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Valuation Report VALUATION REPORT Westfield Stratford City London On behalf of Stratford City Shopping Centre (No. 1) Limited Partnership Valuation Date: 28 May 2014 TABLE OF CONTENTS 1 EXECUTIVE SUMMARY 2 VALUATION REPORT 3 PROPERTY REPORT 4 APPENDICES 5 LETTER OF ENGAGEMENT 1 EXECUTIVE SUMMARY Executive Summary WESTFIELD STRATFORD CITY The Property • Prime shopping centre completed in 2011 within a major regeneration area of East London. • Anchored by John Lewis and M&S, supplemented by a wide range of fashion multiples and complemented by an extensive leisure and dining offer which includes a casino, cinema and gym. • Westfield Stratford is the largest urban shopping and leisure destination in Europe. Tenancies and Covenant Strength The Property offers an expected income weighted unexpired term of approximately 12 years 6 months (6 years 8 months to nearest break); this is considered good and is representative of a prime shopping centre. Within our valuation and calculation of the weighted average unexpired lease term, we have reflected planned asset management initiatives including four proposed lease surrenders and new lettings. In addition, a small number of leases contain rolling break options where such leases could be determined at any time; we have forecast when such leases will be determined. There is only a small percentage of income expiring within the next two years, most of which relates to short term leases, principally on The Street. Over 40% of the passing rent expires within 5 years, on account of the number of break clauses falling within this timescale. We consider the prospects for re-letting are good, given the strong trading performance of brands inside the centre and the low level of vacancy. The rental levels at Stratford appear relatively low in the context of its peer group, considering its London location. Unit sizes are generally larger than many of the older UK regional centres and this will have an impact, nevertheless we consider there is scope for rental growth at Stratford. Approximately 87% of the retail income is secured against national multiple retailers, which is representative of a prime shopping centre. Approximately 8% of the retail income relates to independent retailers and 4% relates to regionally represented fascias. This is not unusual for a prime shopping centre. The majority of this income relates to the Great Eastern Market, which offers shoppers a point of difference, and temporary lettings. The Property has a low vacancy rate with only 1.10% of the total floorspace currently vacant (1.46% based on rental value), the occupancy rate therefore is 98.90%. Including accommodation which is held for development or under offer, the vacancy rate is 2.10% by floor area and 2.40% by rental value. Most of the vacant retail accommodation is within The Street. Media and commercialisation accounts for a higher proportion of the overall income stream than we have seen in other major regional shopping centres (6.75% of income compared to 4% - 5% elsewhere). Stratford is however a newer centre which has been designed to accommodate several large digital screens which account for a significant element of this revenue stream. Turnover rent accounts for approximately 5.4% of the total passing rent, which is higher than many other prime shopping centres. Leases which include provision for the payment of turnover rent have become increasingly common in recent years, and whilst they present a variable amount of income for a landlord, they also enable the landlord to share in strong brands’ trading success. Net Income The net income of the Property comprises the following: Westfield Stratford Amount (£ pa) % of gross rent Shopping Centre rent 72,134,258 74.58% The Street rent 6,031,137 6.24% Food court and Restaurant rent 5,081,440 5.25% Car park income (net) 5,377,525 5.56% Brand Partnership and Media income (net) 6,100,000 6.31% CCHP income, Storeroom, IT and Kids Carts (net) 1,996,300 2.06% Total Income 96,720,660 100.00% Void costs and lease shortfalls 2,279,575 Landlord marketing contribution 1,600,000 Total Expenses 3,879,575 NET INCOME 92,841,085 Turnover rent is contained within the shopping centre income and The Street income and accounts for 5.39% of the total gross rent. Income for the in-line and Chestnut Plaza restaurants is included within The Street income. Market Value £1,955,000,000 (One Billion Nine Hundred and Fifty Five Million Pounds) Yield Profile Net Initial Yield 4.52% Equivalent Yield 4.91% Reversionary Yield 4.92% The Equivalent Yield is the time weighted average yield based on the net income over the life of the valuation cashflow. The Reversionary Yield is the yield based on the net income at the end of the valuation cashflow (June 2059); the net income assumed in 2059 comprises our opinion of the aggregate rental value of the Property minus landlord’s contribution towards marketing and an assumed void rate of 2.50% of the total rental value. Strengths The largest urban shopping and leisure destination in Europe, totalling 1.9m sq ft and attracting over 38 million visitors annually. The centre ranks number one in the Trevor Woods Going Shopping Survey (2013), which ranks shopping centres according to overall attractiveness to shoppers, retailers and investors. London’s economy dominates the UK; income and spending levels per capita are higher than the UK average. London’s population is forecast to grow from 8.3 million at present to over 10 million by 2031. Very well served by public transport, benefiting from two London Underground lines, London Overground, mainline railway, Docklands Light Railway and extensive bus services. 5,000 car parking spaces are also provided. Good anchors including John Lewis and Marks & Spencer, and a comprehensive line up of fashion houses, complemented by a substantial leisure and dining offer. Stratford has been the focus of a major regeneration project, led by the 2012 Olympic Games. Westfield Stratford City forms the centre-piece of the project and is surrounded by new housing, student housing, office accommodation and the Olympic Park. Prime rental values are approximately £300 - £325 per sq ft Zone A, which is relatively low in the context of other major regional UK shopping centres. We consider there are good prospects for rental growth; where retail space has been remerchandised within the internal malls, higher rents have been secured suggesting rental growth has already started to occur. Shopping centres that opened over a decade ago such as Bluewater, West Quay in Southampton and The Oracle in Reading experienced good rental growth from opening to first review (a period of five years) of 50%, 26% and 21% respectively, albeit in a stronger market. The Property has a low vacancy rate with only 1.10% of the total floorspace currently vacant (1.46% based on rental value), the occupancy rate therefore is 98.90%. Including accommodation which is held for development or under offer, the vacancy rate is 2.10% by floor area and 2.40% by rental value. Levels of tenant incentives have fallen from 12-18 months on first letting to around 3 – 6 months (within the centre), although The Street requires higher levels of incentives. The UK commercial property market experienced a notable upturn in demand and transaction volumes over the last 12 months and there is currently no sign of this abating. There is a shortage of openly marketed stock, particularly prime assets, and we would envisage strong demand for the Property in the event of it being marketed. A 30% interest in Bluewater (with management control) has been marketed and the outcome of a second round of bidding is awaited, we understand the three bidding parties are all UK listed property companies. This will be the best available comparable to the subject property and pricing is expected to achieve 4.75% equivalent yield or lower. Risks and Mitigating Factors The Street has been challenging for the owners and has experienced high levels of vacancy and temporary leasing. Recently TK Maxx have signed a lease and are in the process of fitting out their unit, we anticipate their presence in this part of the scheme will increase footfall and retailer interest. There remains a risk however that further retailers may vacate this part of the scheme, with 42% of The Street’s income expiring by way of lease expiry or break option in 2016. Retailers will have limited opportunity to relocate within the centre as the internal malls are virtually fully let, however retailers are likely to use the opportunity to renegotiate their rental terms. The property is a large lot size, and there would be few purchasers that would be in a position to purchase this stake outright, however we anticipate there would be extensive demand from investor partnerships (such as UK REITs with a sovereign wealth fund). Approximately 8% of the income is receivable from sources other than traditional leases, such as media, commercialisation, IT services, and energy supply. Media and commercialisation income makes up 6.31% of this, and half of this income is received by way of 5 year contracts. The car park income has not stabilised yet and our valuation assumes that car park income will increase over the next few years. Car park income appears to be growing and we anticipate that it will continue to do so however there is a risk that a purchaser may take a more cautious view. 2 VALUATION REPORT CBRE Limited Toronto Square Toronto Street Leeds LS1 2HJ Fax +44 (0)113 394 8800 Switchboard +44 (0)113 394 8811 Valuation Report Report Date 28 May 2014 Addressee Stratford City Shopping Centre (No 1) Limited Partnership C/o Westfield Level 6, Mid City Place 71 High Holborn London WC1V 6EA The Property Westfield Stratford City.
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