Savills World Research Retail investment

Briefing note European retail investment: Time for sale & leaseback? August 2018

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” Winston Churchill

“Adapt or die” a net sales rise of 9% in 2017, with 2.9% in 2017 according to Oxford Over the past 24 months, sensational 10% of total sales online. Sixty percent Economics. This is notably due to the headlines about the “retail apocalypse” of its turnover came from European expanding economy, stronger labour have been on the front pages of all sales. They opened 524 new stores markets and improved consumer media. Some long-established retailers worldwide and closed or absorbed 341 sentiment. went bust (e.g. Toys 'R' Us), are closing smaller units reflecting a net opening stores (e.g. American Apparel) or are of 183 stores. They invested €1.8bn in The reasons behind the divergence reducing their number of employees, 2017 “into the introduction of efficient between blossoming and vanishing regardless of their retail property technology, the expansion of their retailers lie in their commitment formats. Although this phenomenon logistics capabilities and the strategy for and rapidity to adopt strong online relates today mostly to US and UK differentiating and optimizing their selling experience, to invest in technology, retailers, it may have an impact at a pan- area”. Inditex is not an isolated case, to reorganise their supply chains and European level through the closures of other retailers that play the game well in redesign their sales areas to meet their international stores. this challenging new retail scene include the new on-demand inclination of notably Ikea and Aldi. customers. Yet, behind these headlines, some retailers are growing and expanding In fact, European retail sales increased across Europe. One example is the by 2.3% pa on average over the course Spanish retailer Inditex, which posted of the past five years and it grew by

FIGURE 1 US Retail bankruptcies timeline

Second bankruptcy

Jan-15 Feb 15 Apr-15 May-15 Jul-15 Sep-15 Oct-15 Dec-15 Feb-16 Mar-16 May-16 Jul-16 Aug-16 Oct-16 Dec-16 Jan-17 Mar-17 Apr-17 Jun-17 Aug-17 Sep-17 Nov-17 Jan-18 Mar-18 Source: CBinsights

savills.co.uk/research 01 Briefing note |European retail investment: Time for sale & leaseback?

The blurring line between FIGURE 2 retail and logistics New delivery routes Online sales have increased 2.5 times Client home Store over the past decade, reaching various In-store sale degrees of penetration, from 3.5%- • Pick-up in store • Delivery at home 5% in Central Eastern Europe and • Delivery at pick-up point Southeastern Europe, to 7.5% -10% in Western Europe and up to 15.1% Online sale • From store - Delivery at home in Germany and 17.8% in the UK. • From store - Delivery pick-up point • From distribution centre - To store According to Forrester, e-commerce in • From distribution centre - To pick-up point • From distribution centre – Delivery at home Western Europe will grow at an average of 11.9% pa over the next five years. Online sales, excluding groceries, will Returns • To store account for 20.2% of total retail sales by • To pick-up point 2022, from 12.4% in 2016. E-commerce • To Distribution centre Pick-up point Distribution centre is growing at a faster pace than overall retail sales, hence becoming a major network in order to shorten delivery blurred as retailers generate much driver in the retail sector. routes and provide quick delivery of their profit from their logistics services to online customers. warehouses, which are used as Whilst in the past retailers used to fulfilment centres for their online trade. expand their footprint by opening Yet traditional brick and mortar retail new stores in new catchment areas, floor-space should play a crucial role Rising volumes are putting some the structural decline in in-store sales in this new retail landscape, led by downward pressure on yields. Prime requires a rationalisation process which convenience in small catchment areas logistics yields experienced the highest focuses on locations with strong existing and by experience in both destination- compression of all sectors, -38bps yoy footfall or with potential for growing city centres and out-of-town locations. on average across Europe between footfall. Additionally, the panoply of Although it may not translate into on-site Q1 2017 and Q1 2018. The average combinations between sales channels sales, physical stores have become a prime yield is at a historic low at 5.5% and delivery “from and to” routes is gateway for retailers to “show-room” compared to the 6.3% five-year forcing retailers to revise and reorganise their products and brand philosophy to average. their entire supply chain. their customers and to get to know their clientele better. At the same time, within the retail sector, Generally, retailers have a regional prime high street yields hardened by distribution centre in the vicinity of their The yield gap between 17bps and the European average consumers base but the booming retail and logistics assets stands at 4%, prime retail warehouse demand for e-commerce puts is closing yields moved in by nearly 16pbs (4.8% pressure on their delivery strategies. With logistics becoming a key element on average), while prime shopping In order to compete with pure online of a successful retail strategy, property centre yields have stabilised across the players, retailers have to leverage their investor demand for logistics assets European markets (4.5% on average). distribution centre with their stores and is growing, often at the expense of adopt omni-channel rather than multi- traditional retail assets. The share of Hence the gap between shopping channel strategies. The standardisation logistics has increased to 13% in H1 centre yields, retail warehouse and of same-day delivery also raises the 18 from a 5-year average of 11%. logistics yields is closing, resulting from stakes for retailers who have to include Nevertheless, the line distinguishing the the blurring of lines between the two smaller urban warehouses in their two sectors is becoming increasingly sectors.

FIGURE 3 FIGURE 4 Share of e-commerce The end-year volume is Prime retail and logistic yields Are expected to be in line with the past two years converging

2014 2015 2016 2017 Logistics Retail Park Shopping Centre High Street 8% UK 17.8% Germany 15.1% 7% France 10.0% Netherlands 9.5% 6%

Sweden 9.5%

EU average 8.8% 5%

Austria 7.4%

Belgium 5.7% 4%

Spain 4.8%

Poland 4.3% 3%

Italy 3.4% 2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 11 Q1 12 Q1 13 Q1 14 Q1 15 Q1 16 Q1 17 Q1 18 Q1 Source: Statista Source: Savills/ RW Retail Warehouse

02 August 2018

Investors are seeking to FIGURE 5 limit their retail exposure Retail investment Volume is decreasing Despite improving economic indicators, disruption in the retail industry has caused investors to limit their exposure Quaterly volume Rolling past 12-month to the sector. Since the final quarter 20 70 18 of 2015, the 12-month rolling retail 60 volume has been slowly but consistently 16 14 50 decreasing. The share of retail 12 investment out of the total turnover 40 10 fell from 15% in 2015 to 13% last 8 30 year. This trend is taking place across 6 20 BillionsEuros

Europe, although more pronounced in 4 BillionsEuros 10 core countries, most particularly in the 2 UK, than in other European countries. 0 0 The three core countries (Uk, Germany,

France) used to account for more than 12 Q1 12 Q2 12 Q3 12 Q4 13 Q1 13 Q2 13 Q3 13 Q4 14 Q1 14 Q2 14 Q3 14 Q4 15 Q1 15 Q2 15 Q3 15 Q4 16 Q1 16 Q2 16 Q3 16 Q4 17 Q1 17 Q2 17 Q3 17 Q4 18 Q1 18 Q2* 18 60% of the total retail volume in 2015, it Source: Savills / *first estimations now accounts for 40%.

During the first quarter of the year, 12 months, suggesting a pick-up in seeking to raise capital to reinject in €9.3bn was invested in retail properties. activity. During the first half of the year, their core business. From an investor’s This is 3% down compared to Q1 2017 retail SLB amounted to approximately perspective, as long as the retailer offers and 1% below the average of the past €850m. This is six times the amount a strong covenant and retail units are five Q1s. A few retail investment spikes sold and leased-back during the same in prime locations, it is an alternative were recorded in Portugal, Poland period last year and 28% above the opportunity to source property and to and Spain, where large portfolios were average of the past five H1s. Retail SLB invest large amounts of capital which transacted. High street, notably in key currently accounts for 4% of the total in return will provide secure income touristic cities, remains the favoured retail investment volume. SLB activity streams.■ format, representing nearly half of the was concentrated in Spain and Italy deals. mostly but also in the Netherlands; mature markets where retail ownership “Investors are attracted to the SLB Based on first estimations, the retail still offers opportunities for investors. volume in the second quarter of the year principal on account of its secure should total approximately €8.8bn, 17% Since SLB transactions often relate cashflow, so long as the income down compared to Q2 last year and to portfolios and large deals, it is too 23% below the Q2 five-year average. early at this stage to predict if the trend covenant is strong enough. We This is notably due to fewer portfolio toward more sale and leasebacks will transactions. expand. However, pending transactions believe that this trend will continue and discussions around the subject on the condition that both sides feel suggest we can expect more of this type Time for sale & of deal during the remainder of the year. like they are getting a good deal.” leasebacks? According to RCA, some €1.1bn of In this challenging landscape, sale Oli Fraser-Looen, Savills Head of Retail retail properties were sold and leased- and leaseback transactions are a investment EMEA back (SLB) over the course of the past great financial opportunity for retailers

FIGURE 6 FIGURE 7 Retail sale and leasebacks Are on the rise Notable retail SLB transactions

Name of Type of N. of Date property/ Country retailer properties Share of SLB out of the total retail volume Rolling 12-month volume of retail SLB porfolio

8 12% Q2 18 Ores Fashion 4 Spain 7 10% 6 Q1 18 Eroski Supermarkets 6 Spain 8% 5 Q1 18 Tigros Supermarkets 8 Italy 4 6% 3 Q1 18 Zara Fashion 14 Spain Billionseuros 4% 2 2% Q1 18 Coop Supermarkets 29 Italy 1

- 0% Q4 17 Diesel flagship Fashion 1 Italy

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q3 17 Albert Heijn Supermarkets 15 Netherlands 2018H1

Source: Savills / *first estimations Source: Savills

savills.co.uk/research 03 Briefing note |European retail investment: Time for sale & leaseback? August 2018

FIGURE 8 Pros and cons for retail sale & lease-back OUTLOOK

Sale & lease- ■ We expect competition between retailers to For retailers For investors back intensify. Clearly, the winners will be those who are quickly adapting. As logistics is becoming an integral Pros ■ Improve finance on ■ Long-term, stable and component of the retail industry, retailers should balance sheet predictable income return reorganise their supply chain to comply with omni- ■ Transfer obsolescence and ■ Alternative opportunity in channel needs. A merger or a partnership with a logistics residual risk of ownership the European market where entity could be an alternative solution. available product for sale is ■ Unlock capital for growth scarce ■ According to Oxford Economics, growth in retail and operations sales is expected to slow down in the coming years. ■ Size of the portfolio deal However, it will continue to show a robust growth of 2% ■ Maintain long-term control enabling to invest a large of property through long- on average pa in EU28, until 2022. At the same time, amount of capital in one deal lease the share of online sales will continue expanding and is expected to account for 20.2% of total retail sales. ■ Rental levels are generally stable or decreasing (except ■ Retail investments will continue to be concentrated in high street locations), in prime high streets in key European cities and in ultra- therefore terms of the long- prime shopping centres and retail parks. But overall, lease should be reasonable investors will restrain their exposure to the sector. We expect to see more sale and lease-back transactions ■ Retail yield compared to before the end of the year. This will fuel the total retail LTA very favourable turnover, which, at year-end, should be in line with that of 2017.

Cons ■ Decrease capital in case ■ Covenant of the tenant ■ The sale and lease-back option is a great alternative of M&A and locations of the retail opportunity for value-add investors to source property in units should be carefully ■ Annual or monthly rents a European market where property available for sale is considered appear on the balance sheet rare, as long as the retail tenant is showing “future-proof” ■ Retail yield compared strategy and their properties are in prime locations. to LTA not particularly Actually, retailers with visionary strategies, seeking to favourable invest in technology or logistics, may well raise their hand to sell their properties. ■ In certain cases, there is the risk of inflated rents being ■ We expect yields to continue hardening in the advocated by the seller logistics sector until the end of the year, whilst overall retail yields will start stabilising. The line between the two sectors will slowly disappear since part of the logistics activity is absorbed by the retail industry.

Savills teams Please contact us for further information

Oliver Fraser-Looen Alejandro Sanchez-Marco Lydia Brissy Head of Retail Investment EMEA Spain Capital Market European Research +44 (0) 20 7409 8784 +34 91 310 10 16 +33 (0) 624 623 644 [email protected] [email protected] [email protected]

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