Investment Opportunities in a Changing Retail Landscape · Japan: Deutsche Securities Inc.*; in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for direct real estate

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]


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


What does this mean for investment?

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-  Changing risk profile?

-  Reduced investment activity and supply?

-  Polarisation?

-  Underperformance?

-  Mispricing and Opportunities?


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)


...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


—  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


...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

13

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


—  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


...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

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


—  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


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


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


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


...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


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


-  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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Documents

Investment Opportunities in a Changing Retail Landscape · Japan: Deutsche Securities Inc.*; in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for direct real estate