Shopping Centre & Retail Market

Shopping centre & retail market Kiinteistötalouden ja -arvioinnin perusteet

23.4.2019

Tuomas Vuorinen, JLL JLL: Global excellence, locally delivered

For more than 250 years, JLL has been a trusted partner to organisations that want more value from the commercial real estate they own, use and invest in. We help our clients Achieve Ambitions.

Goal to be the 80+ professionals in Finland largest in America The largest in EMEA The largest in Asia-Pacific

80 000+ 80 $7,9 B Professionals Countries Turnover, 2017 Goals for the day

3. Building 2. Understanding 1. Retail-market blocks of a shopping centre basics winning value shopping centre

Understanding retail market on high- Understanding the value of a shopping Understanding what makes a good level, basically various graphs pointing centre through income approach & shopping centre and how to analyse it up or down business model

3 Agenda

1. Introduction

2. Retail-market

3. Value of a business • Income approach • Business model approach

4. Foundation of a winning shopping centre

5. Understanding competition

6. Trends Retail rents are the highest in the business

~31€/m² ~170€/m²

Prime office rent per month in Helsinki Prime retail rent per month in Helsinki

5 Internationally, Helsinki retail attractiveness ranks low

Ranking of global retail cities by attractiveness Retail attractiveness of cities in Europe Cross border retailer attractiveness index attractivenessretailer border Cross

Helsinki

Retail sales growth 2015-2019 6

Source: JLL Research Two typical (retail) opportunities are growth and stable income

6% Growth markets Consumer spending is Latvia Lithuania increasing: Lot of 5% potential up for grabs

but risks are typically Hungary Estonia

higher EU Countries)(28 Average

4% Poland

Growth Bulgaria 3% Romania Slovakia Slovenia Czech Republic Spain RetailSales Russia Ireland Average EU (28 Countries) 2% Turkey Greece Denmark Sweden Mature, stable, potentially Portugal Finland Belgium declining markets United Kingdom Norway 1% Italy France Growth is minimal, but there Germany is typically lower risk for Netherlands Switzerland relatively stable income Austria 0% 0 € 2,000 € 4,000 € 6,000 € 8,000 € 10,000 € 12,000 € Retail sales per capita 2017 West Europe CEE, Russia and Turkey Recovery Markets

7 In Finland, growth cities, and mostly HMA attract the most retail interest

Cities as growth centres Total potential per household in Finland Population growth index 2014-2029 Select cities 1.20

1.15

1.10

1.05

1.00

0.95

0.90 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Helsinki Kajaani Kouvola Kuopio Mikkeli Tampere Sources: Statistics Finland (2014), JLL (2017)

8 Retail growth in Finland again slowing down

Vähittäiskaupan vuosikasvu ja ennuste 1998-2020 6%

5.0% 5% 4.4% 4.5% 4.2% 4.3% 3.9% 4% 3.5% 3.5% 3.3% 3.0% 3.0% 3% 2.8% 2.8% 1996-2012 kasvun 2.5% 2.3% 2.4% keskiarvo 2.0% 2% 1.8% 1.5% 1.0% 1% 0.3% 0.1% 0%

-1% -0.9% -0.9% -1.2% -2% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019¹ 2020¹

Toteutunut Ennuste

Lähde: Tilastokeskus, Kaupan liitto Confidence of retailers and consumers peaked in 2018

Kuluttajien ja vähittäiskauppiaiden luottamusindikaattorit 2005-2019 Seurantaindeksi

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

-10

-20

-30

Retailer Confidence Consumer confidence

Lähde: Tilastokeskus, Elinkeinoelämän keskusliitto Overall retail market has been in turbulence

Vähentynyt kulutus Kasvanut kulutus Inflaatiokorjattu liikevaihto Suomessa 2010-2018 Inflaatiokorjattu liikevaihto Suomessa 2010-2018 Indeksi 2010 = 100 Indeksi 2010 = 100

150 Urheiluvälineet +44,7% 110 140 108 106 130 Kodin elektroniikka +31,1%* 104 102 Koko vähittäiskauppa +1,4% 120 Kulttuuri ja viihde +19,1% 100 Päivittäistavarat +0,3%

98 110 Kahvilat ja ravintolat +11% 96 Tavaratalot -5% Optikkoliikkeet +8,1% Vaatteet ja jalkineet -6,2% 94 100 Koko vähittäiskauppa 1,4% Koti ja sisustaminen -6,4% 92 Kirjat, lehdet, etc. -80,9% 90 90 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018

Lähde: Tilastokeskus, KTI Shopping centres take a small, but high-profile, chunk of the market

Retail market size 2016 Bn€ of in sales 37.9

5 16% market share

6.5

Total retail market Shopping centres

Lähde: Suomen kauppakeskusyhdistys Shopping centre sales efficiencies in Finland have declined

Finland shopping centre sales efficiency €/m² 2010-2017 Sales (€) / Visitor in Finnish shopping centres Index 2010 = 100, nominal terms Nominal terms 105 16.60

16.46 16.40 100 100 16.28 98 16.20 16.18 16.18 95 Decrease of 16.11 14% 16.00 90 92 91 15.86 15.86 15.80 88 15.72 85 86 86 86 15.60

80 15.40

75 15.20 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017

Source: Finnish council of shopping centres, JLL research Retail performing weakly at the moment

Total returns 2011-2018 KTI Index 10%

2% KTI 2019: “Expectations remain 1% the most positive for large shopping centres in the Helsinki 0% metropolitan area, whereas for 2011 2012 2013 2014 2015 2016 2017 2018 smaller centres and other areas, Residential Offices Retail Total the outlook for both rents and occupancy rates is negative. “

Source: KTI Shopping centre owners in Finland

15 Agenda

1. Introduction

2. Retail-market

3. Value of a business • Income approach • Business model approach

4. Foundation of a winning shopping centre

5. Understanding competition

6. Trends Income approach for understanding the value of a business

• When analysing business value, the key question is how does this equation play out in the Profit coming years?

 The value of any business is an estimate of expected profits in Revenue Cost future

• While the equation helps understand current value and cash flow, it does not readily Variable Price per unit Units sold Fixed costs x costs lead to understandingwhat drives the profit formula’s components

Units sold x Unit cost

17 Profit formula in a shopping centre

In shopping centres it is mostly the revenue-side (“rent roll”) that is analysed, as on- going costs are not directly related to revenue

Profit

Revenue Costs

Existing Potential OPEX CAPEX

Keeping lights & Keeping the centre up-to- heat on, etc. date with major, singular investments like Rent per Vacant Potential rent refurbishment Tenants x x tenant units per unit

1. How sustainable is our 2. How likely is it that we can current rental income? lease out the vacant space?

Key questions when

analysing a shopping 18 centre 1. Income: Rent roll – The list of tenants, their rent levels and other relevant contract info

Tenant name Category Leased area Rent Date of lease First date of exit Comments

H&M Fashion xxxx m² x €/m²/month dd/mm/yyyy dd/mm/yyyy …

xxxx m² Vero Moda Fashion x €/m²/month dd/mm/yyyy dd/mm/yyyy …

K-Citymarket Groceries xxxx m² x €/m²/month dd/mm/yyyy dd/mm/yyyy …

Gigantti Electronics xxxx m² x €/m²/month dd/mm/yyyy dd/mm/yyyy …

Classic Pizza F&B xxxx m² x €/m²/month dd/mm/yyyy dd/mm/yyyy …

Tenant n Etc. Etc. Etc. Etc. Etc. Etc.

e.g. 1,4m€ Total n/a e.g. 50 000m² monthly

What will happen to this figure in the next year? What about in 3 years? 5 years? 10 years? 19 1. Income & OCR – “Occupancy cost ratio” helps understand tenant viability

OCR Next 3 years

Tena OCR > 20% Tenant 1 nt 2 Risk of exit

20%

OCR 15-20% Tenant n Tenant n Follow closely 15% Tenant Tenant n 3

OCR <15 Tenant n Tenant 4 Good tenant viability Tena nt 5 Tenant n

Expiration date

0,1m Bubble size indicates annual capital rent € 0,2m€ 0,4m€ 20 2. Filling vacant space: Estimating likelihood of filling up vacant space is more difficult

Illustrative space allocation in a shopping centre % share of retail space by category 35% 33% How likely is it that we can fill this empty space with 30% income-generating tenants? 25% 25%  This is when understanding market 20% conditions, tenant demand, strength of location, 15% 12% customer wishes and marketing activities become 10% 8% 8% increasingly important 5% 5% 5% 4%

0% Grocery Fashion Cafes & Commercial Vacant Health & Home & Electronics stores Restaurants services Beauty Interior

21 Agenda

1. Introduction

2. Retail-market

3. Value of a business • Income approach • Business model approach

4. Foundation of a winning shopping centre

5. Understanding competition

6. Trends A broader approach: Understanding value through a business model

Understanding the business 1. Value model helps take a 3. Operations proposition 2. Customers customer-point view. Profit How the value is delivered with people, What value is Who are target customers and how they are formula is merely the partners & processes promised to engaged outcome of a well-delivered customers value proposition

Currently and historically focus in valuing & 4. Profit formula understanding real estate How money is made (including shopping centres) is typically here, which is not conducive to good business- /shopping centre development

23 Background: Multi-sided business models

Platform

Companies who want people to People in need of information their websites

People in need of rides People with cars

People with rooms/apartments to People in need of accommodation rent

People in need of various goods Businesses with products to sell

24 Shopping centre, multi-sided business model

Offering consumers the best Offering tenants a reliable and shopping experience for their needs sufficient flow of consumers

Shopping centre Retailers Consumers (Value proposition) (tenants)

Revenue (rental income) Costs (OPEX+CAPEX)

25 Why focus on business models?

• Opens up new perspectives: (Retail) properties are typically managed like properties, not like businesses. Business model allows a broader understanding

• Helps understand customer needs: Understanding cash flow is not a good starting point for creating experiences that make consumers happy to shop

• There is currently lack of innovation: Shopping centres should have been the natural starting point for eCommerce (e.g. Amazon), instead shopping centres are lagging critically behind in online experience

26 Comparing the two approaches

Income approach Business model approach

Understanding why a business delivers superior value Understanding how the asset generates net cash flows to both customers and retailers. In shopping centres it in future. In shopping centres resulting from rental Vs. means why customers love to visit the shopping Focus income (revenue) and operational+capital centre and spend money there, and why retailers want expenditure (costs) into the centre

When it is important to understand the current value When it is important to understand how to build and When to use of a shopping centre or compare investment options develop winning shopping centres (e.g. for valuations, investment memos)

27 Agenda

1. Introduction

2. Retail-market

3. Value of a business • Income approach • Business model approach

4. Foundation of a winning shopping centre

5. Understanding competition

6. Trends Shopping centre categories – One approach

Focus on experience Most high-profile, but also most difficult to build

• Entertainment centres without • Large, flagship-type shopping a large retail selection (e.g. centres that offer everything High amusements parks, museums, under the same roof for sports centres) everyone (e.g. Iso Omena)

Not very sexy, but highly resilient

• Hypermarkets • Local, typically small shopping • Department stores Low centres, where basic necessities are bought (e.g. A • Shopping centres without bloc, Niitty) entertainment focus (e.g. Forum Helsinki)

Focus on large and varied retail selection Low High

29 Understanding a winning shopping centre platform

JLL’s resilience attributes for shopping centres & cases to study Modified version

Supply vs. Demand Are there enough paying customers? Is competition fierce?

1. Economic fundamentals Active management & response to change Public transportation & Car access Will customers visit the centre? 6. Dynamism 2. Location & proactivity

Resilience attributes

5. Identity 3. Design Meeting Functional & Emotional needs

Is navigation easy? Do customers feel safe and Branding, Marketing, Tourist peaceful in the centre? appeal 4. Offer mix

Balance of tangible & intangible offers and experiences 30

Source: JLL Research 1/6 Economic fundamental: Demand & Supply

Example:

Target Goal: customer groups • Understand potential paying customers • Understand competing shopping centres

Potential factors to analyse: 1. Residents of the near- 2. Employees of the area • Amount of people living or working in area 3. Tourists catchment area • Population growth • Amount of tourists in the catchment area • Amount of retail sales in catchment area • Amount of grocery stores in the area • Etc.

31 2/6 Location

Examples:

Number of people XX XXX Goal: stepping into a public transport vehicle on • Understand people flows in the area average November day 2016 Potential factors to analyse: • Number of people entering public transportation daily • Daily footfall in the streets • Daily car traffic amount 56 000 12 000 • Purchasing mode of people (why are they 15 500

there?) – Spending time, commuting, 43 000 shopping, other 12 000 • Plans for new transportation routes • Location distance from a major transit hub 5 000 27 900 • 37 000 Routes connecting different methods of 2 300 5 000 transportation • Location in relation to main points of 5 000 interest

Example:

Goal: • Understand functionality of the shopping centre • Understand the quality of the interior/ambiance

Potential factors to analyse: • Location of doors • Amount of floors • Locations of anchor tenants • Walking distance across the centre • Cleanliness of public areas • Use of lights, plants and materials • Noise-levels • Visibility to shops • Number of toilets per visitors • Number of elevators per visitors

Example:

Goal: • Understand the components of tenant mix • Understand non-tangible offers, such as free exhibits, events or campaigns

Potential factors to analyse: • Number of unique tenants and/or points of interest • Tenant mix allocation per retail category • Are peak units in the centre new/fresh/interesting or not? • Sales per tenant mix segment • Share of café & restaurant area of total space • Share of entertainment tenants of total area • Number of events annually

Source: Suomen kauppakeskusyhdistys 5/6: Brand, marketing, identity

Example:

Goal: • Understand why the shopping centre exists and how they communicate and engage with customers

Potential factors to analyse: • Quality of website • Online / Offline marketing mix • Activity in social media • Followers in social media • Links to local culture / specialities • Availability of mobile app • Marketing themes & messages • Amount of campaigns annually • Is the logo, colours and theme visible in the shopping centre? • Is there a loyalty program? 6/6: Active management

Example: Epic department store failures Selfridges - The unlikely success Goal: • Understand if the shopping centre is actively managing its tenant mix, brand and staying in tune with latest changes

Potential factors to analyse: • Share of new retail entries to Finnish market • Retail sales / visitors growth • Refurbishment history • Number of unique tenants & comparing this to competitors • Size of shopping centre organisation • Shopping centre management background (property, marketing, technology, startups, ecommerce, etc.) Conclusion: How to analyse a shopping centre?

1. Identify shopping centre type 2. Select attributes to study 3. Identify solutions for development

Based on findings, identify ways to improve the shopping Based on market conditions, client needs, and suspected centre under study. Changes can be small: e.g. changing Is it a local centre, entertainment centre, shopping centre issues, choose the right attributes to location of tenants, improving cleanliness, or large: e.g. hypermarket or a large flagship centre? study further. Not all attributes are useful in all centres building a restaurant cluster, changing the entire shopping centre concept direction

37 Agenda

1. Introduction

2. Retail-market

3. Value of a business • Income approach • Business model approach

4. Foundation of a winning shopping centre

5. Understanding competition

6. Trends Key shopping locations in HMA

Kivistö Under planning

8 Dixi

Jumbo

Myyrmanni

Kaari Lommila Under planning Sello Itis Arabia Tripla

Ainoa Hertsi Redi

CBD Iso Omena Lippulaiva Development

Juna Metro Metro ~2023 Raidejokeri ~2021 Nykyinen Valmistuva Suunnitteilla 39

Lähde: Suomen Kauppakeskusyhdistys Example: Comparing unique tenants between locations

Unique tenant: Something interesting competitors don’t have, a tenant or an attraction Anchor tenant: A tenant that attracts frequent, high-volume footfall. Typically a grocery store, but also sub-segment anchors e.g. H&M, Power, Gigantti, McDonald’s

Iso Omena Tapiola Kamppi Forum Stockmann Sokos Jumbo

-Acne -Adidas -6K -Burberry -Decanter -Aukia -Gerry Weber -Duudsonit Activity -Bebes äitiyden -Hugo Boss Park erikoisliike -J. Lindeberg (-Finnkino) -Calvin Klein -H&M Kids -Joe & The Juice (-Finnkino) -Finnmari Underwear -Hehku -Karen Millen -R/H Studio (-Flamingo) -Golla -Calvin Klein -Nahka Albert -Kari Traa -Henri Llyod -Kekäle -Juoksulabra -Etola (-Finnkino) -Scandinavian Outdoor -Michael Kors -PBO (Philosophy Blues -Quicksilver -Kenkä-Pertti (-Stockmann) -Kortteli -Timberland -Nike Orginal) (-Stockmann) -M.E.E.T -Marco Polo -Union Five -Noom -.Object -Virtual Reality -Moda -Muji pop up -Vans -Peak Performance -S.Oliver (-Zara) -Pikseli Arcade -Sisley -Victoria‘s Secret -Röhnisch -Public services -United Colors Of -Samsoe & Samsoe -Tempur Benetton -Samuji (-Zara) -Tommy Hilfiger -Sand - Muji -Ted Baker -XS Lelut

Source: JLL Research Agenda

1. Introduction

2. Retail-market

3. Value of a business • Income approach • Business model approach

4. Foundation of a winning shopping centre

5. Understanding competition

6. Trends Timeline of changes in shopping

Product Focus: Service Focus: Channel Focus: Experience Focus: Differentiation via product, Shift towards the customer, Disruption from e-commerce Customer experience price place and promotion driving segmentation and new entrants drives mergers and store emerges as the ultimate satisfaction measures closures business driver

1970’s 1980’s 1990’s 2000’s

Source: Gensler Research, Watermark Consulting 2018 “Eating is the new shopping”

“By 2025, in new shopping centre developments in Europe, around 25% of net leasable area will be dedicated for food & beverage“

43 Structural change driven by e-commerce and multi-speed RS growth

Retail Sales Index Europe 2008 vs 2016

140 Physical Retail Sales '16 Online Retail Sales '16 Total Retail Sales '08 130

120

110

100

Index (100 = Total Retail Sales 2008) Sales Retail Total = (100 Index 60

Source: Oxford Economics, Statista (October 2017) 44 Contact

Tuomas Vuorinen

Senior Analyst, Retail

+358 50 302 3037 [email protected]

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