RESEARCH SPOTLIGHT ON RETAIL RESEARCH

SPOTLIGHT ON RETAIL 2015

SHOPPING CENTRES | OCCUPIER TRENDS | INVESTMENT MARKET 1 EXECUTIVE SUMMARY

Q1 26% €519 2% transactions of the shopping centre 2015 forecast last 18 month investment volume of GDP have been prime

High Street Yields Retail Confidence forecast to close 2015 at Indicator up 4.25 % 46% 16 % investment over last in March 2015 18 months has come from SOCIMIs/listed vehicles

2 SPOTLIGHT ON RETAIL RESEARCH

MACROECONOMICS

created in 2014, helped by the previous GRAPH 1 A stronger, more year’s labour market reforms. GDP ANNUAL GROWTH (%) 5,0 efficient economy Growing sectors include manufacturing, The Spanish economy has experienced notably the car industry, which has a dramatic turnaround since the financial seen a sharp rise in exports on the back crisis, notably in the last two years. While of strong international demand and a there remain various headwinds such weaker Euro. Tourism has also given the as a slowly recovering housing market, economy a much-needed boost, while high youth unemployment and general the construction, banking and financial 0,0 elections later in 2015, key economic services sectors are more stable indicators point towards a broadly based Low inflation/deflation is currently a major and sustained recovery over the next issue for much of Europe and negative 12-18 months. price falls are being seen in a number of GDP growth amounted to 0.9% in Q1, countries. In Spain the annual CPI fell -4,0 the seventh consecutive quarter of below zero in early 2014 and, following a

short-lived recovery, inflation has been in 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

growth and the fastest quarterly rate of 2015F 2016F expansion since 2007. taken by negative territory since last summer. Source: INE, IMF the European Central Bank at the end However, the negative inflation rate is of last year – namely the reduction in mostly due to the sharp fall in oil prices its key interest rates to near or below and there is little evidence to suggest that zero and the launch of its quantitative shoppers are delaying purchases because level of growth in the manufacturing and easing programme in the Euro area – has goods are getting cheaper. Indeed, service sectors over the coming months. arguably boosted an economy which was inflation is expected to rise again by 1.2% In summary, economic growth is already in recovery mode. in 2016 once the effect of falling oil prices accelerating on the back of a more dissipates. While youth joblessness remains robust labour market, while easier access stubbornly high at over 50%, the overall Despite the continuing domestic issues to finance, improving confidence and rate of unemployment has peaked and and weakness in other parts of the Euro lower oil prices will provide an additional has edged down over the last 18 months area, the short to medium term outlook boost to corporate activity. Forecasts by to reach 23.8% in Q1. OECD forecasts for the Spanish economy is generally the OECD suggest that the economy will place unemployment just above 20% in positive. Forward-looking indicators grow by around 2.8% this year and 2.7% 2016. Indeed, some 434,000 jobs were such as the CPI indices point to a healthy in 2016.

GRAPH 2 GRAPH 3 Unemployment (%) Inflation (CPI)

TOTAL U25s ANNUAL CHANGE (%)

60 6

30 2

0 -2

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: INE Source: INE 3 OCCUPIER TRENDS

has their sub brands of H.E. by Mango, GRAPH 6 Retail sales growth Mango Kids and Violeta. Similarly, H&M Retail sales growth % (annual, volume) is developing a discount line to compete begins to take-off 10 with Lefties and has & Other Stories and The dominance of mega fashion groups Cos to diversify their offering into higher 5 Inditex, H&M and Mango, both on the end fashion. high street and in shopping centres, has 0 increased during the crisis years. The The success of discount retailing has led -5 rise of fast fashion has coincided with a new foreign brands to enter the market. Of reduction of independent retailers, and the note are Chinese low cost retailers such -10 recession pushed many foreign brands as Mulaya and Okeysi which began mainly -15 such as PC City, GameStop and Darty on secondary retail streets and have now 03 04 05 06 07 08 09 10 11 12 13 14 15 to leave the market. In their absence, we begun to expand and take shopping centre have overwhelmingly seen larger retailers, space as well; i.e opening of Okeysi. Source: INE who were perhaps more comfortable The improving employment picture has with the medium to long term outlook for boosted consumer confidence, which The major fashion brands that dominate Spain, re-entrench themselves in the best reached a post-crisis record high in March. the high street have all seen year on locations, in many cases consolidating In turn, this has translated into buoyant year growth in sales in 2014. Inditex saw locations into large flagship stores. retail sales growth, which reached 2.8% year on year growth of 5%, H&M posted In line with strengthening position of the (seasonally adjusted) in March this year. 12% growth, Mango’s growth in 2014 largest retailers in Spain, they are also Non-food sales have picked up, with was 15%, while Primark reached 29% , developing separately branded lines to sales of household-related products doing driven predominantly by strong expansion target key consumer demographics. Mango particularly well. during 2014. Inditex has reported a 28% y/y growth for their Q1 reporting period of February to April 2015.

GRAPH 4 Given the positive outlook for Spanish Y/Y Sales Growth H&M INDITEX MANGO retail and recent improvements in 20 activity indicators such as retail sales

15 and confidence, we expect more international brands to enter the market 10 however the competition is stiff given 5 the well established position of existing 0 powerhouse brands.

-5 As we begin to see new brands enter the -10 market, there is already a lack of space in the best locations with prime vacancy rates -15 in both shopping centres and high street -20 very low.

New brands to the Spanish retail market include Violeta by Mango, Brooks Brothers, Michael Kors, Coach, Uniqlo, Supertrash, GRAPH 5 & Other Stories, Okeysi, , URBN, Number of Stores and Amount of Sales (€M) Missoni and Mulaya.

INDITEX MANGO H&M PRIMARK 2014/2013 % CHANGE IN SALES VOLUME

INDITEX + 5% 1,822 281 159 40 H&M + 12% €363.06 €726 €702 MANGO + 15% €3,706 PRIMARK + 29% CORTEFIEL + 5% 4 SPOTLIGHT ON RETAIL RESEARCH

TECHNOLOGY IN RETAIL

While the broader Spanish economy suffered greatly during the crisis, GRAPH 7 e-commerce sales have grown at an Quarterly e-commerce sales Spain average quarterly rate of 20% since 2009.

According to the National Statistics 4,000 Institute for Spain, recent online purchases (3 months) in 2014 rose to 27.5% of the adult population and approximately 43% 3,000 of the adult population has made an online purchase in their life. The most commonly purchased products/services were holiday 2,000 accommodation and other travel services, sporting goods and clothing and event 1,000 tickets.

The success of an online platform model has its limiting factors. 0 2009 2010 2011 2012 2013 2014 Greater online sales can create logistical difficulties, particularly with consumers’ Source: CNMC current expectations regarding delivery windows, which are rapidly decreasing, necessitating significant investment in bricks and mortar retail format. Multi- As technology changes, having a basic logistics infrastructure such as warehousing channel formats, such as Click & Collect, online platform is no longer sufficient. and transport. incorporating online sales with pick- The rise of alternate devices other than Online platforms are becomingly up and returns within physical stores, a standard computer has created the increasingly important to retailers active in are convenient for many consumers, necessity of having online retail platforms the Spanish market. That being said, Spain allow for cross selling and can ease compatible for use with smartphones, does lag many other European countries logistics complications. Many retailers tablets etc. In 2014 there were more and is considered a high potential market are incorporating in-store access internet users than computer users and for e-commerce. According to comScore, points to their online platforms, which internet users are increasingly using a Spain´s online penetration of retail allow consumers to order out of stock variety of devices in order to access the websites sat below that of most major product and familiarize themselves with internet. As consumers become more European countries, reaching 78.7% of the platform with the support of sales comfortable with online payments and internet users in 2013 which is well below personnel. Multi-channel retailing, when the payment process becomes easier, we done effectively, increases demand expect alternate device sales to increase the 90.9% in the UK. capture and creates a complimentary in tandem. The rise of online sales in retail is not relationship between physical stores and however the death knell of the traditional online platforms.

GRAPH 8 Online penetration of retail websites Source: Comscore; Statista across European countries (Nov 2013)

100 86.6 87.3 89.1 90.1 90.5 90.9 92,4 82.6 84.1 82 82.2 82.3 78.7 79.3 80.4 70.8

50

0 Portugal Spain Norway Italy Denmark Turkey Switzerland Sweden Finland Poland Ireland UK

5 HIGH STREET

Prime retail rents were one of the only seen high vacancy during the crisis such Spotlight on Sol occupier sectors that resisted a mass fall as the Calle Bravo Murillo in . With Project Canalejas under construction in values during the crisis period and the An excellent example of reviving and the recent opening of the new Apple most expensive high streets in Spain saw secondary streets is the recent changes Store, we are seeing increased occupier relatively little vacancy. Those units that in Calle Orense in Madrid. Calle Orense demand in the area, particularly in Puerta did become vacant on the best streets in has always had a strong retail component del Sol. Both Tous and Swarovski have Madrid and Barcelona were quickly re-let. however the first half of 2015 will see the let units between the Puerta del Sol and While there has been limited downward opening of a new format Pull & Bear, a Canalejas, in apparent anticipation of the movement in prime rents during the newly built Mango and a separate Violeta projects’ completion and amidst rising crisis, we have seen the divide between by Mango. This is in addition to other new rents. prime and secondary locations deepen, tenants such as Tiger and Hema. The Puerta del Sol sits at an axis of with side streets off the best locations Madrid’s Calle Serrano has been the multiple important retail streets, including flattening with other secondary locations focus of high levels of investment in 2014. Calle Preciados, with some of the highest and prime areas condensing in size. With the recent street refurbishment rents in the country. It is a major tourist As previously mentioned, prime streets works completed, we are beginning to see attraction and has high footfall. We expect have remained strong, with little vacancy upward pressure on rents and stronger to see demand increase further and throughout the crisis, however secondary demand. Luxury brands such as Louis upwards pressure on rents during 2015. streets suffered greatly. Vuitton and Montblanc have recently

During 2015 we expect to see more opened new stores on the more prime expansion from brands more likely to side of the street, while mass market locate in strong secondary locations, such brands such as Inditex and Nike are GRAPH 10 as Mulaya, Okeysi, Dealz, Hema, and making the traditionally less prime side of Prime rents Madrid Tiger, helping to revive streets that have Serrano more attractive to occupiers.

AREA (€/sq m / month)

Sol / 280 Preciados

Serrano 220 GRAPH 9 Prime High Street yields BARCELONA MADRID Fuencarral 150

7,5% Gran Vía 230

7,0%

6,5% GRAPH 11 Prime rents Barcelona 6,0%

AREA (€/sq m / month) 5,5% Portal del Ángel 250

5,0% Portaferrisa 158

4,5% Paseo de Gracia 208

4,0% Avenida Diagonal 167 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 F

6 SPOTLIGHT ON RETAIL RESEARCH

SHOPPING CENTRES

GRAPH 12 2013. Footfall continues to trend upwards, GLA Density per 1000 Stock adding to the number of positive indicators inhabitants showing growing momentum in the retail Madrid There are currently 544 shopping centres sector. and retail parks in Spain, with a total GLA Aragón of over 15.4 million sq m. Across a sample of shopping centres of Murcia varying sizes, types and locations across Almost half of shopping centres in Spain Spain, looking at footfall on a sq m basis, Asturias were built before 1999. However the we found that the top five centres were Canarias majority of these centres are smaller predominantly smaller shopping centres, in schemes, averaging about 20,000 sq m. central, urban locations and medium sized Com. Valenciana Since 2000, larger centres have been hypermarkets in city centres. The small País Vasco developed, bringing average delivered centres with high footfall per sq m were Galicia scheme size up about 60% to around also, typically, either centres that have 32,000 sq m. become destinations in their own right, La Rioja with large leisure components or very Andalucía Between 2004-2014, the GLA of schemes well positioned convenience schemes with above 40,000 sq m has nearly doubled. strong complementary service tenants. Navarra Over the last ten years with developers focusing on larger, destination centres, Castilla y León smaller convenience schemes tend to Pipeline Castilla La Mancha be dated and requiring CAPEX. However There are currently six shopping centres Extremadura at the same time, many convenience in the pipeline for delivery in 2015. The schemes that are well located within their Cantabria largest project set to be delivered in 2015 neighbourhoods perform extremely well. is the Sambil centre in Madrid, with a GLA Cataluña

of 42,830 sq m. There are currently only Baleares Footfall two small shopping centre schemes in the pipeline, accounting for only 2.6% of the Ceuta & Melilla Footfall began to move up in 2014 and new development expected over the short 0 100 200 300 400 500 closed the year more than 3% above term. Source: AECC

GRAPH 13 GLA by year of opening

720,211 793,368 689,430 756,518 655,794

534,878 536,116

338,682 344,300

162,515

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: AECC 7 Historically the Balearic Islands have had have been hit harder by the crisis and are GRAPH 14 Mid-market benchmark a relatively low shopping centre density, just beginning to feel the effects of the due in part to more complicated legal and recovery, with occupiers starting to take planning laws. The Balearic Islands are on more space in secondary schemes. currently the only autonomous community SALES Midmarket schemes tend to have vacancy left with a shopping centre density below rates of between 10% and 16%. Vacancy 200 sq m/ 1,000 in habitants, except Fashion >2,500 1,500-2,500 <1,500 is much lower in prime / dominant for Ceuta/Melilla. With the two projects schemes in main cities, particularly Food & Beverage >3,000 1,800-3,000 >1,800 currently in the pipeline for the Baleares, in Madrid and Barcelona, where Food Anchor > 4,000 2,000-4,000 <2,000 GLA density will bring the area from occupational levels in prime centres are one of the lowest at 171 sq m per 1,000 extremely high, often with waiting lists. In inhabitants to approximately 291; an Barcelona particularly, vacancy in prime increase of almost 73%, but still below EFFORT RATIOS urban centres is practically zero. the national average of 332. However; these figures don´t take into account high In terms of store size, the highest vacancy Fashion <15% 15-17% >17% tourism numbers in the area which, with levels are found in small-medium sized Food & Beverage <17% 17-20% >20% 23 M air passengers annualy form an units (<200 sqm) whilst demand remains Food Anchor <3.5% 4.5-5.5% >5.5% important part of the market. strong for larger premises (>1500 sqm) particularly in prime and dominant Vacancy schemes.

RENTS (€/SQM/MES) Prime and well-established retail schemes have continued to perform well and are Fashion <15% already benefitting from the broader Food & Beverage <17% recovery. Secondary assets and cities GEOGRAPHICALFood Anchor <3.5% DISTRIBUTION

GRAPH 15 Shopping center density (number of centers and GLA)

14 5 GLA 27 GLA 470,872 GLA 7 126,024 794,504 GLA 197,441

The average GLA 38 + GLA density2.7% in Spain 886,741 4 GLA 101,311 47 Footfall May 2015 26 currently stands GLA GLA 14 1,471,197 667,144 GLA at approximately 97 640,037 GLA 332 sqm/1,000 3,073,630 inhabitants Footfall continues 22 59 15 GLA 503,393 GLA to trend upwards, GLA 1,838,493 8 245,984 GLA adding to the number 190,389 of positive indicators 21 GLA 105 showing growing 690,895 GLA momentum in the 2,687,000 34 GLA retail sector. 826,157

1 GLA 14,363 8 Source: AECC / INE

1 SPOTLIGHT ON RETAIL RESEARCH

Case study

Plenilunio by Orion to Klepierre, is one of the most The Challenge: important real estate transactions. Knight Frank has managed the Plenilunio shopping centre since opening, In March 2006, two months before Highlights: mandated by its original developer, opening, Knight Frank won the full Riofisa, and later by its two subsequent mandate for the property and asset Knight Frank’s management of the centre GEOGRAPHICAL DISTRIBUTION owners Banif (2006-2009) and Orion management, including the lettings and firmly consolidated it as a prime asset, Capital Managers (2009-2015). During ECOP, with the objective to position the notably improving its commercial mix and this period, the value of the asset 70,000 sq m centre as a reference for the achieving excellent results such as the increased more than €100 million, entire sector. 2014 opening of the largest Primark in consolidating Plenilunio as one of the Spain, the continual increase in rents and best centres in Spain. The Result: footfall and the 100% occupation level

14 Today Plenilunio is one of the 10 best achieved for the last three years in the 5 GLA 27 GLA shopping centres in Spain and its sale, restaurant area. 470,872 GLA 7 126,024 794,504 GLA 197,441

The average GLA 38 GLA density in Spain 886,741 4 GRAPH 16 GLA 2013/2014 Footfall growth Source: Experian 101,311 47 26 currently stands GLA GLA 14 1,471,197 667,144 GLA at approximately 97 640,037 15% GLA 332 sqm/1,000 3,073,630 9.68% 9.87% 10% inhabitants 6.00% 22 59 5.27% 15 GLA 503,393 GLA 7.36% 5% GLA 1,838,493 8 245,984 GLA 3.99% 3.65% 190,389 2.60% 1.63% 0% 21 -0.53% GLA 105 690,895 -1.79% GLA 2,687,000 34 -5% GLA 826,157 -9.18% -10% JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 1 GLA 14,363 9 Source: AECC / INE

1 GRAPH 17 Investment volume by investor type INVESTMENT MARKET

2% 2% Record levels of over €6 billion were Strong interest from international investors 7% 3% invested in commercial property in Spain is putting pressure on yields which in 2014, the main sectors being offices have now moved in by almost 200 bps and retail with more than €2.9 billion since the beginning of 2014. Both prime 40% invested in shopping centres, including and secondary assets have seen yield the Klepierre/Carrefour operation. compression and we expect to see further compression over the coming three While 2015 has started strong with quarters, particularly in secondary cities. 46% approximately €519M in assets closing in the first quarter, there are still many Intense competition particularly for large transactions pending closure and we lot size disposals has in many cases, INVESTMENT JV-PRIVATE expect the year to close with a total forced investors to be increasingly MANAGEMENT INVESTMENT VEHICLE investment volume above the historical aggressive, not only on pricing but also

PRIVATE REIT average however below that of 2014. In with the speed and efficiency with which EQUITY 2015 we expect fewer large operations they can execute a deal. FINANCIAL PENSION FUND than in 2014 but a larger number of INSTITUTION/BANK Listed vehicles such as Socimis continue opportunities. to be a key player and account for 46% Source: Knight Frank While many large, prime shopping centres of the investment volume in 2014/2015. have come to market in the past five They are followed closely by investment quarters, we expect 2015 and 2016 to be managers, which have invested 40% of dominated by the sale of smaller or more the volume over the same time period. GRAPH 18 secondary assets. Investment volume by autonumous community

MADRID

ARAGÓN

GALICIA GRAPH 19 Source: Knight Frank C. VALENCIANA Investment volume (€M) PAÍS VASCO 3.500 PORTFOLIO 2,898 2,926 3.000 ANDALUC´ÍA

CATALUÑA 2.500 2,168 1,971 CAST. LA MANCHA 2.000 CASTILLA LEÓN 1.500 CEUTA 1,123 946 1.000 CANTABRIA 773 774 563 400.000 800.000 505 533 451 ASTURIAS 500 367 30 0 Source: Knight Frank 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Knight Frank

GRAPH 20 Retail investment yield evolution PRIME SHOPPING CENTRE SECONDARY CENTRE

SOCIMIs continue 9% to be a key player 8% accounting 46% 7% of the investment 6%

volume 5%

4% THIS DATA INCLUDES SHOPPING CENTRES AND RETAIL PARKS 3% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

10 SPOTLIGHT ON RETAIL RESEARCH

GRAPH 21 Retail investment transactions 2015

DESCRIPTION LOCATION GLA TRANSACTION PRICE (€) VENDOR PURCHASER SQM

Plenilunio Madrid 70,000 375,000,000 Orion Capital Klepierre

AireSur Seville 20,000 76,500,000 Grupo Lar CBRE GI

As Termas Lugo 46,500 67,500,000 ADIA Lar Socimi

Puerto Venencia (50%) Zaragoza 103,500 255,400,000 Intu CPP

Zielo Shopping Pozuelo, Madrid 15,555 71,500,000 Hines UBS

Portal de Marina Ondarra, Alicante 11,500 7,000,000 Eroski Lar Socimi

1 2 Top deals

1. Zielo Shopping Pozuelo ▪ 15.550 sqm GLA ▪ advisory for UBS on the purchase

2. Habaneras ▪ 24.000 sqm GLA ▪ advisory for Harbert Management on the purchase

3. Parque Ceuta ▪ 14,500 sqm GLA ▪ advisory for Morgan Stanley and Grupo 3 4 Lar on the sale

4. Alcala Magna ▪ 34,165 sqm GLA ▪ advisory for Incus Capital on the purchase

11 FORECAST 2015-2018 RETAIL RESEARCH Humphrey White - MRICS The current retail sales pipeline foresees In addition, the centres coming to market Partner, Head of Capital Markets at least €3Bn of assets coming to will, on average, be of a smaller size and [email protected] market in the coming two years. While be more geographically diverse. +34 600 919 012 the majority of GLA in the pipeline until Competition will continue to be high 2018 is shopping centres, we expect to Félix Chamizo and pressure on yields will continue see an increase in alternate format retail Partner, Head of Retail over the short to medium term. Not only schemes such as retail parks and factory [email protected] will investors have to be able to move outlets come to market. +34 600 919 072 very quickly to secure the best assets, While 2014/2015 saw numerous prime they will also have to spend more time Elaine Beachill - MRICS centres come to market, we currently studying regional / provincial markets in Capital Markets Manager expect the future pipeline to be Spain in order to be able to appropriately [email protected] dominated by core plus and value add analyze the opportunities in the upcoming +34 600 919 016 opportunities. Competition for prime value-add and core-plus assets. assets will continue to push investors Irene Giménez towards slightly higher risk assets, and regional schemes will see improving Head of Retail Letting [email protected] fundamentals as the recovery spreads +34 600 919 074 from Spain’s largest cities, and in turn incentivizing the sale of core plus and Brynn Evans value add opportunities. Capital Markets Consultant Market Intelligence [email protected] +34 600 919 129

GRAPH 22 GRAPH 23 %GLA sales pipeline %Total sales pipeline by profile 2015-2018 by profile

100% 12% 13%

24%

12% 37% 35% 47%

50% 45%

14% 48% 19% 32% 24%

9% 7% 0% 3% Opportunistic Value Add 2015 2016 2017 Core Plus Prime

Opportunistic Value Add Source: Knight Frank Core Plus Prime

Source: Knight Frank

www.KnightFrank.com

© Knight Frank 2015. This report has been published for general information purposes only. Knight Frank does not accept any legal responsibility for any loss or damage as a result of the content of this report. As a general report, this material does not necessarily represent Knight Frank’s opinion with regard to private properties or schemes. Reproducing part of this report or the entire report will only be permitted if appropriate reference is made to Knight Frank.com

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