ICSC European Retail Property School
The Asset Management Team Responding to the changing retail world Ashley Blake
Friday 11th July 2014 Berlin - Scandic Berlin Potsdamer Plat
The Asset Management Team
Morning Session – The Asset Management Team • Session 1: 8.30 - 10.30am • Why is the team important in the current environment? • Client and asset team dynamics • Financial and performance Metrics
• Coffee Break: 10.30 – 10.45 • Session 2: 10.45 - 12pm • Adding value and business planning • Main group exercise • Key summary
• Go get those certificates!
The Asset Management Team
My Background – Different Angles • Advisor - DTZ • Client side – Lathe Investments £180m • Small core team – 7 people • Home market and overseas • Total out-house model • Complex funding, fund structure, JV partners, bank debt
• Client side – Land securities £4bn • Large core team – 300+ • Home market only • Total in-house model • Simple funding
The Asset Management Team
This mornings objective: ‘To bring together the weeks lessons to look at creating high performance asset management teams to enable retail destinations to thrive in a changing retail environment’ Reflection Discussion Participation Group exercises
The Team in a Changing Environment
What big trends are changing our sector? • Multi-channel • Customer empowerment • The changing role of retail in our lives • Globalization of retailers/brands • Globalization of investors • Physical obsolescence of our stock
“We have seen more change in retail in the past 5 years than the past 500…”
Rates of shoppers using multi-channel
% of shoppers using m-commerce during a purchase (UK) Source: Verdict
77.3%
79.3%
2013
2014
71.8% 62.9% 52.0%
28.2%
2009
2010
2011
2012
Rates of shoppers using multi-channel
% of shoppers using m-commerce to make a purchase (UK) Source: Verdict
35.1%
23.4%
11.3% 4.5%
2000
2005
2010
2014
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Changing role of retail in our lives • We don’t need to buy in physical stores • We are more time-poor • We want to be entertained • We are less loyal • We have more information than you • We expect quick/instant gratification • We are more demanding • We get bored quickly
The Asset Management Team
Changing role of retail in our lives “Retail has gone from being a necessity to become a leisure activity…”
“Retail locations now need to be multi-use destinations”
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Globalization - Retailers • Although some brands fail when they go overseas, there is an increasing push by brands to move outside their home markets • Vertical versus horizontal retailers – the verticals are on the up • They need less stores in their home markets due to the internet • Funders are pushing them to expand to grow revenue • Multi-channel makes expanding abroad easier • The globalization of culture, sport and social media is homogenizing our brand requirements
The Asset Management Team
Globalization Current cross-border Investors • Opportunity funds (US especially) • Sovereign wealth funds and overseas funds (China, Korea, Middle East, Norway and others) • Global retail REITS (Simon, Westfield etc…) • Euro-zone cross border investors (Unibail etc…)
In the future? • Chinese property companies (40m sq m of malls under construction right now in Chinese cities) • Other BRIC countries?
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“..a big bargain for wanda.” Wang Jainlin, Chairman Dalian Wanda
The Asset Management Team
Physical obsolescence • Many European shopping centres were built in the 1960s to 1980s and need radical updating • Are even those built in the 1990s and later fit for 21st century retailers and shoppers demands? • How often should a centre be refurbished and repositioned? • More ‘churn’ of tenants requiring more construction work • Technology needs to be fitted (WiFi, Path intelligence) • Leisure uses need increasing (cinemas, restaurants) • Alterations needed for an aging population (signage, lifts, ramps, information systems)
The Asset Management Team
What does all this mean for the team? • More specialists needed • Marketing • Social media • Specialist leasing • Retailer sales and customer behavior analysts • Multi-channel • Customer services • Project management, construction management • Designers, architects, signage specialists • Food and beverage advisors • Customer circulation specialists…
• The team has got larger and more diverse • Many members of the team are not property-experts
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Who cares! Why is a team important anyway! A little bit of theory… • Poor teamwork is the number 1 reason for organizations failing to succeed • The shopping centre real estate industry has changed from a pure property model to one closer to an operational/consumer industry where teams are far more important • No one team member or even class of expert can solve today’s complex problems by themselves • More knowledge and information is needed from more sources requiring the resources of a team
The Asset Management Team
Six Key Elements of Team Building 1 Assembling the right team members 2 Creating the right environment 3 Setting clear goals 4 Capitalizing on each members strengths 5 Measurement of team success 6 Communication and feedback
The Asset Management Team
Types of team management/leadership Directing
Supporting
Enabling
The Asset Management Team
Traditional asset team structure – Core Team Client Internal or external Banks / Funders
Asset manager
Leasing agents/team
Property manager
The Asset Management Team
Leasing Team
Owner/ Asset Mgr.
Property Manager
Speciality Leasing
Investment
Operations Marketing Social Media
A modern asset management team It doesn’t work with silos and a ‘need to know’ culture.
Environmental
Construction Design & Development
Research
M-Commerce Tenant Liaison
Data/analytics
The Asset Management Team
Six Key Elements of Team Building – Group Exercise 1 Assembling the right team members 2 Creating the right environment 3 Setting clear goals 4 Capitalizing on each members strengths 5 Measurement of team success 6 Communication and feedback
The Asset Management Team
What is shopping centre asset management? Creating and implementing a plan to improve the shopping centre by the following metrics • Improved customer spend • Improved trading by tenants • Increased tenant demand • Increased rental income • Control of costs: revenue & capex • Increased capital value But now also to include: • Risk control • Environmental sustainability • Community involvement
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Ownership strategies Property ownership strategies are often grouped in the following categories: Core - Super prime assets in core markets (Bluewater, Westfield London) often with strong prices and dry income but good rental growth prospects. Low risk but strong prices mean a low starting income yield. Limited availability of stock.
Core+ - Strong assets in prime/good secondary locations – as above but with a higher income yield than core.
Value-Add - Assets where there is the opportunity to add to the capital value be asset management/development.
Opportunity - Assets in secondary/tertiary locations that have low prices that produce high yields but come with higher risk.
The Asset Management Team
Ownership strategies Strategy hugely influenced by time-scale: 1. Short-term plans (3-5 years) Aggressive asset management and income management to raise rents and hence value. All efforts designed to ensure a successful exit to another investor at a higher price. Many such investors are committed asset managers but many also base their plan on a market upswing in values rather than committing resources to improve the centre. The ‘bigger fool’ method of exiting…
2.
Longer-term plans (5 years+) Investors able to take on larger repositioning and redevelopment projects to unlock rental growth and move the asset up the retail hierarchy. Requires funders with a longer view and not those who demand short-term results. A great example is Regents Street on London, once a poor relation to the streets around it, it is now one of the top three leading retail streets globally.
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Retail Real Estate Owners These are the main types of investor/owner: High-net worth individuals Family trusts/investment offices Private unlisted property companies Public property companies Funds - Private Equity/Opportunity Funds Funds – Institutional Sovereign wealth funds
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Ownership types
Column 1
Row 1
High-net worth individuals
Row 2 Family Row 3 trusts/investment offices
Investment assets 4 Key drivers Column 2 Risk Column 3Types ofColumn Column 5 Horizon Tolerance sought Long-term 10yrs+
Low/Medium
Core/Core +
Wealth preservation Income Low debt
Long-term
Low/Medium
Core/Core+ Value add
Wealth preservation Income Low/medium debt
Short-medium term
Medium
Value add
Total return Medium/high debt
Medium-term
Low/Medium
Core+ Value add
Shareholder return Dividends Low/medium debt
Short-term
Medium/High
Core +/Value add Opportunity
Total return High debt
Long-term
Low
Core/Core+
Total return Income Low or no debt
Very long-term
Low
Core/Core+
Wealth preservation No debt
Row 4 Private unlisted property
Row 5 companies Row 6
Public property companies
Row 7 Row Funds8 - Private Equity/Opportunity Funds
Row 9 Funds – Institutional
Row 10 Sovereign wealth funds
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Bankers: your other client and owner Banks increasingly want interaction with asset managers: • Regular reporting • Restrictions in the loan agreement (surrenders, lettings, development) • Loan covenants (LTV/ICR) • Approvals • Repayment penalties • Servicing agents • Rent accounts
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In-house or out-house management: A big topic. Which is better? Strong views on both sides. Out-house •
Works well for small firms who don’t have economies of scale to make directly employing specialists affordable
•
Reduces liability on owners
•
Enables owners to benefit from specialist staff and departments without employing them all year round
•
Avoids employment management and HR issues
•
Works well for foreign investors without a team on the ground
•
Banks like having an external property manager to control rent account
•
External agents bring new knowledge and skills
•
Asset managers freed up to focus on value-add work and the big picture
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In-house or out-house management: In-house •
More control over delivery
•
Communication can be easier (but sadly sometimes worse!)
•
Stronger direct relationship with retailers
•
Easier to keep information and proposed actions (like a sale plan or turnover data) confidential
•
Can a in-house structure become inward-looking and stale?
•
If a colleague does a bad job, what can you do?
In reality most firms have a mixture of in-house and out-house depending on the asset and their organisations requirements. One thing you should be careful about out-sourcing is asset management.
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Financial Metrics The following are almost common universal metrics that investors use to assess real estate performance: • Internal Rate of Return % (‘IRR’) p.a. • Net operating income (‘NOI’) • Rental value (total p.a. or per sq m/ft) • Incentive package (often expressed in months or years) • Income yield % p.a.
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Financial Metrics • Internal Rate of Return % (‘IRR’) p.a. •The weighted average return per annum produced from a discounted cashflow. Can be compared to other investments including non-real estate ones for investment comparison and assessment. Most businesses will have target returns by which to judge investments.
• Net operating income (‘NOI’) • Expressed as the gross income from a property less all property costs borne by the investor to produce a ‘net’ income to him as a property return (ie ignoring higher level corporate and debt costs).
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Financial Metrics • Rental value (total p.a. or per sq m/ft) •Provides a open market value of space/accommodation to prospective tenants that can be compared across the asset/location or with other assets/locations. Can be used to value new space or space to be relet but adjustments will be needed to allow for individual units.
• Incentive package (often expressed in months or years) • Rental value above often is expressed as a ‘head-line’ figure, i.e.; the final rental achieved but what incentives were used to secure the rent. Knowing the incentive package can provide transparency on the whole deal. Many firms use an average number across the centre to track trends in incentives. • Where the Rental Value allows for incentives then this is often described as a ‘net effective rent’.
The Asset Management Team
Financial Metrics • Income yield % •A key valuation metric used by the industry. In effect it shows the rental yield achieved from an asset. The base calculation is: Annual Contracted Net Rental Income/Valuation (or Purchase Price). • Different countries use different valuation approaches. Some deduct purchasers costs (legals, surveys, tax), others do not. • Be careful of what rental figure is being used. Does it net-off all property costs or is it a gross rent? Does it allow for income guarantees by the vendor or rentfrees? • Used by valuers as a benchmark to compare prices paid for assets. •Obviously the higher the price – the lower the yield. • Prime assets that are in demand by investors therefore generate a lower yield as investors are so keen to own them that they will accept a lower yield on their investment.
The Asset Management Team
Performance Metrics The following are almost common universal metrics that investors use to assess operational retail real estate performance: • Footfall (numbers p.a. or per week) • Catchment drive-time • Catchment affluence • Frequency of visit • Spend per head • Total sales • Sales densities (per sq m/ft) • Total occupational cost ratio %
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Performance Metrics “It’s the economy, stupid” Bill Clinton on what voters cared about
Have you got this data? If not, why not?
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Drivers of value? Ultimately all property is valued as rent multiplied by a capitalisation factor (normally an investment yield) less any capital costs required. These are the three levers you must pull through your actions.
Rental income is a fact and as an asset manager you can make a lot happen to defend and increase it.
Capitalisation rate/yield however is a reflection of investors desire to buy your asset. It is mostly driven by the market but your actions can increase its desirability. Have you thought about the following: The look of the building – would you buy it? Your tenant mix – How attractive to a buyer is it? Legal title – are there issues that could cause problems for a buyer or his bank? Are all regulations compiled with? Fire, health and safety etc Planning/zoning consents approved and documented?
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Drivers of value? Capital costs – keep an eye on your repairs and the costs needed to ensure your centre meets the needs of shoppers and retailers. If you don’t ensure these areas are covered, your valuers and certainly your buyer will deduct such costs from the sale price. Increasingly, purchasers are looking to deduct capital costs for refurbishments and improvements not just repairs. Do you have a proper look-forward repair plan that is costed out? Can your service charge cover the costs of running the centre? Does your centre look tired or need essential improvements/upgrades?
Is your property ready for sale?
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Adding value? The following are examples of active asset management • Replacing poorly trading tenants • Improving tenant mix • Increasing rents on expiry or rent review • Improving the leisure offer • Increasing space in the centre for new tenants or retailer expansions • Using and reconfiguring existing space to create better units • Driving more revenue from car-parking • Creating or adding income from advertising, commercialisation, sponsorship and promotions • Creating new additional uses such as hotels, office space, residential
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Adding value? Is your initiative adding value? •Asset management projects tend to be in the following categories: • Defensive These initiatives stop income or value from leaking from the asset. Examples include non-income producing refurbishments, reconfigurations to retain tenants and improvements to infrastructure/services. Other examples can be adding customer facilities such as toilets, catering and additional car parking where there is insufficient income to cover the costs. Many asset managers claim such works will produce rental growth and/or an improvement in capitalisation rates. Many do not. Ask yourself, if someone carried out this project would you pay more for the asset?
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Adding value? Is your initiative adding value? •Asset management projects tend to be in the following categories: • Value Accretive These initiatives add value but not by adding income. Good for net asset value but not your revenue. Examples include re-gearing a lease with a tenant to make it longer and hence increase value, bringing in a more valuable tenant with a stronger brand to enhance the centre. Often such initiatives have costs (tenant incentives for example). Does your project really add enough value to cover the costs? What if capitalisation yields get worse during or after your project. Is your initiative really a defensive one?
The Asset Management Team
Adding value? Is your initiative adding value? •Asset management projects tend to be in the following categories: •Income Accretive The best asset management you can do. Adding income will add to revenue and net asset value. Examples include building more accommodation, creating additional income from advertising and releting at a higher rent. However, what costs are incurred in getting this extra income? How long will the income last? If it is creating a long-term income stream then you will get a strong valuation increase, if it is temporary (say a temporary exhibition for 2 months), then you may get little or no value uplift. How secure is the income? Good covenant? Will the tenant trade well? If your tenant fails could you re-let?
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Creating a café from developing 35 of your car parking spaces Your project involves building a 200 sq m café with outside seating on part of your centre surface car park. Due to the layout of the car park, 35 spaces are lost - 10% of your total. At present, car parking is free at the centre.
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Is your initiative adding value? A simple appraisal: New cafe unit on the car park: Area 200 sq m Rent 300 euro per sq m Total annual rent 60,000 euros Capitalisation rate 6.5% (multiplier x15.4) End value 923,000 euros Less costs Land value (assumed no value) 0 euros Construction 500,000 euros Professional fees (architects) 75,000 euros Leasing costs 6,000 euros Tenant incentive 60,000 euros Project contingency (10%) 64,000 euros Total costs before finance 705,000 euros Finance costs (5.5%) 20,000 euros ____________ Total development costs after finance 725,000 euros ____________ Profit/Profitability 198,000 euros (27%) Development yield 8.3%
The Asset Management Team
Is your initiative adding value? A simple appraisal: New cafe unit on the car park: Area 200 sq m Rent 300 euro per sq m Total annual rent 60,000 euros Capitalisation rate 6.5% (multiplier x15.4) End value 923,000 euros Less costs Land value (car wash) 150,000 euros Construction 500,000 euros Professional fees (architects) 75,000 euros Leasing costs 6,000 euros Tenant incentive 60,000 euros Project contingency (10%) 64,000 euros Total costs before finance 855,000 euros Finance costs (5.5%) 20,000 euros ____________ Total development costs after finance 875,000 euros ____________ Profit/Profitability 48,000 euros (5.5%) Development yield 6.8%
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Business planning A properly created business plan does the following: 1.
Brings the team together in its creation
2.
Sets out a clear vision for the asset both short, medium and long-term
3.
Provides a well-researched and honest analysis of the current position
4.
Sets clear agreed goals for the team
5.
Presents timescales and milestones for the plan
6.
Provides metrics to measure those goals
7.
Is a ‘living’ document that can and will change
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Business planning A mini-group exercise What are your top-three ‘must includes’ in a business plan?
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Business plan contents – Just my view! Every retail business plan is different depending on the asset but shouldn’t yours include the following: 1.
A clear vision for the asset in the short, medium and long-term
2.
Market context regarding the economic, occupational and investment markets with forecasts if possible
3.
Review of the asset’s position in the market and the competition both existing and proposed
4.
Detailed summary of historic and current performance key statistics – Both financial and operational
5.
Analysis of customer data and trends
6.
Analysis of retailer performance and tenant mix offer
7.
Risk analysis of the asset with mitigation strategies
8.
Clear set of financial and operational targets with time-scales for each
9.
Detailed implementation plan to achieve the targets with milestones
10. Appraisals of each capital expenditure project with estimated costs and profitability 11. An approach to reviewing and monitoring the business plan over the year ahead
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Are you ready to role-play?
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Group Exercise You have been given details on a sample property which you must work with your members of your team to create a short-form asset plan. The hand-out gives the background to the investment, it’s financing and challenges/opportunities Also each of you will take the role of a team member – you will get a card giving you a briefing on your role. There are some things you can tell your team and others you must decide whether to tell them or not. Your team has a 30min brain-storming session to develop an outline plan for the asset. Stay in character! You will then present to the board – myself and the rest of the class!
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