EUROPEAN RETAIL REPORT

A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION

Q4 2011

WHATS IN STORE FOR EUROPEAN RETAIL IN 2012?

WHATS IN STORE? INTRODUCTION

This report has been prepared by the European Research Group at Cushman & Wakefield to analyse the retail market and assess how it will perform in 2012. The final section of the report provides a range of contact points for Cushman & Wakefield Research and our retail teams globally. While every effort has been made to provide comparable and robust data, definitions used in different sources will necessarily vary. For further information, please contact the authors in the Cushman & Wakefield Research team. If you require any assistance regarding our capabilities please refer to the contact section featured on page 18. This report was written by Jonathan Rumsey, Martin Mahmuti, Kristina Gorkovskaya and David Hutchings. The design and organisation of this report was undertaken by Michelle Mejia.

Russia, Tyumen Cushman & Wakefield is the exclusive letting agent on this 100,000 sq m shopping center in Tyumen. Anchors will include Auchan hypermarket, DIY, fashion and entertainment.

UK, Trinity Leeds, Leeds On behalf of Land Securities we act as development and leasing consultants on this major new development. Anchor tenants are Marks & Spencer, Topshop and Boots.

EUROPEAN RETAIL IN 2012

CONTENTS
SUMMARY: WHAT LIES AHEAD FOR EUROPES RETAIL MARKET? THE RETAIL ECONOMY: POLARISED AND SLOW OCCUPIER TRENDS: FOREIGN, FRESH AND NEW MULTICHANNEL RETAILING: EVERYONES TRYING TO DO IT IN-TOWN RETAIL PROPERTY MARKET TRENDS: RELATIVELY ROBUST SHOPPING CENTRE DEVELOPMENT: AN UNCERTAIN PIPELINE THE RETAIL WAREHOUSE SECTOR: CONTRASTING PERFORMANCES DESIGNER OUTLETS: COMING OF AGE RETAIL PROPERTY INVESTMENT: A SECTOR VERY MUCH IN FAVOUR APPENDICES/DATA 3 4 5 6 7 8 9 10 11 12

Puerto Venecia, Spain Cushman & Wakefield is the leasing agent on this stunning new destination for shopping, fashion, leisure, eating out, sport and adventure, with more than 206,000 sq m GLA. 250 units are dedicated to delivering not just the biggest but the best in retail and leisure.

WHATS IN STORE?
Summary: What Lies Ahead for Europes Retail Market? The European market has been busier than anticipated, albeit with activity very much focussed on prime as all parties have continued to value quality and certainty in an uncertain world. A major trend however remains the ongoing internationalisation of retailing. Both retailers and investors are looking increasingly across borders, with retailers seeing international expansion as a key response to the global crisis. However, while dominant locations are in demand from both groups, there is more variety emerging in the cities that each will focus on, with more occupiers ready to again embrace less established markets, notably with more interest in emerging markets. While less risk-averse investors are ready to follow them, core investors are still focussed on the largest, mature markets. Retailers meanwhile are also adapting their stores, their methods of operation and their strategies, to enhance the customer experience and to develop their multi-channel offer, with m-commerce as well as e-commerce a key battleground. No one strategy can be assumed to work in all markets but a need for efficient, wired and well-located visible property is a key theme in all top cities. Retailers however face falling supply for the best space and with development limited, rents have been bid up. In more secondary areas the reverse is still true availability is often still rising and rents remain under pressure. Lower inflation and interest rates will boost spending power in 2012 but ongoing uncertainty, unemployment and higher taxes will keep consumers subdued. As a result, rents will continue to be dictated more by supply than demand. Growth in 2012 may be less than in 2011 (and negative in many mid-market locations) and will reflect the dichotomy in retailing itself, with high streets outperforming shopping centres due to demand from luxury as well as mass-market traders seeking high profile, accessible units. Retail warehousing will perhaps do better as convenience and cost effective formats see greater demand. Designer outlets are also expected to continue to perform well, with turnover in the past few years for well-managed centres substantiating the belief that the concept is more resilient in recession than other areas of retail. For investors, while arguably offices are easier to understand and a more homogenous asset class, that is not stopping a growing number of buyers from all parts of the risk spectrum focussing on retail seeing potential from structural change as well as eventual economic upturn but also good defensive merits in the best locations and wellconfigured assets. In fact a pan-European market is now opening up for the top tier of centres. With more supply, at least selectively, a steady improvement in investment is forecast, with volumes to rise 7.5% this year to 41.7bn and 10-15% in 2012, to around 47bn. Performance trends will however remain diverse with the market polarised as a function of risk - real and perceived as well as income strength and the growth outlook. There may be modest yield compression for the best assets, given the balance of supply and demand and likely level of interest rates, but elsewhere, mid-market towns and schemes may suffer, whether they are prime or secondary. Indeed, a key challenge for the industry and for governments across Europe will be helping to manage the decline of many such areas as well as producing investment ideas and policies to aid their rejuvenation.
4.0% 3.5% 3.0% 2.5%

CONSUMER SPENDING (EUROZONE)

Consumer Spending Inflation

Annual Change - Euro Zone

2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% 2007 2008 2009 2010 2011 2012

Source: Cushman & Wakefield, Oxford Economics

THE INVESTMENT OUTLOOK IN THE RETAIL SECTOR

Q1 80 Q2 Q3 Q4 Yr End Estimate

70

60

50

Investment (bn)

40

30

20

10

0 2006 2007 2008 2009 2010 2011 2012

Source: Cushman & Wakefield, KTI, RCA and Property Data

RETAIL RENTAL GROWTH OUTLOOK ACROSS EUROPE

Shop Units 20% Shopping Centres Retail Warehouses

15%

10%

Prime Average, All Europe

5%

0%

-5%

-10%

-15% Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12

Source: Cushman & Wakefield

EUROPEAN RETAIL IN 2012

The Retail Economy: Polarised and Slow

Western Europe

RETAIL SALES
Central Europe Eastern Europe Eurozone 10%

Across Europe consumers continue to feel the pressure of economic headwinds as a result of the ongoing sovereign debt crisis. Confidence has eroded in many countries that are witnessing fiscal austerity, low wage growth and high unemployment. Interestingly however sales growth across Europe is expected to pick up somewhat in 2012 as inflation eases. What is more, there are already areas where retail sales are doing well, for example on the back of strong GDP growth in some countries across Eastern Europe. Retail sales across Europe continue to be dominated by the Big 3 of Germany, France and the UK, which accounted for 41% of all European retail sales in 2009. German retail sales remain quite robust in 2011 with households continuing to be supported by a relatively strong labour market with a moderate but steady improvement in unemployment through much of the year. Conversely, retail sales growth has stagnated in the UK as the labour market has lost momentum and unemployment has been on the rise. In France, household consumption remains steady but somewhat subdued due to a weak labour market and higher inflation and taxes. Strong retail sales growth has been recorded in parts of Eastern Europe. In Russia, retail sales have grown by a healthy 6% on the year to Q3 2011 as a result of improved labour market conditions and easing inflationary pressures. Simultaneously, consumer confidence continues to grow in Poland and consumer demand remains strong with private consumption growth over 3% in 2010 and into 2011. Turkish consumer spending has been fuelled largely by a significantly improved labour market and a marked increase in access to bank lending over the past year. Despite consumer lending growth slowing and a recent deterioration in consumer confidence, retail sales growth is still expected to be over 7% in 2011. Retail sales have remained weakest in Greece and Spain as a result of fiscal austerity and growth has also weakened in other core economies as the effects of earlier stimulus measures have worn off and consumers have become increasingly pessimistic. Consumer confidence has been slipping in most countries in fact and reached a new low in the Czech Republic for example, while retail sales have stagnated in Hungary. Unsurprisingly meanwhile, consumption has fallen in Portugal where consumers remain hampered by a tough labour market, fiscal austerity and relatively high inflation. Overall therefore a strong upturn in 2012 appears unlikely in much of Europe, but there will be pockets of growth. What is more, private sector employment intentions could improve quite quickly once businesses have the confidence to invest. Lower inflation and low interest rates will help those countries where consumers are choosing to hold back rather than being forced to hold back by their need to deleverage or by falling real incomes. However, while some retailers will be looking to position themselves to benefit from this growth when it comes, most will be reacting to strategic rather than cyclical drivers while also looking to reduce costs and raise efficiency.

5%

% Aggregated PA Growth

0%

-5%

-10% 2008 2009 2010 2011 2012

Source: Cushman & Wakefield, Oxford Economics

RETAIL SALES 2009-2010

10%

5%

0%

% Growth PA

-5%

-10%

-15%

-20%

Source: Cushman & Wakefield, Oxford Economics *: Calculated inflation deflator figure

15%

10%

5%

% Growth PA

0%

-5%

-10%

-15%

Source: Cushman & Wakefield, Oxford Economics *: Calculated inflation deflator figure

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RETAIL SALES 2011-2012

WHATS IN STORE?
Occupier Trends: Foreign, Fresh and New
Luxury*

LUXURY VS VALUE
Value** Global retailing industry 25%

% Year-on-Year Growth in Revenue

With an uncertain economic climate retailers are evaluating their store portfolios to cut costs and maximise margins. Many are still expanding albeit with a focus on major global cities in prime high street and shopping centre locations. This focus on prime invariably leads to the question of what to do with the increasing vacancy rates in secondary stock. Expansion can also be difficult due to a limited development pipeline. The projected delivery of 6.8 million sq.m for 2011 is likely to fall short due to various schemes reporting delays. Retailers buying freeholds is also a rising trend that takes space out of the leasing market. Bosideng recently acquired a prime development site in London, joining the likes of Chanel, LVMH and Bestseller also buying freeholds. Inditex has also purchased space in London and Milan. The surge of US retailers expanding into Europe and across the globe is now relatively old news. The likes of Abercrombie & Fitch / Hollister, GAP / Banana Republic and Forever 21 have joined retailers such as SuperGroup, Primark and TK Maxx expanding into Europe with many requirements to fulfill. Many of these bring heightened customer experiences such as new and innovative store designs and entertainers at store entrances. Shopping centre owners now increasingly seek foreign, fresh and new brands to keep ahead of the competition, leading to increased cross border activity of retailers to and from Asia-Pacific. There are two dominant reasons for this trend: limited capacity in European markets and the huge consumer demand of eastern markets. Retailers such as Ted Baker, Tommy Hilfiger, Burberry, Mulberry, Gap Inc, H&M, Jimmy Choo, Karen Millen and Prada are all currently or planning to expand into Asia-Pacific. In the opposite direction we are seeing UNIQLO, Muji, Le Bunny Bleu and Bosideng entering Europe. We expect to see the trend of both value and luxury retailers performing well to continue. Frugal spending and a focus on value by consumers has benefitted value retailers and discounters such as Lidl, Aldi, Primark and H&M whom are expanding their portfolios, while the very wealthy are more insulated from economic headwinds and more particularly, consumers in general still aspire to the best when they can, ensuring luxury retailers continue to prosper. There has been notable mergers and acquisitions over the last 12 to 18 months, firstly among retailers that face financial difficulties are a prime target for private equity buyers. Examples include Emerisque, Gordon Brothers and Hilco; the latter who recently sold the Habitat UK brand to Home Retail Group and Habitat Europe Continentale (HEC) to CAFOM SA after buying the brand in December 2009. Secondly, we expect to see more M&A by retailers looking for an easy route to markets around the globe. The March 2011 deal of LVMH taking control of Bulgari highlights the mutual benefits such a deal can bring; it allows LVMH to compete with Richemont and Swatch in the luxury watch and jewellery market whilst allowing Bulgari access to resources to expand in key markets such as Asia-Pacific.

20%

15%

10%

5%

0%

-5% 2007 2008 2009 2010

*: Average year-on-year growth in revenue of LVMH, Richemont, Polo Ralph Lauren, Gucci and Chanel. **: Average year-on-year growth in revenue of H&M, TJX Companies, Primark, Aldi and Lidl Source: Verdict, Mintel, Datamonitor and Company Records

Le Bunny Bleu first European opening on 15th October 2011 at Westfield, Stratford Source: Cushman & Wakefield, Le Bunny Bleu

Ginza shopping district, Tokyo, Japan Source: Cushman & Wakefield

EUROPEAN RETAIL IN 2012

Multichannel Retailing: Everyones Trying To Do It In recent years it has been evident that growing store networks is not the only route to increasing market share and turnover. Consumers growing expectations for convenience and online interaction has resulted in the need for retailers to offer a seamless multichannel experience, while ensuring brand consistency across all channels. A thorough understanding of a market is needed however to ensure all retail channels are aligned, to provide customers with the convenience and experience they demand. When considering online retail and mail order against the backdrop of economic volatility and falling consumer confidence, it appears that these sectors are showing relative immunity, with sales seeing quarter on quarter growth (excluding 2011 Q1) since Q3 2009. Online and mail order sales vary considerably across the EU, which can be explained by the level of internet access and users comfort at purchasing online. This unsurprising trend is shown in the chart opposite, and highlights maturing markets for online retail, and those countries that could see future potential unlocked. On a global scale, Russia, China and India have a low proportion of consumers who shop online due to security and infrastructure issues; once such issues have been addressed, these emerging markets could offer significant potential to online retailers. The continuing growth of mobile device use in emerging countries will also add to the growing opportunity becoming available to retailers offering a mobile/online channel. The growth of mobile phone retailing has created another channel for retailers to utilise alongside online channels. Major fashion retailers are exploiting these channels, and taking different routes of entry in both mature and emerging markets. ASOS offers online delivery to over 150 countries whilst not having a physical store presence, whereas Zara has a physical presence in over 70 countries but limited online delivery, launching its first transactional website in September 2010. The many fascias of Arcadia have a physical presence in nearly 40 countries but also offer expansive online delivery coverage. The trend of having an online and mobile channel on a European and global level is set to increase, especially given the likely proliferation of market entries into the increasingly internet savvy Asian market. For some retailers, their first experience of a new market may be via the internet, while for others, online stores follow where a store presence has been established, although at the very least retailers will look to have a non transactional website to create an online presence. Mobile retail is not restricted to transactional websites and has, and will increasingly, feature heavily in the shopping experience. Starting as early as next year Near Field Communication (NFC) will begin to be rolled out across retailers, enabling quicker payment, while retailers are already sending out offers and store information to customers mobiles and via social media. Innovative ideas such as the shopping wall pioneered by Tesco in South Korea and then Ocado in One New Change, London will flourish.
7% 6% 5% 4%

EU RETAIL SALES: INTERNET/MAIL ORDER VS. TOTAL RETAIL

Mail orders and internet, Constant Prices (2005) Total, Constant Prices (2005)

% Change on Previous Quarter

3% 2% 1% 0% -1% -2% -3% 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2

Source: Cushman & Wakefield, Eurostat

ONLINE PURCHASES VS. HOUSEHOLD INTERNET ACCESS

80

% Households who have Purchased Online in the last 12 Months

70

NO UK DK SE DE NL LU

60

FI FR

50

40

EU
MT SK PL CZ ES CY PT HR FYRM
50 60 70

AT BE IR

IS

30

SI

20

10

EL BG TU RO
30 40

HU LV IT LT

EE

80

90

100

% Households with Internet Access

Source: Cushman & Wakefield, Eurostat

PHYSICAL STORE AND ONLINE STORE PRESENCE (2010)

200

ASOS

Number of Countries with Online Delivery

150

Figleaves
100

Arcadia

Abercrombie & Fitch The Gap Inc. M&S

50

Next N Brown (Simply Be) N Brown 0 (Oxendales) Kiabi TJX Fast Retailing Debenhams Companies
10

H&M
40 50 60 70

Zara

C&A

20

30

80

Number of Countries with Physical Store

Source: Company websites,Verdict

WHATS IN STORE?
In-town Retail Property Market Trends: Relatively Robust Prime high street and shopping centre rents recorded a mixed performance in recent months, with growth in some parts of Europe offset by falls elsewhere. In terms of highlights, supported by strong demand and limited availability, high street rents in Germanys top-7 cities have increased by an average of 16% since the start of the year. In Finland, prime high street and shopping centre values reached record levels earlier this year, although the pressure on rents has eased with new supply entering the market. In Denmark, growth of 10-15% was recorded on some high streets in Q3. In Russia and Turkey meanwhile, robust retail sales and increased occupier activity have left their mark on property pricing, with doubledigit annual growth in many locations. In Poland retail sales are also on an upward trajectory and many major global players are looking to increase their presence. However, smaller domestic retailers are reportedly becoming more cautious amid concerns about the economic outlook, and rents in some major cities came under slight downward pressure in the first three quarters as a result. In other CEE markets demand is highly selective: activity is driven by global brands, with interest focused on large units in prime locations. In France, retailers are still expanding, albeit at a slower pace than in 2010 and early 2011. Prime rents were unchanged on a quarterly and annual basis in Q3 in most of the locations surveyed. In the UK, many retailers are still in expansion mode, but interest is becoming increasingly selective against a backdrop of economic uncertainty and low consumer confidence. In recent months rents have grown in Central London, but some declines have been recorded elsewhere around the country. In Italy and Spain, demand for prime space remains strong considering the challenging trading environment. In Italy, a high level of activity was reported on the top high streets, leading to moderate rental growth in several cities in Q3. In Spain, some global brands are still in expansion mode, and while secondary rents are down, prime rents have been remarkably resilient in recent years in some of the most soughtafter locations values have held firm since early 2008. In Portugal, several retailers have delayed or cancelled expansion plans in recent months. However, there have been no mass shop closures and some operators are still taking advantage of challenging conditions to secure units in top locations. As a result, prime rents were unchanged in Q3, supported by limited availability. Overall, prime rents are well-supported and should remain broadly stable across most of Europe, but declines cannot be ruled out in some markets as austerity measures bite and in particular, secondary properties will struggle to attract quality tenants as demand becomes increasingly selective in the coming months.
PRIME RENTS AVERAGE ANNUAL GROWTH - HIGH STREET SHOPS
Europe 50% Western Europe CEE & Turkey

40%

30%

20%

10%

0%

-10%

-20%

-30%

07

08

08

08

08

09

09

09

09

10

10

10

10

11

11 2 Q
11 2 Q Q

Source: Cushman & Wakefield

PRIME RENTS AVERAGE ANNUAL GROWTH - SHOPPING CENTRES

Europe 15% Western Europe CEE and Turkey

10%

5%

0%

-5%

-10%

-15%

-20%

07

08

08

08

08

09

09

09

09

10

10

10

10

11

Source: Cushman & Wakefield

Cushman & Wakefield is advising ProWinko on the Toison DOr retail and residential development in the heart of the Brussels uptown central shopping area. Source: Cushman & Wakefield

11

11

EUROPEAN RETAIL IN 2012

Shopping Centre Development: An Uncertain Pipeline As of 1st July, the European completion total for 2011 was estimated at nearly 6.8 million sq.m, with 4.6 million sq.m of GLA due in the second half of the year. The 2012 pipeline was estimated at 5.8 million sq.m. Several major new shopping centres have been completed in the ensuing months. Westfield Stratford City opened on 13 September, increasing provision in London by 9%. In Russia, Leto in St Petersburg and Rodnik in Chelyabinsk opened their doors (the latter increasing provision in Chelyabinsk by 25%); MEGA Ufa and MEGA Samara are now partially open. In Hungary, the opening of KKI Terminal boosted provision in Budapest by 8%. In Romania, the opening of Maritimo Shopping Centre has increased supply in Constanta by more than 40%. In Poland, the newly-opened Millenium Hall is now the largest shopping centre in the Podkarpackie region. Openings scheduled for November include M5 Mall in Ryazan, Russia (66,490sq.m), Ora Shopping in Istanbul (65,176sq.m), and Electroputere Parc in Craiova, Romania (54,840sq.m). Alongside this flurry of recent completions, delays have recently been reported in several markets however, and this years European total is likely to fall short of projections. In Russia, several projects have been postponed from Q4 2011 to 2012, the largest being Oz Krasnodar, which is now due next February. In Turkey, NeoCity in Istanbul (65,000sq.m) has been pushed back to Q4 2012 and there is some uncertainty about completion dates for a few other projects. In Italy, Conca dOro (55,000sq.m) in Palermo has recently been pushed back to next March, following delays to several other schemes earlier this year. There is also some uncertainty about the pipeline for the coming years, although several countries may see an increase in completions in 2013 and beyond. In Poland, there is some ambiguity about start dates due to selective demand for new space and the difficulty of obtaining financing. In Portugal, many projects are still at the early stages of development and are unlikely to go ahead any time soon. In Spain, the 2012 pipeline still stands at more than 400,000sq.m, with several major schemes under construction; however, most of these have suffered setbacks in recent years and will be delivered later than originally planned. In France, development activity is expected to remain focused on the extension and refurbishment of existing schemes. In the UK, completions will reach a historic low next year, but should pick up again in 2013, with a handful of schemes in the pipeline. In Germany, 2012 will see the lowest completion total since 1989; however, development activity may pick up if current demand levels are sustained.
Million sq. m
10

THE EUROPEAN PIPELINE

Western Europe CEE and Turkey

Source: Cushman & Wakefield

COUNTRY UK Russia Turkey Russia Hungary Poland Romania Turkey Hungary Poland

Source: Cushman & Wakefield

COUNTRY Russia Spain Russia Russia Turkey Slovenia Italy Croatia Russia UK Ukraine

19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 Es 201 t. 0 20 Es 11 t. * 20 12 *

RECENT OPENINGS CITY OR TOWN London St. Petersburg Istanbul Chelyabinsk Budapest Rzeszw Constanta Ankara Szeged Kielce SCHEME NAME Stratford City Leto Akbati Rodnik KKI Terminal Millenium Hall Maritimo Shopping Centre Atlantis rkd Szeged Galeria Echo (extension) GLA (SQ.M) 176,500 77,695 63,500 58,000 55,000 52,000 48,130 43,000 41,000 40,000

MAJOR SCHEMES IN THE PIPELINE

CITY OR TOWN Krasnodar Zaragoza Ufa Samara Istanbul Ljubljana Villesse Zagreb Nizhniy Novgorod Leeds Kiev SCHEME NAME OZ Mall Puerto Venecia MEGA Ufa (partially open) MEGA Samara (partially open) Marmara Park Sportni Park Stoice Villesse Shopping Supernova Zagreb Nebo Trinity Leeds Ocean Plaza GLA (SQ.M) 163,000 123,475 114,700 102,000 100,000 96,319 90,000 80,000 75,000 76,000 72,188 YEAR DUE 2012 2012 2011 2011 2012 2012 2012 2012 2012 2013 2012

Source: Cushman & Wakefield

WHATS IN STORE?
Retail Warehouse Sector: Contrasting Performances
10%

EUROPE: STRONGEST GROWTH (TOP FIVE)

The occupier market was largely stable in Q3 but the picture was defined by contrasting fortunes as Western markets generally outperformed emerging countries, but with rental values across the continent still below pre-crisis levels.
Annual Rental Grwoth to Q3 2011

8%

6%

Weak retail sales growth in the UK continues to affect occupiers strategies, with an increase in floorspace often the only way of showing growth in business models. All segments of retail warehousing are being impacted, but inevitably, the divide between the weaker and stronger operators will be more marked as austerity measures take hold. Occupier demand for prime properties is relatively good and being driven by value retailers, open A1 operators and renewed interest from some bulky retailers. Demand for secondary pitches remains static primarily fuelled by discount and bulky operators. The recent rise in Belgian retail take-up has been driven by a range of newcomers and expansions, but also by openings from grocers and retail warehouse operators such as Media Markt and Euro Shop. However, while rents are now stable, values may come under slight downward pressure, even for top quality locations. The Netherlands continues to be affected by the tight retail restrictions for retail warehouses, which have translated into fewer opportunities to fill vacant units, especially in secondary pitches. Nevertheless, prime rental values have held firm this year. The French market appears to be benefitting from its competitive occupancy costs and sluggish performance of new shopping centres. Several traditional retail warehouse operators are still expanding when an opportunity presents itself, while others are creating new concepts. Retailers active in the shopping centre market are now eager to adopt a more balanced strategy, expanding in both formats as they look to cut costs and reduce the risk of opening new stores. Prime rents rose marginally in Q3 on the same period in 2010. The German retail warehouse market has historically been less volatile than its European counterparts, even during the global economic crisis. Nevertheless, the broad-based economic expansion now also supported by higher consumer spending and low unemployment have boosted occupier activity in recent months, with prime rents in September rising 1.5% on the same period last year. While biased towards traditional big box operators, Spain has seen more fashion operators enter the market in 2011. Following the falls witnessed in 2008/2009 principally on the back of declining values for electronic and furniture stores this has allowed some rental stabilisation. The economic picture suggests a bumpy road ahead for the European retail warehouse sector. The polarisation in fortunes between prime and secondary locations will become more pronounced as retailers, eager to minimise risks and costs, avoid secondary pitches affected by lower footfall and higher vacancies in favour of properties with a good track record.

4%

2%

0% Sweden Norway Austria Belgium United Kingdom

Source: Cushman & Wakefield

EUROPE: NEGATIVE GROWTH (TOP FIVE)

0%

-2%

Annual Rental Grwoth to Q3 2011

-4%

-6%

-8%

-10% Denmark Italy Finland Greece Hungary

Source: Cushman & Wakefield

PRIME RENTS ANUAL RENTAL GROWTH

Europe 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Western Europe Central and Eastern Europe

-0 7

8 Se p08 D ec -0 8 M ar -0 9

Ju n09 Se p09 D ec -0 9 M ar -1 0

ar -0 8

-1 0

ar -1 1

-1 0

p1

-1 1 Ju n

p0

Ju n0

ec

Ju n

Se

ec

Se

Source: Cushman & Wakefield

Se

p1

EUROPEAN RETAIL IN 2012

Designer Outlets: Coming of Age Occupier Focus Occupier demand for Designer Outlets is currently high, with the best schemes performing well in recent years and more retailers targeting the format: in some cases due to excess stocks thanks to subdued sales in other retail outlets or from traders simply being keen to pursue new formats. Nonetheless, the market has not seen a substantial number of new entrants, although there are several brands presently interested and certain operators who already have a minor presence now looking to expand. The better managed global retailers have a distinct outlet strategy, usually coupled with and reliant on their high street strategy. Requirements are therefore linked to high street and shopping centre expansion, with occupiers aggressively extending their presence and inevitably needing an outlet business which goes in tandem with their increased wider presence. The best schemes have seen strong gross sales growth in the last 4-5 years, often surpassing 15%-20% y-o-y.Vacancy in the top schemes is approximately 2%; however, this is very much controlled, with landlords keen to keep free units for special brands or to be able to move occupiers around, making these schemes effectively fully leased. While the sector is generally performing better than shopping centres and high streets, it remains polarised. Indeed, strong tenant interest has not necessarily extended to second or third tier schemes, which in some cases have witnessed vacancies and have never been fully leased. Development activity is particularly evident in East and Central Europe, but with more schemes now in operation across Europe, retailers are primarily focusing on centres with a good trading record and where an attractive deal is on offer. Investment Focus Designer outlets remain a niche investment sector; however, there is a growing recognition that they offer a viable retail property investment. Activity in the market has been limited, with the acquisition of McArthurGlen Roubaix Designer Outlet by Resolution the most notable transaction in 2011, but this is primarily due to a lack of opportunities rather than an absence of demand. While investor appetite has shifted toward core markets, there is a shortage of available or ideal assets on the market. Outlook The European Designer Outlet sub-sector is well positioned for growth both in mature western markets as well as in emerging countries where the format is still in its infancy. Even in the more developed markets, the format has untapped areas of potential new occupiers, with certain retail segments currently absent. Over the medium term, Central and Eastern European countries may offer limited market size but there is also an under-provision of modern outlet space and relatively looser planning regulations to facilitate development.

SCHEME HIERARCHY ACROSS EUROPE AVERAGE TURNOVER PER SQ M PER ANNUM Elite schemes

12,500 - 16,000 5,000 - 8,000 4,000 - 6,000 2,000 - 4,000

Tier 1 Schemes

Tier 2 Schemes

Tier 3 Schemes

Source: Cushman & Wakefield

TOTAL GLA (1,000 SQ. M)

1000

800

600

400

200

Source: Cushman & Wakefield *: Certain schemes maybe included which are locally labelled FOC but which do not necessarily match international definitions.

Source: Cushman & Wakefield *: Certain schemes maybe included which are locally labelled FOC but which do not necessarily match international definitions.

tu g A al Sw us itz tria er lan U ni *T d te u d rk K ey in gd om It *G aly re e Ire ce lan Be d lgi u C m ro at ia Sp a Fr in an H ce N ung et ar he y rla Bo Cz S nds sn ec we ia h de & Re n H pu er b ze lic go v N ina or w Po ay lan D en d m a Bu rk l G gari er a m an y Se Ro rbia m an ia

Po r

ni *T te u d rk K ey in gd om Ita l Fr y an ce Sp Po ain rt G uga er l m an A y us t *G ria Sw re itz ec er e lan d N Pol et an he d rla n Be ds lg C H ium ze u ch ng Re ary pu b Sw lic ed e Bo Ire n sn la ia & C nd H ro er at ze ia go v Ro ina m a Bu nia lga N ria or D wa en y m ar k Se rb ia

GLA (SQ. M) PER 1,000 INHABITANTS

20

16

12

10

WHATS IN STORE?
Retail Property Investment: A Sector Very Much in Favour Retail investment markets had a busy third quarter with 9.1bn traded, 7.7% up on Q2. Activity over the first nine months of the year totalled 29.7bn, 9.8% higher than the same period of 2010, a market share of 34.3% versus 33% in 2010. Nonetheless, a shortage of finance for large lots such as shopping centres has held the sector back and after slipping behind retail in the opening quarter, offices have since regained top spot, with a 42% market share. Demand for retail is good across the region despite the concerns faced by consumers in many areas. Investors are focusing on stronger areas of demand in the new age of retailing, on shopping centres that can be actively managed and improved and on convenience property that is at least somewhat protected from economic downturns. With a selective increase in supply, a further improvement in activity is forecast, with volumes to hit 41.7bn this year, 7.5% up on 2010, and increasing 10-15% further in 2012. Risk, or rather risk avoidance, is key to determining where investors will go and not just in deciding what markets they target, but also how quickly they will act and how they will finance a deal. The UK and Germany dominate activity accounting for 57% of retail trading in the opening three quarters and are more evenly matched than usual, with Germany in fact taking the top spot in the last two quarters. A range of other markets are attracting strong interest however. Denmark, Italy, the Czech Republic and Poland are all set to outperform their 2010 volumes for example and clearly there is a wide range of factors driving investors into these quite different markets with opportunity a key issue. Retail makes up a much higher than average share of activity in CEE and also in Southern Europe. Over the past year the rise of Eastern Europe is particularly impressive ranging from areas where the market is restarting after the credit crunch such as Bulgaria and Croatia to the runaway growth story, Russia, which has seen over 2bn traded so far this year, the highest retail total yet recorded in this market. Shopping centres are the dominant sector of demand but interest in shop property has also increased; particularly in the top high streets which have coped relatively well through the economic downturn. Retail warehouse demand has been slower to stir but is now coming back for modern well-located parks and interest in other formats notably Designer Outlets is also up. Yields have stabilised over the past few months meanwhile and are around 10-20 basis points down on the year, a somewhat lesser degree of compression than expected. Indeed, while some areas continue to see yields edge lower the Czech Republic, France, Germany, Norway, Poland and Turkey in the third quarter for example others are seeing yields flat-line or increase, such as Denmark, Ireland, Portugal and Greece in Q3.
45

PROPERTY INVESTMENT BY QUARTER

Offices Retail

40

35

Quarterly Volumes (bn)

30

25

20

15

10

Q 1

Q 3

Q 1

Q 3

Q 1

Q 3

Q 1

Q 3

Q 1

Q 3

Q 1 11 20
Mar-11

06

06

07

07

08

08

09

09

10

10

20

20

20

20

20

20

20

20

20

20

Source: Cushman & Wakefield, KTI, RCA and Property Data

TOP RETAIL INVESTMENT TARGETS

2010 - Quarterly average 4.0 2011 - Q1/3 average

3.5

3.0

2.5

Euro bn pa

2.0

1.5

1.0

0.5

0.0 UK Germany East Nordics Central South France West (ex UK, Ge, Fr)

Source: Cushman & Wakefield, RCA, KTI and Property Data

RETAIL YIELDS ACROSS EUROPE

Shop Units 8.0% Shopping Centres Retail Warehouses

7.5%

7.0%

Prime Average, All Europe

6.5%

6.0%

5.5%

5.0%

4.5%

4.0% Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Sep-11

Source: Cushman & Wakefield

11

20

11

Q 3

EUROPEAN RETAIL IN 2012

APPENDICES: RETAIL ECONOMIC INDICATORS

YEAR-ON-YEAR RETAIL SALES GROWTH
2008 2009 2010 2011

YEAR-ON-YEAR CONSUMER SPENDING

2008 2009 2010 2011

Austria Belgium Bulgaria Czech Republic Denmark Estonia Eurozone Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Netherlands Norway Poland Portugal Romania Russia* Slovak Republic Slovenia Spain Sweden Switzerland Turkey United Kingdom

1.5% 0.4% -7.2% -1.5% -4.7% -17.2% -2.4% -2.7% -0.2% -2.8% -11.4% -5.1% -6.8% -1.4% -28.5% -21.4% 1.7% -4.4% 0.6% 3.3% -2.0% -9.8% 3.5% -10.2% -10.4% -5.4% 1.3% 0.5% -2.3% 1.4%

2.3% -0.6% -7.1% -1.1% -0.3% -1.2% 0.8% 2.7% 3.8% 1.1% -6.2% -2.4% -1.0% 0.1% -1.7% -7.1% 8.7% -1.0% 1.5% 6.2% -0.2% -5.8% 9.0% -2.2% -0.3% -2.7% 3.3% 1.8% 6.7% 1.6%

-0.4% 0.8% 1.2% 0.8% -0.9% 3.8% -0.3% 3.7% 2.6% 1.0% -12.0% -0.1% -3.3% -0.5% 4.4% 6.7% 7.4% -0.9% 2.1% -0.8% -5.2% -3.8% 10.0% -1.2% 1.1% -4.5% 1.3% 0.2% 7.5% 0.9%

2.3% 1.3% 3.1% 1.4% 1.4% 5.0% 0.3% 3.0% 1.2% 1.0% -12.9% 0.2% -1.7% 0.0% 4.8% 6.0% 2.9% 0.2% 2.0% 3.4% -1.1% 3.7% 13.0% 3.7% 3.0% -1.1% 1.3% 1.4% 1.3% 1.5%

Austria Belgium Bulgaria Czech Republic Denmark Estonia Eurozone Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Netherlands Norway Poland Portugal Romania Russia Slovak Republic Slovenia Spain Sweden Switzerland Turkey United Kingdom

-0.2% 0.8% -7.2% -0.1% -4.5% -18.4% -1.2% -3.1% 0.2% 0.0% -1.8% -7.8% -6.9% -1.8% -22.6% -17.7% 1.1% -2.6% 0.2% 2.1% -1.1% -10.4% -4.8% 0.3% -0.8% -4.3% -0.3% 1.4% -2.3% -3.5%

2.2% 2.3% -1.3% 0.1% 2.3% -1.9% 0.8% 2.7% 1.3% 0.6% -4.6% -2.1% -0.7% 1.0% 0.4% -4.5% 2.1% 0.4% 3.6% 3.1% 2.3% -1.6% 3.0% -0.3% 0.5% 1.2% 3.6% 1.7% 6.7% 1.0%

0.5% 1.2% 1.5% -0.4% -0.3% 4.5% 0.4% 3.7% 0.7% 1.0% -5.5% -1.4% -3.6% 0.6% 3.8% 7.6% 2.4% -0.6% 2.4% 3.4% -4.6% -0.4% 5.7% -0.1% 0.5% 0.4% 2.4% 1.1% 7.5% -1.2%

1.0% 1.0% 2.5% 1.1% 1.2% 3.8% 0.3% 2.0% 0.9% 0.8% -7.5% 0.3% -2.8% 0.1% 3.5% 6.7% 2.0% 0.3% 1.6% 3.0% -3.5% 3.3% 4.9% 1.0% 1.5% 0.2% 1.6% 1.2% 1.2% 0.5%

*Calculated inflation deflator figure Source: Cushman & Wakefield, Oxford Economics

Source: Cushman & Wakefield, Oxford Economics

12

WHATS IN STORE?
RETAIL RENTS
PRIME HIGH STREET RENTS
/sq.m./yr. Country Prime Rents, Average Annual Growth to Q3 2011 Prime Rent Q3 2011 Country Austria Belgium Bulgaria Croatia Czech Republic Denmark Finland France Germany Greece Hungary Ireland Italy Netherlands Norway Poland Portugal Romania Russia Serbia Slovakia Spain Sweden Switzerland Turkey United Kingdom Ukraine

PRIME SHOPPING CENTRE RENTS

/sq.m./yr. Average Annual Growth to Q3 2011 6.3% 0.3% -20.0% -11.1% 8.8% 0.0% 6.1% 0.0% 2.5% 0.0% -6.9% 9.1% 4.3% 0.0% 1.3% -4.7% -0.9% 0.0% 18.2% 0.0% 8.3% 0.0% 5.0% 3.7% 17.2% -3.8% 0.0% Prime Rent Q3 2011 1020 1430 288 384 780 638 1380 2000 672 540 1080 1800 800 900 1016 936 900 660 2981 420 780 960 825 2051 1073 2300 1491

Austria Belgium Bulgaria Channel Islands Croatia Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Netherlands Norway Poland Portugal Romania Russia Serbia Slovakia Slovenia Spain Sweden Switzerland Turkey Ukraine United Kingdom
Source: Cushman & Wakefield

0.6% 9.8% -16.1% 0.0% 0.0% 3.2% 4.6% 0.0% 9.3% 0.9% 14.6% -6.7% 0.0% -7.8% 2.8% 0.0% 11.5% 0.0% 4.4% 8.0% -0.4% 0.0% -1.8% 13.1% -8.3% -6.7% 0.0% -0.5% 2.5% 0.5% 8.4% 0.0% -0.3%

3,300 1,800 600 1,812 900 2,040 2,285 240 1,920 7,364 4,080 2,220 1,200 3,007 7,000 240 348 1,440 2,600 2,031 1,020 960 780 3,354 1,100 504 360 3,120 1,552 6,564 2,460 7,236 7,236

PRIME RETAIL WAREHOUSE RENTS

/sq.m./yr. Country Austria Belgium Czech Republic Denmark Finland France Germany Greece Hungary Ireland Italy Netherlands Norway Poland Portugal Romania Slovakia Spain Sweden Turkey United Kingdom Average Annual Growth to Q3 2011 2.6% 1.7% -2.2% -2.9% -5.0% 0.2% 1.5% -6.0% -9.3% 0.0% -4.3% 0.0% 7.3% 0.0% 0.0% 0.0% 0.0% 0.0% 8.3% 0.0% 1.6% Prime Rent Q3 2011 144 175 122 148 144 180 195 150 96 150 220 135 140 105 90 96 108 210 201 97 600

13

EUROPEAN RETAIL IN 2012

YIELDS & INVESTMENT VOLUMES

PRIME RETAIL YIELDS
Country Q3 2011 Prime Shop Yield Q3 2011 Prime Shopping Centre Yield Q3 2011 Prime Retail Warehouse Yield Current Trend Country

RETAIL INVESTMENT VOLUMES

Retail investment volume Q1 - Q3 2011 Euro millions Retail share of total investment Q1 - Q3 2011 Retail increase Q1-Q3 2010 to Q1 - Q3 2011

Austria Belgium Bulgaria Croatia Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Netherlands Norway Poland Portugal Romania Russia Serbia Slovakia Slovenia Spain Sweden Switzerland Turkey Ukraine United Kingdom
Source: Cushman & Wakefield

4.25% 5.00% 9.00% 7.75% 6.00% 5.00% 8.25% 5.00% 4.50% 4.10% 7.40% 6.75% 6.75% 5.00% 8.50% 8.00% 5.75% 4.70% 5.25% 7.50% 7.00% 9.25% 12.50% 10.50% 7.25% 7.00% 4.75% 5.00% 4.50% 7.25% 17.00% 3.00%

6.25% 5.50% 9.00% 7.50% 6.00% 6.00% 5.00% 4.75% 4.80% 7.60% 6.50% 7.85% 6.25% 5.25% 6.25% 5.50% 6.00% 7.50% 9.00% 9.50% 10.50% 7.25% 6.00% 5.25% 5.30% 7.75% 14.00% 5.50%

6.25% 6.25% 7.25% 7.25% 7.75% 5.75% 6.95% 7.40% 7.75% 7.90% 7.00% 7.60% 6.50% 8.00% 9.50% 9.00% 8.25% 6.50% 5.75% 9.50% 5.00%

Austria Belgium Bulgaria Croatia Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Netherlands Norway Poland Portugal Romania Russia Serbia Slovakia Slovenia Spain Sweden Switzerland Turkey Ukraine United Kingdom

113.75 157.24 149.70 220.00 1,092.50 948.00 206.32 154.98 1,591.00 8,482.30 20.00 122.17 30.00 1,562.40 0.00 0.00 13.15 800.15 310.50 833.76 63.40 17.00 2,056.74 0.00 39.40 0.00 335.84 1,127.82 240.00 378.50 98.31 8,542.26

12.4% 9.9% 86.4% 55.1% 65.2% 41.5% 78.1% 23.9% 16.2% 49.2% 12.5% 25.4% 17.2% 47.8% 8.1% 33.9% 21.8% 44.2% 39.2% 6.0% 44.1% 35.1% 35.2% 17.5% 13.6% 50.4% 21.0% 32.6%

13.8% -45.0% 1530.6% 540.1% -68.7% -34.0% 33.6% 100.0% -3.8% -80.6% 91.7% -64.5% -45.7% -68.5% 59.1% -78.4% -82.5% 1076.8% 57.6%

-79.6% 107.4% 129.1% -8.4% -57.4% -10.0%

Source: Cushman & Wakefield, KTI, RCA and Property Data

14

WHATS IN STORE?
SUMMARY OF STANDARD RETAIL LEASE TERMS
The following is a summary of typical lease structures for retail commercial property. It should be noted that in many instances, certain aspects of lease terms will be open to negotiation and these therefore represent only the standard terms currently being seen across the European retail market. Security of Tenure/Right to renew Country Length Years - Retail Tenant breaks
None other than by negotiation. Typically the tenant agrees not to terminate the contract for a stipulated period (often 3-5 years) but has the right to do so after this period is over (mostly at the end of every quarter with 6 months notice). Tenants may terminate the lease every 3 years with 6 months prior notice. If explicitly provided for in the lease agreement, the landlord may also terminate the lease every 3 years with a year's prior notice if he intends to use the premises himself or in certain exceptional circumstances. In the latter case, compensation by the landlord will be due. Break options after the third year with 6 months notice in a 5-year contract and after the fifth or sixth year with 6 months notification in 10-year leases. Rare in the past but now increasingly negotiable. In the absence of a clear agreement in the lease, the tenant has no legal right to break so long as the landlord fulfils his obligations. Breaks can be negotiated at any point in the lease.

Indexation or Review

Austria

5-10

No automatic right to renew.

Rent reviews are not a common practice, only sometimes used in indefinite lease contracts on basis of a specialists arbitration. Frequency is negotiable, usually 5 10 years. Indexed to a government-issued monthly index. Often a 3-5% step before an increase comes into effect.

Belgium

9+ (max 99 yrs)

The tenant normally has the right to renew for a further three terms of 9 years but must adhere to a strict procedure. Exceptions to the tenants right to renew are where the property is required for the owners occupation, where the owner wishes to redevelop, or where there is a better offer from a third party which the tenant is not prepared to match. None other than by negotiation. On expiration of the term of the lease the lessee has the right to negotiate a further lease for a definite period of time.

Annual indexation to the Health Index (an adjusted consumer price index).

Bulgaria

5+

Rents can be indexed to HCPI or the Eurozone CPI index.

Channel Islands

9-15

No security of tenure in Jersey or Guernsey and renewal is by negotiation.

Index linked 3 yearly rent reviews (upward only). Prime stock linked to market rental value and secondary stock to the cost of living.

Croatia

None - usually subject to negotiation,

Right to renew after the first 5 years.

Annual indexation to Eurozone Consumer Price Index (CPI).

Czech Rep

3-5

Conditions to terminate are negotiable but must be clearly stated in the lease otherwise there are limited reasons permitted by law for the landlord to break. Whilst break clauses do exist, they are almost exclusively conditioned by penalty. Negotiable, but typically Danish leases have a non-termination period of 3-5 years after which the lease is constantly rolling until notice is served by the tenant.

Security of tenure is not automatic but may be included in the lease by negotiation.

Annual indexation to the relevant inflation index: Eurozone or EU 27 HICP for Euro-denominated leases or Czech Statistical Office CPI for CZK leases

Denmark

3-5

The tenant has security unless the landlord wishes to occupy, tear down or redevelop. These conditions are rather strict, and in reality the landlords options of terminating the lease are very limited. Not automatic by law, but a common practice on the market. If, after expiry of a fix term lease contract, the tenant continues to use the leased premises, the lease is taken to have become a lease agreement entered into for an unspecified term. Very secure. Early termination is only by break clause. Following the termination of a commercial lease by the landlord, the tenant is entitled to compensation, unless the landlord can provide other premises for lease or certain other circumstances (such as the tenant's misconduct) are at hand. Therefore, the tenant always has a so called indirect security of tenure.

Annual CPI indexation or to a fixed percentage. Reviews can occur every 4 years in accordance with the Danish Business Lease Act, and may be upwards or downwards, depending on current market rent.

Estonia

5-10

Lease agreement for an unspecified term may terminate a lease by giving at least three months notice. A lease agreement for a specified term expires at the end of term.

Rents are typically indexed to local inflation.

Finland

Stand alone retail 5-10 Shopping centre and high street retail 1-5 years.

None.

Indexed annually or biannually to the cost of living (FIN elinkustannusindeksi). The rent is reviewed to market rent at the end of the lease term by negotiation between the landlord and tenant.

15

EUROPEAN RETAIL IN 2012

Country

Length Years - Retail

Tenant breaks

Security of Tenure/Right to renew

The tenant has the right to renew for another 9 years. The landlord can refuse to renew, but will have to pay high eviction indemnities.

Indexation or Review

France

10-12

Tenant option every three year (except when a fixed term has been agreed).

Rents are indexed to the INSEE cost of construction index. New retail leases for shopping centres and retail parks are increasingly linked to the ILC (Indice des Loyers Commerciaux).

Germany

10 years (5+5) with options.

Unusual, however anchor tenants in shopping centres get break options.

Only if options to extend (e.g. 5+5) were agreed in the contract

Rents are indexed to the official consumer price index ("Verbraucherpreisindex") an automatic adjustment on a given date or whenever the changes occur.

Greece

12

The tenant has the right to break after 1 year with three months notice and 1 month penalty as Landlord compensation.

The tenant has the right to extend for a further 4 years

Annual indexation to consumer price index plus extra margin (usually +1 percentage point).

Hungary

5-10 (SC, RW) 2-5 (HS).

The majority of landlords prefer fixed 5-year terms without providing any early surrender.

Security of tenure varies considerably but is not automatic for defined-term leases.

Annual indexation to HICP.

Ireland

10

Negotiable, but becoming more standard as tenants are now in a much stronger position given the significant vacancy prevailing.

After 5 years, up to 20 year additional term. Tenants can contract out of these rights once legal advice has been obtained

Pre February 2010: 5 yearly to market rental value but upwards only. Post February 2010: 5 yearly to market rental value. Legislation from February 2010 prohibited the upwards only clause in all new leases.

Italy

The standard form of Property Lease (Contratto di Locazione) may be used for commercial premises of all types, and its format is to some extent covered by the Civil Code. The most typical duration is 6 years + 6 years (but it may also be for other prescribed combinations e.g. for 9 + 6 years, or for 9 + 9 years, or for a longer fixed period). Another form of contract (Contratto di Affitto di Ramo DAzienda) is in common use in shopping centres where the landlord controls the retail trade licence. Such business leases are usually for 5 to 7 years. 1-5 (HS) 5-10 (SC)

The 6 + 6 year regime (contemplated by the Civil Code) enables the tenant to restrict the term to 6 years, or automatically extend the term for the second period. Break clauses can be included within the lease structure by negotiation .

Property lease: tenants have the right to extend for another term and for retail receive compensation if terminated. Business lease: tenants do not have any statutory right to renewal, or compensation if the landlord decides not to renew the contract.

Annual indexation to ISTAT (cost of living index). Property lease: 75% of ISTAT or 100% if the lease is longer than 6 years. Business lease: 100% of ISTAT.

Latvia

None, only for leases of an unspecified term where at least 3 - 6 month's notice is required but with minimal term 1 year.

Yes, for an additional term.

Rents are indexed to either local inflation or Euro CPI, or capped at a pre-agreed fixed rate

Lithuania

2-5 (HS) 5 (SC)

None, unless the ownership changes or during lease revision.

Yes, for another term. Notice about lease renewal 3-6 month before.

Rents are indexed to local inflation or more rarely to Euro CPI, or capped at fixed rates. Rent Reviews are not typical, unless leases are without indexation (rents review each 1-2 years.) Annual indexation is typically seen, tied to inflation (the Consumer Price Index from STATEC). Indexation occurs usually on set dates once a year or in some cases may be triggered if inflation reaches a certain limit (5pts change in CPI). Market reviews are uncommon before the end of the lease but can be agreed by negotiation, usually before a break option.

Luxembourg

9-12

Rare but negotiable. At the earliest after 5 years. Breaks are by negotiation only and are not frequently seen. Early termination is only possible by negotiation and agreement with the landlord. Notice periods to break are set out in the lease but are typically 6 months.

There is no automatic right to renewal at the end of the lease but this can be negotiated. Indeed, options to annual renew or extend the lease are quite usual terms to be added to the lease.

Netherlands

5-10

Negotiable.

The tenant has security of tenure as the lease automatically renews at expiry, bearing in mind the notice period. The exception to this is if the landlord wishes to occupy, tear down or redevelop the building. These conditions are rather strict and in reality the landlords options of terminating the lease are limited. Statutory right to renew.

Annual indexation to CPI. Possible after first term, then after every 5 years. Review to comparable rental prices over last 5 years.

Norway

3-10

Negotiable. Can be agreed by parties for a definite term contract. Indefinite term contracts can be terminated in accordance with the Polish Civil Code.

Annual indexation to CPI.

Poland

5-10

No automatic right to renew.

Annual indexation to Eurozone CPI or less frequently a fixed increase of 2%-3%.

16

WHATS IN STORE?
Country Length Years - Retail Tenant breaks Security of Tenure/Right to renew Indexation or Review
New lease type - Freely negotiated between parties, usually increased annually according to inflation(based 100% of CPI published by INE). Shopping Centres - Freely negotiated between parties, usually increased annually according to inflation (based 100% of CPI published by INE). Annual indexation to CPI. There is no standard review mechanism and this may be negotiated in the lease. Reviews will typically be seen at the end of the initially agreed term rather than during this period.

Portugal

6 (SC) 10 (HS)

Freely negotiated between parties under the new law - usually 120 days notice for both parties.

Under new leases termination and/or renewal provisions within the lease contract. Shopping Centres: No security of tenure.

Romania

3-5

No break options

Security of tenure is not automatic but can be agreed in negotiations. An option to extend is often incorporated in the lease by negotiation

Russia

1-3

Break option is not common in the market. If break option is presupposed there are strict penalties for pre-term break Subject to negotiation

Tenants who register their lease agreements with the appropriate organisations are secured by Russian law No automatic right to renew

Annual indexation to USA/EU CPI or fixed increase. For retail typically 4-10% or at a level of USA/EU CPI. 4% is common for good quality fashion anchors. Annually to CPI

Serbia

3-5

Slovakia

5-10

Usually none but can be agreed for large requirements

None outside the lease term

Indexed annually to Eurozone or EU 27 HICP inflation. Rent reviews, if agreed, are rare. Not all leases are indexed. For those that are indexation varies but is typically either Slovenian CPI or Austrian CPI Annual indexation to IPC (or IPC+1 if the rent is low). For shopping centres: Annually (CPI) and at the end of fifth year (extraordinary rent review agreed upon by both the landlord and tenant) or market rent review. For high streets rents are indexed to CPI annually and it is common to update/increase rent to open market rent every 5/10 years in Barcelona. In Madrid for high streets rents are indexed to CPI annually and it is common to add on a further increment of 3 to 5 points every 5 years.

Slovenia

5 (HS) 5-10 (SC )

By negotiation and typically the current tenant needs to find a replacement

No automatic right to renew. Only by negotiation

Spain

5+ (10-20 for HS)

Shopping centres: In long term leases of more than 5 years usually there is a break option for the tenant at the end of the 5th year. High street: 3 years are usually compulsory. Break options at the 5th or 10th year with 6 months notice.

None, but the parties do not have any restriction on agreements for further terms

Sweden

3-5

None for short leases, negotiable on a lease of 5+ years

Commercial leases are automatically renewed at the end of the lease term (usually for 3 or 5 years at a time) if neither landlord nor tenant serves notice. Following the termination of a commercial lease by the landlord, the tenant is entitled to compensation; unless the landlord can provide other premises for lease or certain other circumstances (such as the tenant's misconduct) are at hand. Therefore, the tenant has a so called indirect security of tenure. The tenant has no security of tenure after the lease expires unless he can prove exceptional hardship. If landlord breaks the lease early and not at a contractual break option, the landlord is liable for all related damages or costs that arise.

Indexed annually to the consumer price index (CPI). Effectively there is no rent reviews within Swedish leases. The lease will generally contain an annual or quarterly index linked clause. The rent is reviewed at the end of the lease by negotiation between landlord and tenant.

Switzerland

Negotiable

Annual indexation to Swiss CPI is typical.

Turkey

There are no restrictions on break options. For leases between 3 and 5 years break options are provided after the first year or third year on a 5 year lease. 3 to 6 months notice should be provided

None except by negotiation.

Annual indexation to currency CPI or fixed step rents through the lease term.

Ukraine

Breaks clauses may be allowed subject to negotiation

Security of tenure is not automatic but can be agreed in negotiations. An option to extend is often incorporated in the lease by negotiation.

There is no standard review mechanism and this may be negotiated in the lease. With most leases being short however, reviews will typically be seen at the end of the initially agreed term rather than during this period. Indexation is by negotiation.

United Kingdom

5-15

Negotiable, after the first rent review at the earliest

Statutory right to renew.

5 yearly to open market value (upward only). Indexation is not common practice but is being seen on an increasing basis, together with fixed uplifts and can be particularly prevalent in corporate outsourcing deals.

17

EUROPEAN RETAIL IN 2012

GLOBAL RETAIL CONTACTS Our specialist agents work together to deliver integrated and innovative solutions to each client, regardless of the size or scope of the assignment. We have real geographical coverage with an on the ground market presence and expert local knowledge. Our teams have been created specifically to cater for the demands of international clients and cover geographic regions, shopping centres, out of town, leisure and restaurants, and lease advisory. Enhanced by our dedicated cross-border retail teams, we offer the widest range of services from any retail advisory company with true accountability and a clear understanding of our clients needs.

John Strachan Head of Global Retail Retail Services EMEA Tel: +(44) 20 7152 5090 john.strachan@eur.cushwake.com

Richard Middleton Executive Managing Director ASIA Tel: + (852) 2956 7075 richard.middleton@ap.cushwake.com

Matt Winn Senior Managing Director U.S. Retail Services Leader AMERICAS Tel: +(1) 404 853 5309
matt.winn@cushwake.com

Mark Burlton Head of Cross Border Retail Retail Services EMEA Tel: +(44) 20 7152 5290
mark.burlton@eur.cushwake.com

OUR RESEARCH SERVICES The Research Group provides a strategic advisory and supporting role to our clients. Consultancy projects are undertaken on a local and international basis, providing in-depth advice and analysis, detailed market appraisals and location and investment strategies. Typical projects include: Reliable and comparable data and market intelligence Site specific, location analysis, ranking and targeting for occupation or investment Analysis of future development activity and existing supply/competition Market research and demand analysis by retail/industry sector Rental analysis, forecasts and investment and portfolio strategy

David Hutchings Head of European Research Group EMEA Tel: +(44) 20 7152 5029
david.hutchings@eur.cushwake.com

Sigrid Zialcita Managing Director ASIA Tel: + (65) 6232 0875 sigrid.zialcita@ap.cushwake.com

Maria Sicola Executive Managing Director AMERICAS Tel: +(1) 415 773-3542 maria.sicola@cushwake.com

Jonathan Rumsey Senior Research Analyst Retail Research & Consultancy EMEA Tel: +(44) 20 7152 5970 jonathan.rumsey@cushwake.com

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