Deutsche Asset & Wealth Management
Investment Opportunities in a Changing Retail Landscape October 2014
Presented by: Simon Wallace, Vice President, European Research Analyst +44 (0) 207 541 6468, [email protected]
Deutsche Asset & Wealth Management
Important notes
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01 Changing Retail Landscape
Deutsche Asset & Wealth Management 3 18-35 year olds
Deutsche Asset & Wealth Management 4 Aging (well)
Deutsche Asset & Wealth Management 5 Experience
Deutsche Asset & Wealth Management 6 Convenience
Deutsche Asset & Wealth Management 7 Innovation
Deutsche Asset & Wealth Management 8 Value
02 Implications for Investment
Deutsche Asset & Wealth Management
What does this mean for investment?
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- Changing risk profile?
- Reduced investment activity and supply?
- Polarisation?
- Underperformance?
- Mispricing and Opportunities?
Deutsche Asset & Wealth Management
Retail investment activity returning to pre-recession levels but at a lower share of the total...
Retail Investment as a Share of Total UK Transactions (%)
Sources: Real Capital Analytics, September 2014
11
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Eurozone Germany France Italy Spain
— Retail investment activity recovering strong
— £14 bn of retail property sales in the 12 months to Q2 2014
— Retail accounted for around 25% of sales over the past year
— Share of sale on a downwards trend?
Investment Activity
0
5
10
15
20
25
30
35
40
45
0
2
4
6
8
10
12
14
16
18
20 Annual Retail Transactions (£bn) % UK Investment (RHS)
Deutsche Asset & Wealth Management
...and as the risk profile of retail property changes...
Yield Levels by Weighted Average Unexpired Lease Term, Q3 2014
Sources: Deutsche Asset & Wealth Management
12
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Eurozone Germany France Italy Spain
— Average lease length
— Credit rating and default rates
— New supply and competition
— Asset depreciation
— Management costs
Changing Risk Profile
4
5
6
7
8
9
10
0 5 10
Yield (%)
Weighted average unexpired lease term
Deutsche Asset & Wealth Management
...and the total number of stores required declines...
Chain Store Numbers (All Categories)
Sources: Javelin, Q3 2011 F= forecasts; There is no guarantee that the forecasts will materialise
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Eurozone Germany France Italy Spain
— Estimated 25% decline in total chain stores in decade to 2020
— Greatest impact in-town
— Challenge also posed by large supermarkets and OOT destination stores
Key Challenges
80%
74%
20%
26%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2010 2020f
Units
Weighted average unexpired lease term
Deutsche Asset & Wealth Management
...this is likely to reduce the relative size of the retail investable market
Investable Stock (%, 2013)
Sources: IPF, March 2014, Deutsche Asset & Wealth Management F= forecasts; There is no guarantee that the forecasts will materialise
14
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Eurozone Germany France Italy Spain
— Retail currently the largest sector of the UK commercial property universe
— Falling store numbers weighing upon stock requirements
— Underperformance forecast to reduce the relative value of retail CRE market
— The size of alternative real estate is growing quickly in size
Key Challenges
40%
40%
11%
9%
Retail Offices Industrial Other
Deutsche Asset & Wealth Management
The market continues to polarise, creating a diverging rental outlook
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Sources: CBRE, PMA Q3 2014 F= forecasts; There is no guarantee that the forecasts will materialise
Number of Trading Location by Spend Coverage Annual Average Retail Rental Growth (%, 2013 to 2018f)
0.0 1.0 2.0 3.0 4.0 5.0 6.0
Prime Smaller SC's
Ret Units Smaller Towns
Sec SC's
Leisure
Retail Parks
Ret Units Big Towns
Supermarkets
Big SC's
Ret Units London Suburbs
Restaurants
Ret Units C London
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U.K. retail is forecast to underperform other sectors but opportunities exist outside defensive, low yielding prime stock
Market total return (%), 2013 – 2018f
Source: PMA Q3 2014
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2013 2014f 2015f 2016f 2017f 2018f 14-18f 0
2
4
6
8
10
12
14
16
18
20
All Property Retail
Deutsche Asset & Wealth Management
Urban convenience locations can take advantage of local demand and supply constraints...
Local Authority Population in 15 min walk*
Islington 55,485
Kensington and Chelsea 52,316
Hackney 51,683
Tower Hamlets 51,410
Lambeth 45,203
Hammersmith and Fulham 44,510
Westminster 40,856
Camden 40,429
Southwark 39,970
Wandsworth 35,843
Local Authority Population Density
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Sources: Nomis, Deutsche Asset & Wealth Management, 2013 Note: * Based upon average population per 4 square kilometres
Sources: Office of National Statistics, Census 2011, 2013
Local Authority Population Density
Deutsche Asset & Wealth Management
...and opportunities where risk is mispriced or assets can be repositioned to meet changing occupier demands
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Net Initial Yield, Q3 2014 (%) Shopping Centre Vacancy Rates (%)
Source: CBRE, Q3 2014, PMA, Q3 2014
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Prime Central London
Prime UK Good Secondary Secondary
High Street Retail Shopping Centre
High Street Retail Average Shopping Centre Average
0
5
10
15
20
25
Large Town Centre Out of Town Regional Small Prime Secondary
Deutsche Asset & Wealth Management
UK high street returns expected to underperform Europe but may be closer to the new equilibrium
Expected High Street Total Returns by Region (%)
Note: f = forecast. There is no guarantee the forecast shown will materialise. Source: PMA (historic data), Q1 2014, Deutsche Asset and Wealth Management Research, July 2014, Centre for Retail Research, March 2014
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% Retail Sales Online
0
5
10
15
20
25
30
35
40
45
0
2
4
6
8
10
12
14
16
Share Growth 2013 (%, RHS)
-5
0
5
10
15
20
25
-10
-5
0
5
10
15
20
25
Core Europe UK CEE Periphery
Deutsche Asset & Wealth Management
- Changing risk profile
- Retail sector expected to underperform
- Retail to form a smaller part of the UK investment market
- Investor demand is polarising but this is increasingly reflected in price
- Appraisal, mispricing and active asset management opportunities
- UK underperforming Europe but closer to reaching a new equilibrium
Summary
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