Retail and Communities, UK Nigel Hugill Chief Executive Investor Roadshow UK / US – May 2006 Agenda UK retail market Building the retail business UK residential market Crosby in context 2 Defining UK retail characteristics Footfall, footfall, footfall High absolute rent, not relative to turnover Fixed cost for retailers = capital value for investors Ferocious operating environment coupled with clear understanding of importance of location Witness behaviour of C&A (moved from retailing to landlord in UK market) 3 Recognising these characteristics Enduring retail locational stability with occasional new entrants Fewer than 10 new entrants in last 20 years, drops to 2-3 if exceptional Margaret Thatcher planning environment is excluded Unrealistic to build a business around creating new super regionals Scope is for moving locations up the retail hierarchy, creating space, strengthening rents and consolidating yields Retail development most likely and effective as part of comprehensive urban revitalisation 4 Tools with which to work Clear willingness of local authorities to subcontract spatial and master planning as well as delivery and direction of major new urban quarters to the private sector High overall UK capital values mask 20 year movement in relative values across classes and uses Density has become a political imperative 5 Enduring retail locational stability Continued pressure for large scale comparison retailing to be retained in Share of UK Comparison Town Centre locations Goods Trips Polarisation toward catchment dominant (% total) locations capturing disproportionate spend 1971 50% of UK comparison expenditure Other Retail 68 60 occurred in the top 200 towns Centres 1996 50% in the top 80 centres 2005 40% in the top 50 centres 32 Top 50 40 Retailers understand market dynamics Retail Centres well, therefore we do not have the same negotiating leverage as overseas 2000 2005 Sources: Estate Gazette, March 1997 CACI Research for Lend Lease, February 2006 6 Capital investment will consolidate prime locations Continued pressure for large The top centres will capture shoppers scale comparison retailing to be from smaller centres (2005 – 2015) retained in Town Centre Percentage 30% locations change 25% Retail Provision in provision/ 20% Expenditure Polarisation toward catchment comparison (constant 2005 prices) dominant locations expenditure 15% Still opportunity for centres with 10% potential to become catchment 5% dominant 0% -5% -10% 1 – 5 –100 1000 1500 6 – 1011 – 20 21 – 50 – > 1500 51 101 – 250251 – 500501 – 750 751 – 1001 UK Centre ranking groups Source: CACI Research for Lend Lease, February 2006 7 The opportunity afforded by yield compression Long retail leases, typically 10-25 years (with upward rent review, every 5 years but no turnover participation) inform the whole ownership and funding structure Prime centre yields have been correlated with 10 year Gilts in recent years Secondary centre yields have compressed in comparison to prime centre yields Wall of money does not discriminate: purchasers are chasing cash flow Yield Comparisons 9 Percentage 8 7 Prime Shopping Centres Secondary Centres 6 10-Yr Gilts 5 4 3 Year 1998 1999 2000 2001 2002 2003 2004 2005 Source: Real View 412 – UK Retail Development Pipeline, Merrill Lynch, October 2005; www.dmo.gov.uk, 2006 8 How we intend to build the business in an expensive market Start with the conviction that it is not going to get much cheaper Recognise locations with potential to increase catchment dominance and, better again, where we can help enlarge catchment Look to create 500,000 sq ft and work up Partnering with existing owners and authorities who wish to retain an interest in the project Lend Lease is perceived as a good partner in UK Legal & General Dartford Borough Council Liverpool Victoria Solihull Metropolitan Borough Council Minerva Norwich City Council 9 Typical retail project chronology Year 03 5 10 15 Plan and Approvals Develop/Construct Secure Partnership Operate Take equity position – underlying economic benefit anywhere in the Development range of 25-100% Management Capability for Bovis Recycle capital Initial 5 year rent review Lend Lease to do Development profit whether Ongoing asset/fund construction sold or refinanced management fees Prospect of some or all Capital optionality being sold into Lend Lease versus fund capability managed funds Management fees reflecting market circumstances 10 Stronger looking map Bridgefield, Stockport * Overgate, Dundee – 100,000m2 Overgate – 39,000m2 Dundee Golden Square, Warrington Cameron Toll Cameron Toll, Edinburgh – 63,600m2 Edinburgh – 34,800m2 Touchwood, Solihull Golden Square – 60,400m2 Warrington The Meadows, Chelmsford * Bridgefield 2 2 Park Place, Croydon Stockport – 14,000m – 80,000m (perhaps higher) – 82,700m2 Touchwood Solihull Arndale Centre, Eastbourne The Meadows Chelmsford Bluewater, Kent – 55,700m2 Park Place – 148,600m2 Croydon Bluewater Kent Arndale Centre Note: slide shows total potential area of centres Eastbourne * additions since November 11 Stepping up the pace through retail and residential Clear underpinnings for high density housing and enlarged retail offer supported by demographics, government policy and land constraints Best potential for value creation likely to come from mixed projects with strong retail and residential constituents where planning, demand and economics become self reinforcing Lend Lease looks genuinely competitive in this market - Chelmsford and Stockport Investing in sufficient projects to mitigate inherent timing uncertainties Opportunity to recycle capital 12 UK residential reminders 60 million+ population growing at an average annual rate of 0.4% 26 million+ dwellings in the UK with 2 million housing transactions per year Low replacement of existing stock New housing accounts for less than 10% of total market transactions Owner occupation above 70%, of which approximately 60% is mortgaged 70% of UK households are without children, 75% of residential stock comprised of houses Private rental sector only at 10% 13 UK residential reminders Structural under supply Projected household growth (by region) 2001 to 2021 UK – housing starts v net new households '000s Excess demand - 33k units p.a. 35,000 25% 240 20% 220 25,000 15% 200 15,000 10% 180 160 5% 5,000 140 % total growth 120 0 st 0% Average annual new households lands North d East 100 London 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 North West Humberside South East & South We East Mi West Midlands Region Yorks Average annual new households Total % Growth Housing Starts Net new households Source: ODPM Source: ODPM, Scottish Executive 2004 Household formation has grown strongly, particularly smaller family units Lack of green field land together with infrastructure overload encourages high-density development on brown field sites 14 Mixed development Combining politics with economics Urban revitalisation and housing affordability remain firmly on the Government agenda Increased density is a cross party political imperative Sustained, Government sanctioned, inward migration acts to drive growth in major cities and key urban regions 15 Politics and economics Working for inner urban residential British dwelling completions by type 180,000 Housing completions Flat completions 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 1991/ 1992/ 1993/ 1994/ 1995/ 1996/ 1997/ 1998/ 1999/ 2000/ 2001/ 2002/ 2003/ 2004/ 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: ARUP (ODPM) 16 Politicians can make a difference DRAFT From 1994 to 2004 in England New Dwellings in England by Land Classification (% total) New dwellings built on brownfield sites Percentage increased from 51% to 68% 100% The density of total new dwellings per hectare increased from 24 to 40 80% Clear political acceptance of need 60% for higher density 40% 20% 0% 95 98 01 02 04 Year 1994 19 1996 1997 19 1999 2000 20 20 2003 20 Brownfield Greenfield Conversions Source: Home Builders Federation website, February 2006; A consultation Paper on a New Planning Policy Statement 3 (PPS3) Housing, 17 Office of the Deputy Prime Minister, December 2005 Not as much as they would like Absolute reliance on private sector Collapse of public rental construction In 2001 UK housing completions fell to their lowest peace time level since 1924 Private enterprise 450,000 Housing Local authorities Completions 400,000 Registered Social Landlords 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 Year Housing completions UK 1949-2002 Government ‘Affordable’ includes: Intermediate, Shared Equity and Social for Rent Source: ODPM Review of Housing Supply - Delivering Stability: Securing our Future Housing Needs (Kate Barker), March 2004 18 Reduced demand for three bedrooms as UK gets older, wealthier and fewer households have children Permanent Dwellings Completed in UK by Bedrooms DRAFT (% total) Percentage 100% 80% 4+ bedrooms 60% 3 bedroom 40% 2 bedroom 1 bedroom 20% 0% 92 8 0 2 1/ 7/9 9/0 1/0 3/04 Year 9 99 99 0 0 19 1993/94 1995/96 1 1 20 20 Notes: The jump in 1 and 2 bedroom dwellings in 2002/03 is aligned with an increase in the proportion of flats being completed in the same year 19 Source: Office of the Deputy Prime Minister Buy to let going one way DRAFT Increases in the buy to let market from Households Rented from 2001 onwards coincided with a rising Private Owners by Country