Research

october 2012

highlights

spanish Retail investment market report

The polarisation of the market continues: despite the economic situation, prime

and well-establised centres continue to perform well, whilst secondary schemes

and cities are suffering.

International retailers continue to demand space in prime shopping centres.

The retail investment market remains static. There have been no high profile deals

completed so far this year.

Debt transactions are increasingly the focus of investors. Future investment sales

over the short term are likely to be in the hands of the banks.

Experienced investors continue to seek opportunities in Spain’s prime cities,

testimony to the belief that despite the economic climate, Spain offers the correct

fundamentals for retail investment. Those with a site-specific strategy, rather than

a country approach, will identify assets that meet their criteria through micro

analysis.

october 2012

spanish retailinvestment market report

Economic OutlookThe challenging macroeconomic situation inSpain needs little introduction having beenthe focus of many economic and politicaldebates in recent times.

The Spanish economy, characterised by a lossof competitiveness, high levels ofunemployment and falling consumptionrates, continues to contract. There are avariety of GDP forecasts available but thegeneral consensus is that economy willcontract by around -1.7% in 2012, as a resultof further upcoming fiscal reforms andcontinued low economic activity.

Unemployment in Spain now stands atapproximately 24.7%. However, this is spreadunevenly across the country, with the rate inMadrid being around 6 percentage pointslower than the national average.

It goes without saying that factors such as theintensification of financial stress associatedwith sovereign debt markets, restrictions onaccess to credit and increased uncertainty,not only surrounding Spain but also thefuture of Europe, do not create the healthiestscenario for investment.

Against this backdrop, the Spanishgovernment continues to strive to steer Spainout of the dark. Over the year, the CentralGovernment has presented numerous fiscalmeasures designed to achieve Spain’s deficittargets. These measures include:

• Increase in tax revenues, including VAT,corporate income tax, personal income taxand excise duties.

• Changes to unemployment benefit andsocial security contributions.

• Improvement of public sector efficiencyand reduction of the public sector wage bill.

• Review of pension system.

The fact remains that Spain's economy is the12th largest in the world. Despite the currentsituation, investors remain keen to monitorthe market and to have a foot in the door for

when the real opportunities begin toreappear. It is difficult to imagine how acountry with a population of almost 50million people, having experienced nearly 15years of above average GDP growth beforethe slowdown in 2007, will be not be able toturn itself around and find the road torecovery. Investors recognise that the key tothe Spanish market is being prepared andready to act. The economy is unlikely to makea recovery before 2015, however there will besome interesting opportunities to be hadalong the way.

retail marketThe retail market remains characterised by thepolarisation between prime and secondaryschemes. Some prime shopping centres areachieving 100% occupation and have in factseen an increase in the number of visitors, aswell as sales. This is a quite a differentscenario from the challenges some secondarycentres are facing today.

Supply and DemandOperators remain selective when opening newstores and many expansion plans are on hold.

Spain is facing competition from othercountries, particularly in Eastern Europe,where there is considered to be greaterpotential for economic growth, attracting the

expansion of international brands. However, a number of international retailers continueto seek to increase their coverage in primeshopping centres in Spain and believe thatSpain offers the correct fundamentals forretail business.

Primark remains particularly active as doesthe Sonae Group with Sport Zone and Zippy. A relatively new operator to the market is JDSports, having opened several new storesthis year. Other international operators, suchas Superdry, remain active in their expansionbut opt to reduce risk via franchising in non-prime locations.

Generally, vacancy rates vary from 2.5% -4.5% for prime centres and are 10+% insecondary schemes, depending on thequality of the asset. Lease negotiationscontinue to be difficult as operators areincreasingly demanding. Landlords shouldseriously consider fit out and financing storesto maintain competiveness.

Sales Despite the economic situation, people docontinue to shop, but consumers haveadjusted their budgets to match currentdisposable income. On average, centresmanaged by Knight Frank registered a fall insales of between 2% and 8% over the firsthalf of the year.

In general, leisure and restaurants haveparticularly suffered over the last year, ashave household goods retailers in certaincentres. However, low cost concepts such as

Economic Indicators 2010 2011 2012

GDP Growth -0.1 0.4 -1.7

Unemployment rate 20.1 21.6 24.5

Consumer Price Index 1.8 3.2 2.5

Government Bond 10 yr 4.25 5.43 5.64

Source: Savings Bank Foundation

2

(*)

(*) Annual average forecasts

McDonald’s or Burger King and those brandsthat have repositioned to adjust to thecurrent situation have been able to maintaintheir positions. Similarly, supermarkets andlow cost formats such as Lidl and Aldi, arenow outperforming the traditionalhypermarket formats in many cases.

Some operators are finding efficiency byincreasing format size and are now movingfrom smaller units of 100-200 sq m to largerformats of 600-700 sq m whilst maintainingvery tight price margins. Smaller operatorsare most affected due to the lack of credit,whilst franchise and chain stores areperforming better.

New OpeningsOnly two schemes, Gran Plaza 2 in Madridand Serrallo Plaza in Granada, opened in thefirst half of 2012. However, three large newshopping centres opened in September andPuerto Venecia, belonging to British Landand Orion Capital, will open at the beginningof October in Zaragoza. By the end of 2012,we will have seen half a million squaremetres of GLA come to the market, anindication of the confidence key developershave in Spanish retail.

Retail InvestmentmarketDespite speculation about distressed sales,the market has remained very static so far this year.

Property owners that do not need cash have nomotive to sell in the current market. From bothan operational and transactional perspective,many property investors continue to focus onmaximising the value of their currentportfolios, rather than considering rotation.

This general lack of product, together withrestrictions on finance, lengthy decisionprocesses and overall uncertainty surroundingthe Spanish economy, continues to makeinvestment transactions extremely difficult.

Nevertheless, experienced investors remainpositive and are opting to monitor the marketrather than remove Spain from their target list.Emphasis is generally on prime cities,favouring Madrid, Barcelona and the BasqueCountry, as these areas have the most positiveconsumption and growth forecasts, and havebeen less affected by the economic downturn,particularly if we refer to Madrid andBarcelona.

Debt transactions are increasingly the focus ofinvestors; even some of the more traditionalasset buyers are looking at ways to form newvehicles for the purchase of securitised loans.It should be remembered that the sale of thedebt does not necessarily mean that the assetis performing badly, but could be due toproblems the sponsor has elsewhere or simplyan attempt from the bank to reduce exposure.

It would seem that future investment salesover the short term are likely to be in thehands of the banks. However, despite theireagerness to clean up balance sheets andreduce exposure, there is a general reluctanceto accept offers entailing direct loss.Opportunistic funds interested in the purchaseof debt or distressed assets are, of course,expecting significant discounts in order toachieve their returns, which the banks arerejecting. The increasing distress in certainsituations means that discounts not acceptedtoday could lead to greater losses in thefuture, as over time, these assets will havelittle or no capex invested in them. They willeventually reach the market under managedand out dated, and by that time, will be farfrom meeting investment grade, even foropportunistic funds.

Banks not willing to accept reasonable lossesin the current situation should seriouslyconsider how they will manage foreclosed andproblematic shopping centre assets. These

Scheme Location Developer GLA (sq m) Opening Date

Serrallo Plaza Granada Corporación García Arrabal 24,000 March 2012

Gran Plaza 2 Majadahonda, Madrid LSGIE 57,000 April 2012

Río Shopping Arroyo de la Encomienda, Valladolid Inter Ikea Centre Group 100,000 September 2012

Zenia Boulevard Orihuela, Alicante Immochan 80,000 September 2012

El Faro Badajoz Unibail-Rodamco 66,000 September 2012

Puerto Venecia Zaragoza British Land, Orion Capital 118,000 October 2012

Luz Shopping Lifestyle Center Jerez de la Frontera, Cadiz Inter Ikea Centre Group 15,000 Novemeber 2012

As Cancelas Santiago de Compostela Carrefour Property España, Realia 50,500 Novemeber 2012

Main Shopping Centre Openings 2012

Source: Spanish Shopping Centre Association

www.knightfrank.es

3

properties require intense management inorder to avoid falling into situations whichallow the scheme to deteriorate andgenerate costs to the extent that it simplywill not sell at any price.

TransactionsThere have been no high profile deals onthe market so far this year.

The first half of the year saw the sale of theArambol Retail Park in Palencia to a familyoffice investment club from Barcelona. Thisretail park opened last year and although ithas a good tenant mix of retail warehouseoperators, is considered secondary due toits location. However, this is an example ofhow family offices looking to diversify in theretail sector can obtain higher returns thanthose offered by other asset classes. Privateinvestors can take advantage of the currentsituation to invest in retail warehouses, whichalthough they do require a certain degree ofspecialist knowledge, do not necessarilyneed the same intense management asshopping centres.

It is also worth mentioning the sale of theBahia Mar Retail Park in Cadiz to a localinvestor. With a tenant mix of local operators,high vacancy and short term leases, thetransaction of Bahia Mar was driven by thefinancing bank.

Despite the low level of investmenttransactions, there are a number of sales

processes currently underway, both on andoff market, which have generated noticeableinterest from investors. These potentialtransactions could increase the overallinvestment volume by the end of the year,however, their completion is uncertain and asever, will greatly depend on finance options.

We expect to see further debt portfolios andindividual cases come to the market over thenext 12 months. These will present goodopportunities, however in the case ofunderperforming assets, investors would bewell advised to carry out intensive duediligence in order to establish whether or notthe asset is likely to deteriorate further in thecurrent climate. In these situations, it is keyto establish a sound post-acquisition strategy

with the necessary measures for successfulmanagement.

Enterprising investors who are able to seebeyond Spain’s high risk country profile,away from a general macro analysis toconcentrate on the micro surroundings, willfind good products that still perform well inspite of the economic situation. Recent salesprocesses have shown that experiencedinvestors continue to seek opportunities inSpain. This is testimony to the belief thatdespite the economic climate, Spain offersthe correct fundamentals for retail investmentand those with a site-specific strategy, ratherthan a country approach, will identify assetsthat meet their criteria.

Humprey White. MRICSAssociateHead of Investmenthumprey.white@es.knightfrank.com

Elaine Beachill. MRICSInvestment Retailelaine.beachill@es.knightfrank.com

Investment

www.knightfrank.esSuero de Quiñones, 34-3628002 - MadridT: +34 91 59 59 000 F: +34 91 575 73 23

© Knight Frank 2012. This report is published for general information only. Although high standardshave been used in the preparation of the information, analysis, views and projections presented in thisreport, no legal responsibility can be accepted by Knight Frank Retail or Knight Frank Spain for any lossor damage resultant from the contents of this document. As a general report, this material does not ne-cessarily represent the view of Knight Frank Spain in relation to particular properties or projects. Repro-duction of this report in whole or in part is allowed with proper reference to Knight Frank Spain.

october 2012

spanish retailinvestment market report

Arambol Retail Park, Palencia