Research & Forecast Snapshot

EMEA | Retail Q3 2016

Retail Market Snapshot Mid-year 2016 Tab. 1: Key Metrics in the TOP 12 EMEA Markets [H1 2016] Prime SC Rent ¤/sqm/month (6m change, %)

Prime HS Rent ¤/sqm/month (6m change, %)

Amsterdam

133

(no change)

219

(no change)

5.25%

(+45)

3.90%

Berlin

180

(no change)

340

(+3%)

6.50%

(no change)

Dublin

178

(no change)

238

(+6%)

4.50%

(no change)

Istanbul

113

(-10.7%)

144

(-11.1%)

7.25%

London

328

(+2.4%)

1,273

(+16.7%)

Madrid

45

(+84%)

240

(+9.1%)

Milan

50

(-11.5%)

1,000

(+5.3%

Moscow

113

Munich

90

City

Prime SC Yield

Prime HS Yield

(6m change, Bps)

(6m change (Bps)

Investment Volume ¤million [vs. 10-year average]

(+10)

153

[-9.0%]

3.70%

(-30)

520

[+9.4%]

4.00%

(no change)

983

[+346%]

(no change)

6.00%

(no change)

64

[+58%]

4.00%

(+25)

2.50%

(no change)

1,424

[-18.9%]

4.75%

(-50)

3.75%

(-75)

308

[-13.6%]

6.50%

(-50)

3.50%

(-100)

423

[+107%]

(-8.8%)

287

(+12.3%)

10.00%

(no change)

13.50%

(no change)

17

[-94.7%]

(no change)

370

(+2.8%)

4.75%

(no change)

3.00%

(no change)

366

[+15.3%]

Paris

208

(n/a)

Stockholm

133

(no change)

Warsaw

112

(+4.7%)

1,250 137 90

(n/a)

3.50%

(n/a)

2.50%

(n/a)

566

[+5.5%]

(+6.9%)

4.00%

(-50)

3.75%

(-50)

200

[-52.6%]

(no change)

5.50%

(no change)

7.00%

(no change)

8

[-92.6%]

Source: RCA, Colliers International

Summary European retail sales continued to grow steadily in the first half of 2016, propelled by higher employment and growing disposable income. This has helped to drive rental growth, or rental stability, across key EMEA markets. Prime high street rental growth was recorded in 46% of EMEA markets. Solid high street rental growth was seen in key locations including London, Madrid, Vienna, Stockholm and Dublin. Shopping centre rental growth was recorded in 24% of EMEA locations, with the most significant rental increases in prime shopping centres in Vienna, Bratislava and Madrid. International retailers continued their strong expansion across the region. London, which saw numerous new openings retained its leading position.

Despite a significant y-o-y decline in investment activity in H1 2016, the total volume remained higher than the 10-year average by 6%. While key western European markets, notably the UK and Germany, recorded y-o-y declines, the Nordics, Ireland, Spain and Italy prospered, resulting in an increase in investment volumes. Following the increased activity outside core Western Europe, strong prime yield compression was observed in select markets in Southern Europe, the Nordics and CEE. Looking forward, the post UK-referendum hit to consumer confidence amidst growing uncertainty across Europe is liable to slow markets down across the EU as a whole in H2 2016. That said, retail occupier markets in prime locations is expected to perform well, as the level of competition will remain high - particularly in the grocery sector. We expect international retailers to continue their expansion, driving availability down and prime rents up in cities like Madrid, Lisbon, Dublin, Munich, Prague and Stockholm.

ECONOMIC BACKDROP The European retail market was in good condition during the first half of 2016, with the EU market recording over 2% y-o-y growth in retail sales every month. In June retail trade volumes increased by 2.4% (y-o-y) in the EU, and by 1.6% in the euro area. Romania has continued to post record retail trade levels with 16.2% y-o-y growth in June, followed by Lithuania (6.2%), Spain (5.8%), Hungary (5.6%) and Poland (5.5%). Despite strong growth in retail trade volumes, consumer confidence has been on the decline since peaking in early 2015. As of July 2016 the EU consumer confidence indicator stood at -7.6, representing a -2.5 y-o-y fall. In the aftermath of the referendum decision to leave the EU, UK consumer confidence slumped to its lowest level in two years. There is a wide concern that less confident consumers, uncertain of the current economic outlook and their own financial situation will curb their spending. It is also expected that the devaluation of the pound will force retailers in the UK to increase the prices of goods in the medium term as a result of higher supply/logistics costs. However, retailers with sales generated primarily from abroad, such as ASOS, might benefit from the depreciation of pound against both the US dollar and euro. A weak pound may also encourage higher spending in key UK tourist destinations, such as London.

In recent months we have seen a number of legislative changes in Europe which are expected to have a significant impact on local retail markets. Although the French government had relaxed Sunday trading rules in 2015, implementing these changes has been held back by negotiations between retail stores and unions. Allowing both Sunday trading and extended opening hours during the week in 12 international tourist zones of Paris was aimed at helping shops fight-off competition from 24-hour internet retailers, as well as to counteract losing tourist spending in favour of other countries. Reportedly, an agreement was reached in May between employee unions and a group of circa 30 brands. However, many retailers - including some department stores - have yet to succeed and remain closed on Sundays. In Hungary, the ban on Sunday trading was scrapped in April 2016, barely a year after its introduction. Poland seems to be moving in the opposite direction, as a ban on Sunday trading is currently being discussed and, with the government generally supporting the idea, such a law could come into force next year. A retail turnover tax comes into force in the country in September.

Fig. 1: Monthly EU Consumer Confidence and Retail Trade [2004 - 2016] Consumer Confidence (LH)

Retail Sales (RH)

Source: European Commission, Eurostat, Colliers International

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EMEA Research & Forecast Report | Mid-year 2016 | Retail | Colliers International

Jun-16

Dec-15

Jun-15

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

85 Jun-09

-40 Dec-08

90

Jun-08

-30

Dec-07

95

Jun-07

-20

Dec-06

100

Jun-06

-10

Dec-05

105

Jun-05

0

Dec-04

110

Jun-04

10

Occupier market International retailers continue with both physical and online expansion across EMEA markets amidst strong competition. Amazon keeps raising the online bar; it has expanded Prime Now across UK and it has launched the service in Paris, Berlin, Milan and Madrid. The retailer also launched Amazon Fresh in London in June. Inditex has decided to grasp new technology and they will enable in store mobile payments from each brand’s online application starting in Spain from September. One of the key new entrants to the European retail market is the Canadian retail group Hudson’s Bay Co., which has recently announced that they will open their first stores in Germany and the Netherlands next year, including premium department stores and Saks Off 5th discount department stores. The retailer will move into many premises formerly occupied by the bankrupt Dutch department store V&D. The collapse of V&D, and of BHS in the UK, are a reminder that operating a successful retail business today is anything but easy. The market proves to be challenging for grocers as well. Tesco continues to fight to regain profitability. In the UK it has disposed of its non-core business including Giraffe restaurants, Dobbie garden centres and Harris + Hoole coffee shops. The retailer is also optimising its business abroad. Another British supermarket chain, Sainsbury’s, is expected to intensify the online competition after its successful £1.4 bn bid for Home Retail Group (Argos owner). Occupier demand is spreading from London to the UK regions and the food and beverage sector continues to flourish. Lease lengths have stabilised and rent free periods reduced. Continued demand has resulted in a greater take-up of space and a return to rental growth in key regional markets, with prime rents in Manchester approaching the pre-recession tone of £300 per sq ft Zone A. London, the world’s primary tourist destination, remains top choice for international retailers. Recent new entrants include Delpozo, Golden Goose and True Religion. Prime rents reached record levels with £1,750 per sqft Zone A on Old Bond Street and £1,000 on Oxford Street West. Dublin has clearly left all troubles behind, as private consumption is growing and consumer confidence remains strong. Solid demand and limited availability of premises pushed prime high street rents up by 6% since the end of 2015. We expect to see further rental growth in the retail sector throughout 2016, in particular on Dublin’s principal high streets, Grafton Street and Henry Street. Recent lettings include Victoria Secret on Grafton Street, with the opening planned for 2017. The recovering economies of Portugal and Spain along have seen increasing retail spending boost occupier and investor demand. After years of strong adjustments, Madrid’s prime high street and shopping centre rents increased.

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The limited availability of space in the best locations will feed further rental growth. The retail market is the best performer in Portugal and rental growth has reached both Lisbon high streets and shopping centres. A high shopping centre pipeline has put downward pressure on prime shopping centre rents in Milan. In April we saw the opening of Il Centro in Arese (92,000 sqm) and in October Scalo Milano (60,000 sqm) will be opened in Locate di Triulzi. Prime high street rents, however, recorded growth and so have high-street rents in Rome. These cities are two of the most popular tourist destinations in Europe and are seeing very high tourist spending, driving their appeal to retailers. Recent openings include Tiffany & Co in Rome and Moschino’s flagship store in Milan. Another luxury retailer, Philipp Plein is to open its flagship store and HQ in Milan in December. In Central and Eastern Europe (CEE), a solid 6-month growth in prime shopping centre rents was recorded in Bratislava (18.5%), Riga (7.1%), Vilnius (5.3%), Kiev (5.3%) and Warsaw (4.7%). Demand from international retailers for prime locations in the region remains strong. This autumn we will see the opening of the first COS store in the Baltics, in Riga’s Galerija shopping centre, as well as three Forever 21 stores in Poland. Despite a few significant closures: American Eagle Outfitters, Mothercare and, most recently, Burberry, Poland remains one of the key expansion markets for international retailers. Also its home brands are expanding successfully, attracting investors’ interest. Smyk, a well-known children’s apparel and toy store chain, was sold by Poland’s Empik Media & Fashion (EM&F) to a private equity group Bridgepoint for €247 million, including debt. Another major M&A transaction in the CEE region took place in Romania, where the Competition Council has recently approved the takeover of 86 Billa supermarkets from German group REWE by French retailer Carrefour. The retailer has agreed to give up three supermarkets in Braila, eastern Romania, to receive the approval. The transaction is estimated to be worth €95-100 million, including Billa’s debts. After a prolonged period of rental decline caused by economic difficulties and currency exchange fluctuations, rents seem to have stabilized in key Russian markets. Development activity has slowed significantly and a 10-year record low level of retail completions is expected this year. With a poor economic outlook and weak consumer demand in place, the retail market situation is not expected to change any time soon. This however, does not mean that Russia is beyond international retailers’ interest. Among 2016 openings we have seen the launch of Reserved store in St Petersburg (the largest in Russia), and the opening of Furla store in Moscow.

EMEA Research & Forecast Report | Mid-year 2016 | Retail | Colliers International

New supply and the depreciation of the Turkish lira pushed rents down in Istanbul. With 600,000 sqm of new space under construction we expect rents to decline further. Also, further afield in the Middle Eastern markets, developers’ activity remains very high, with 565,000 sqm under construction in Abu Dhabi, 175,000 sqm in Dubai and 227,500 sqm in Cairo. Most of these are large-scale developments like the Mall of Egypt in Cairo (165,500 sqm) where the grand opening is planned for September. With the majority of forthcoming supply positioned as regional malls, there is an unmet demand for community and lifestyle retail in UAE.

20

15

Rome

Istanbul

St. Petersburg

Prague

Edinburgh

Munich

Milan

Leeds

Dubai

Dublin

Kyiv

Glasgow

Vienna

Madrid

Stockholm

-5

Eindhoven

0

Abu Dhabi

5

Frankfurt

10

London

The prime rents in key shopping areas in the Netherlands remained broadly stable. New store openings in H1 2016 include Urban Outfitters in Utrecht and Stradivarius in Amsterdam, the first one in the Netherlands. Also in Amsterdam, Hudson’s Bay signed a lease with IVY Group for three buildings of total space of 16,000 sqm located in Rokin District – a redevelopment of former Fortis Bank head office. The first department store is to be opened in 2017.

Fig. 2: 6M Change in Prime High Street Rents [%]

Moscow

The retail market in Germany is characterized by stability. Private consumption is benefiting from various factors, including favourable labour market trends and low inflation. Berlin and Munich recorded growth in prime high street rents and further rental growth is expected. Both cities have emerged in recent years as two of the most popular retail spots in Europe, thanks to high purchasing power and tourist spending. Despite being the most expensive location in Germany, Munich keeps attracting top retail brands; this year we have seen opening of Christian Louboutin and BCBGMaxAzria stores.

-10

-15

Source: Colliers International

Fig. 3: 6M Change in Prime Shopping Centre Rents [%] 30 25 20 15

-10 -15

Source: Colliers International

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EMEA Research & Forecast Report | Mid-year 2016 | Retail | Colliers International

London

Wroclaw

Leeds

Lisbon

Warsaw

Kyiv

Vilnius

Manchester

St. Petersburg

Madrid

-5

Vienna

Minsk

Milan

Istanbul

0

Bratislava

5

Moscow

Frankfurt

10

Source: RCA/ Colliers International

The share of cross-border transactions was slightly below 60%, with US investors dominating in the EMEA market, followed by capital from the UK, Luxembourg, South Africa and Canada.

Fig. 6: European Retail Investment Volumes [2009-2016, Sums of H1’s]

>> The acquisition of 100% stake in Grandi Stazioni Retail by a consortium formed by Antin Infrastructure Partners, ICAMAP and Borletti Group; the portfolio embraces commercial space in 14 Italian and two Czech railway stations, >> The purchase of 75% of shares in Poland-based Echo Prime Properties by South African Redefine Properties from Echo Investment. The newly created vehicle comprising retail and office assets worth €1.2bn is to be managed by Griffin Real Estate. >> The acquisition of Blanchardstown Centre in Dublin by Blackstone from Green Property for around €950 m, pushed Ireland’s retail investment volume to the highest ever level. >> The £350m sale-and-leaseback of David Lloyd’s 44-property portfolio throughout the UK. The purchaser in this all-cash deal was M&G Investments. >> The £335m purchase of Grand Central shopping centre in Birmingham by Hammerson in JV with CPP Investment Board, at a net initial yield of 4.00%.

¤ Bn 40

35

30

25

20

15

10

5

0

2009

2010

2011

Source: RCA/ Colliers International

5

Russia

-100

Capital Flows

Despite lower activity, several big ticket transactions were recorded, including:

Benelux

Germany

CEE

0

UK

France

100

Austria/ Switzerland

200

Nordics

The key markets of the UK and Germany recorded a significant decline of 45% and 48%, respectively. Despite this drop, the UK remained the preferred choice for retail investors, attracting 23% of the capital invested in the EMEA retail market. Germany lost out to the Nordics, where strong activity in Sweden and Finland pushed the volume up to €3.9 billion. Also Ireland, Poland, Spain and Italy showed resilience having recorded high investment volumes.

300

Spain

This drop can be partially attributed to the exceptionally high activity last year. Nevertheless, the uncertainty surrounding the EU referendum in the UK has clearly contributed to the suppressed activity across the region.

400

Italy

A significant drop in retail investment activity was recorded in the first half of 2016. The total volume reached €23.7 billion, which is 36% lower than the volume recorded in H1 2015. However, this is 6% over the 10-year average.

%

Poland

Investment Volumes

Fig. 4: H1 2016 Retail Investment vs. 10 Year Average

Ireland

CAPITAL MARKETS

EMEA Research & Forecast Report | Mid-year 2016 | Retail | Colliers International

2012

2013

2014

2015

2016

Tab. 2: Key Retail Transactions 2016 H1 Date

Market

Name

Buyer

Seller

Est. Price

June

Poland

17-Property Portfolio (Retail and Office)

Redefine

Echo Investment

75% of €1,180m

June

Italy, Czech Republic

16-Property Portfolio

Borletti Group JV Antin JV ICAMAP

FS Italiane JV Eurostazioni

€953m

June

Dublin, Ireland

Blanchardstown Centre

Blackstone

Green Property

€943m

June

Brierley Hill, UK

Intu Merry Hill

Intu Properties

QIC

50% of €1,033m

January

UK

44 Health & Racquet Clubs Portfolio

M&G Investments

David Lloyd Leisure

€475.7m

January

Birmingham, UK

Grand Central Birmingham

Hammerson plc JV CPP Investment Board

Birmingham City Council

€455.3m

February

Sweden & Finland

97-Property Portfolio (Retail, Office, Hotel)

Partners Group

Sveafastigheter

€450.0m

February

Spain

11 Eroski Stores

Invesco RE

Eroski Group JV Topland Group JV Mondragon Investments

€358m

January

Berlin, Germany

4 Retail Properties (Part of 14-Property mixuse Portfolio)

Brookfield Property Partners JV KIC

Savills Investment Mgmt

€26.8m

April

Germany

25 Property Portfolio

Patrizia

Savills Investment Mgmt

€320m

January

Milan, Italy

2-4-6 Via Errico Petrella

Meyer Bergman

Montepaschi Group OBO Sansedoni Spa JV Carpathia Real Estate SRL

€307.1m

February

Helsinki, Finland

City Forum

Sponda plc

Forum Fastighets Kb

€232.2m

Source: RCA/ Colliers International

In Scandinavia, compression of both prime shopping centre and high street yields in Stockholm (-50bps) and Oslo (HS -75bps, SC -25bps) was recorded.

Pricing Strong activity in Poland brought prime shopping centre yields in regional markets down by -25bps, on average. Other CEE key centres also saw compression of prime yields, including Prague, Bratislava, Budapest and Bucharest. Solid investor interest in Southern European markets also put downward pressure on prime yields in Lisbon (-75bps), Milan (HS -100bps, SC -50bps) and Madrid (HS -75bps, SC -50bps).

Fig. 6: Prime High Street Yields (6M Change)

Along with a disappointing performance of the Benelux investment market, a widening of prime shopping centre and high street yields was recorded in Dutch cities (between +15 and +50bps).

Fig. 7: Prime Shopping Centre Yields (6M Change)

London

3

Stockholm

Q2 2016

.

.

.

Lisbon

Milan

Budapest

Source: Colliers International

EMEA Research & Forecast Report | Mid-year 2016 | Retail | Colliers International

Bratislava

Prague

Vienna

Bucharest

.

.

. Hamburg

. Madrid

.

. Frankfurt

Oslo

Rome

Leeds

Glasgow

Manchester

Dublin

Prague

Oslo

Stuttgart

Amsterdam

Madrid

4

2 Source: Colliers International

Warsaw

. Leeds

.

.

. Munich

.

Glasgow

.

Dusseldorf

.

.

Dublin

Stuttgart

. . Lisbon 2

Stockholm

Copenhagen

Berlin

Hamburg

Milan

Frankfurt

Vienna

Munich

London

4

6

6

5

Dusseldorf

5

Budapest

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

. 6

3

Q4 2015

7 .

7

[%] 8

.

Q2 2016

Rome

Q4 2015

Berlin

[%] 8

Despite lower investment activity in Germany, further yield correction took place in Berlin, Hamburg and Frankfurt.

Outlook Despite an uncertain economic outlook, we expect the retail market in the region to show resilience, particularly outside of the UK. Dublin and well performing Southern European markets are expected to see further rental growth. Warsaw, Prague and Budapest are forecast to lead shopping centre rental growth in CEE. In the UK, despite uncertainty regarding consumer behaviour and general retail market performance over the medium term, rents in prime UK locations are expected to remain broadly unchanged. The recent devaluation of the pound may act as an extra incentive for investors with eyes on long-term investments in the UK, and in particular London. While expectations of a price decline are unlikely to be forthcoming, reduced competition for assets amidst broader market uncertainty will improve the ability of many investors to act.

AutHor: Zuzanna Baranowska Senior Analyst | EMEA Research +44 2 074 871 628 [email protected] Business Contacts: Paul Souber Head of Retail | EMEA +44 2 073 446 870 [email protected] Richard Divall Head of Cross Border Capital Markets I EMEA +44 2 074 871 605 [email protected] Damian Harrington Director | Head of EMEA Research +358 9 856 77 600 [email protected] Contributors: Juliane Priesemeister, Information Designer [email protected]

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EMEA Research & Forecast Report | Mid-year 2016 | Retail | Colliers International