three important transactions took place during the first quarter of this year, involving Klépierre, Orion Capital Management and Union Investment, demonstrating interest by a wide range of international investors in acquiring retail properties in Italy. With the exception of the Romagna Retail Park in Savignano sul Rubicone, investors interest will continue to focus on shopping centres. The number of Italian investors and funds interested in complex multi-tenant retail products and therefore active on the market remains limited. Of the approximately 4 active funds and investors, less than 1% can be classified as Italian capital, demonstrating the current lack of comprehension by our domestic investors with respect to a sector defined as perhaps too sophisticated or ultraspecialised. The gap between prime shopping centres and secondary products, in terms of value and expected profitability, continues to widen, with the motto being: Prime is King. Secondary products, even good-quality ones, will undergo more prolonged stagnation in yields, and if the current landlords wish to sell, they will have to adapt their price expectations accordingly. This is largely due to the high perceived risk of secondary products with respect to income security, particularly in the presence of difficulty in paying rent, poor performance in terms of income and the perceived low liquidity of the property itself. The gap between the price expectations of sellers and buyers will narrow for second and third-quality products (retail parks, proximity centres and assets with weak fundamentals in limited catchment areas). The future of retail In May of last year, through its interactive web site, Jones Lang LaSalle launched Retail 22, an analysis of the global retail panorama for the next 1 years. Retail 22 is making its appearance ten years from Jones Lang LaSalle s publication Retail Future, 21, a report that envisaged many of the trends that contributed to changing the retail world from 2 to 21. The analysis examines all of the factors - economic, technological, demographic and cultural - that will likely have an impact over the next 1 years on the real estate market of a sector, namely that of retail, which is constantly and rapidly changing, and poses a question: what does the future hold in store and how will the major players keep up? Over the next ten years, the retail market will undergo a period of critical change. Conditions for landlords, occupiers, developers and retailers over the next decade will be more difficult compared to the scenario of the last ten years, but there will also be huge opportunities for those who are able to identify the signs of change in advance. At the end of the recession, the retail sector will increasingly represent an important segment of our economy, driving growth, providing employment and developing a new dynamic context for consumers. For more information: www.retail 22.com
The objective of this report is to monitor development of the retail sector in Italy. Created thanks to the reliability and leadership of Jones Lang LaSalle in Europe, it highlights the key factors of the Italian market in 21 and during first quarter 211, along with the main trends expected over the medium term. The Retail Agency Department, the Retail Capital Markets team and the Research Department would be more than willing to answer any queries and provide additional information on the retail sector in Italy. Contacts Davide Dalmiglio National Director Retail Capital Markets Milan + 39 () 2 85 86 86 649 davide.dalmiglio@eu.jll.com Simone Burasanis Associate Director Retail Agency Milan + 39 () 2 85 86 86 63 simone.burasanis@eu.jll.com Elisabetta Terzariol Senior Analyst Research Milan + 39 () 2 36 1 578 elisabetta.terzariol@eu.jll.com Shopping Centre Report 21 Q1 211 June 211 OnPoint reports by Jones Lang LaSalle provide key real estate market indicators and specialised surveys and forecasts on a half-yearly and annual basis, highlighting emerging market trends. www.joneslanglasalle.it COPYRIGHT JONES LANG LASALLE IP, INC. 21. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We would like to be told of any such errors in order to correct them.