October 2009

Shopping Centre Report -H1 2009 The consumption crisis and the difficulty in securing bank loans are slowing the pipeline: many projects planned to begin in 2009 have been postponed to 2010 or later.

Investors as well as retailers prefer prime locations, which are less risky and allow for the adoption of defensive strategies during this uncertain phase in the investment market.

Compared to other sectors, the retail sector has attracted the highest absolute investment volume in Italy this year, accounting for 54% of the total amount invested (compared to 23% during the same period the prior year).

2 Shopping Centre Report H1 2009 – October 2009

Shopping Centre Report H1 2009

Supply of shopping centres in Italy

Economic situation As predicted in previous months, the effects of the financial crisis in the global markets have begun to appear in the real economy, demonstrated by the figures recorded in early 2009. The Italian economy has entered a recession, with a 0.5% decline in GDP during Q2 2009 compared to the prior quarter, equal to a 6% trend variation (source: ISTAT). This result is mainly due to the decline in industrial production and the drop in exports, following the collapse of international trade, particularly during the first three months of the year. According to ISTAT figures, the unemployment rate rose to 7.4% during Q2 2009, compared to 6.7% during the same period of 2008. Forecasts for the end of 2009 call for a further increase in this rate. The inflation rate remained low at around 1%, and the year-end outlook confirms that this figure will remain below 1%.

Stock and new openings There were some 900 retail complexes in Italy at the end of H1 2009, for a total GLA of over 14 million sqm. A very high percentage of stock (approximately 88%) consists of traditional shopping centres, with the remainder comprising factory outlet centres (4%), retail parks (6%), and other types (2%), including leisure.

Eighteen new centres were opened during the first six months of this year, in addition to the expansion of an existing centre, for a total of approximately 375 thousand sqm of new GLA. The traditional shopping centre anchored by a supermarket or hypermarket continues to prevail among new openings (14 openings out of 18). In addition to these, 4 retail parks were opened, along with a mixed-use centre. The density of shopping centres in Italy has grown over the years to approximately 239 sqm per 1000 inhabitants1. However, this figure differs from region to region. The northern regions in particular have a higher density than the Italian average, with 320 sqm per 1000 inhabitants. Regions in the centre have a density of around 243 sqm and those in the south of 156 sqm.

1 This density is calculated by taking into consideration the total stock, which includes all types of schemes.

Figure 1: Growth of stock Source: Jones Lang LaSalle Research Italy

Figure 2: Density – sqm of GLA per 1000 inhabitants

Source: Jones Lang LaSalle Research Italy

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Shopping Centre Report H1 2009 – October 2009 3

Demand by retailers

The trend of declining retail sales that began in 2008 continued during the first half of this year, essentially due to the consumption crisis underway at the international level. This trend has led to a review of the plans for new openings by several large-scale retail chains. Few retailers have maintained aggressive expansion policies in Italy, and although many international brands (particularly French) remained active during the first quarter of the year despite the difficult period, these brands also revised their plans during second quarter. The search for new areas is in any case limited to prime locations with large catchment areas and which have stabilised from the retail point of view, with a consequent reduction in the risk margin. Furthermore, negotiation times for the stipulation of contracts are much longer than in the past and retailers are demanding very favourable conditions and numerous incentives. As a result of this particular situation, new openings are being postponed and secondary locations are recording numerous vacant units or a sharp reduction in the expected rent levels. Demand for leasehold units in the historic centres remains high in both Milan and Rome, but retailers are increasingly less willing to pay high key money amounts, which can be incorporated into the rent.

Rents

The factors that have impacted the market during the first half of 2009, described in the paragraphs above, have also resulted in a decline in rents, more evident in shopping centres and retail parks situated in secondary locations.

Figure 4: Growth in retail rents Source: Jones Lang LaSalle Research Italy

Developments

A consequence of the difficult phase in the retail sector is the fact that many projects scheduled for 2009 have been postponed to 2010 or later. As at the end of H1 2009, the pipeline for the second half of the year and for 2010 amounted to approximately 2.1 million sqm of new retail GLA. The pipeline for 2009 has undergone a slowdown of approximately 60% compared to the outlook at the end of 2008. This is essentially due to the difficulty in obtaining or maintaining financing or in securing tenants within the expected time frame. The pipeline no longer contains an abundance of large projects (> 50,000 sqm) as in prior years, but this is not necessarily due to the crisis, since in recent years we have seen the opening of many shopping centres in the larger catchment areas (such as Rome). In fact, the major catchment areas in our country (necessary for such large areas) are now almost fully saturated, even though Milan is still missing a large regional centre. Traditional type shopping sectors continue to prevail in the pipeline, with an average size of approximately 20,000 sqm, while we expect a gradual reduction in the size of food anchors to an average of about 4-5,000 sqm (previously 10-11,000 sqm). Retail parks have undergone a slight decline, but our country still has various possible areas for development of this type of product, especially if backed by less complicated authorisation regulations. There is a continued preference for locations near primary shopping centres, which are highly attractive particularly in cases where the centres are already consolidated.

Figure 3: Pipeline by region Source: Jones Lang LaSalle Research Italy

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4 Shopping Centre Report H1 2009 – October 2009

Investments

Figure 5: Growth of retail investments in Italy Source: Jones Lang LaSalle Research Italy

Despite the slowdown in investment activity in all sectors, the volume of transactions in the Italian retail sector grew significantly during H1 2009 compared to the same period in 2008: 12 transactions were completed for a total of €768 million, equal to a 68% increase in volume compared to the first half of the previous year. The retail sector appears to have attracted the highest absolute investment volume in Italy, accounting for 54% of the total amount invested (compared to 23% for the same period last year). However, we know that numerous transactions are the result of preliminary agreements dating back to as far as two years ago and involving development projects. We estimate that there are currently over €3 billion in retail investments available on the Italian market, with various product types, qualities, sizes and risk profiles.

Germany and Italy were the most active markets in continental Europe during the first half of this year, accounting for 25% and 15% of the total volume invested, respectively. Three transactions exceeded €140 million: Centro Rondò, Antegnate Shopping Centre and Galleria Alberto Sordi in Rome.

Apart from institutional investors, German open-ended funds were the most active category of investors on the market during the first half of the year, in addition to several Italian funds. Given the substantial difficulty in securing financing, equity buyers continue to

be the most active players, although the scenarios are slowing changing, as we will see in the Outlook.

Investment funds have, in general, become highly selective, essentially focusing on prime assets located mainly in the centre/north and in the capital, as these provide lower risk levels and better covenants (therefore, prime shopping centres or retail parks and high-street properties). Other European countries have seen a significant decline in values, a situation that has not yet taken place to the same extent in Italy. However, we have not yet achieved an alignment between the expectations of sellers and purchasers, risking future stagnation in the investment market, particularly as regards new negotiations. Despite the 12 transactions completed in these 6 months, we believe there is still no concrete evidence that the growth in yields is actually a result of negotiations begun in 2009 by sellers that did not need to sell within a specific time period or who were in any case experiencing difficulty.

Having clarified the above, we expect the adjustment in prices to be confirmed during the second part of the year. The ample supply of assets may contribute to an increase in the value of yields, particularly for secondary assets and for development projects that at the moment appear to be the least attractive due to the difficulty in securing bank loans. Furthermore, the gap between the prices of assets located in the north and those located in the south is clearly widening, almost fully excluding the regions of the south from the investment market, except for several major, high-quality projects.

In past years, particularly between 2006 and 2007, investment funds often valued products regardless of their geographical location and intrinsic elements, due to the scarcity of available product. This resulted in the stipulation of preliminary purchase agreements for projects under development at values near or similar to existing ones, in dominant positions, stable and above all income-producing. We can therefore reasonably state that values are normalising, following a market that was previously “infected” by the sharp difference between product supply and excess availability of capital and above all debt. As far as prime products are concerned (for e.g., dominant shopping centres, situated in northern Italy, lot size €50 million), we expect a more limited increase in returns compared to that expected for secondary products (approximately +25/50 bps).

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Shopping Centre Report H1 2009 – October 2009 5

Figure 6: Italy: investment by sector Source: Jones Lang LaSalle Research Italy

Figure 7: Growth in gross yields Source: Jones Lang LaSalle Research Italy

Outlook

The sense of uncertainty that characterised the first half of the year will almost surely be a dominant factor during the second half of 2009 as well. The difficult economic situation is not expected to improve in the near future, with a recovery envisaged for second quarter 2010.

Demand by retailers for new space will continue to focus on prime locations, while the gap between demand for prime locations and demand for secondary locations will continue to expand. In terms of rent, a stabilisation in values, which declined significantly during the first half of the year for secondary locations, is expected for the second part of the year.

Developers are facing numerous obstacles as a result of the high cost of debt, difficulty in securing financing, the decline in rents and difficulty in selling new products at the values originally indicated in their business plans. In terms of investments, equity buyers are certain to occupy a dominant position, despite clear signs of distress within this segment as well, particularly as regards open-ended German funds and their attempt to handle the redemption requests of many institutional investors. New funds with more aggressive/opportunistic profiles are about to enter the retail sector. In past years, these funds did not find the right opportunities to achieve their expected return levels and, in particular, aimed for high-risk development projects in order to achieve specific multiples for their risk capital. The same return expectations are now “magically” possible for existing products, which therefore have a past and room for growth in value, following asset management activities. Consequently, at the end of the year, we may see atypical transactions that were unthinkable only 24 months ago.

In light of the above, we should have evidence of this growth in yields during the second half of the year, and we can expect a stabilisation of yields in 2010, following alignment of seller and purchaser expectations.

German funds that were not frozen at the beginning of this year are showing significant interest in the Italian retail market, although many of these have not yet defined clear strategies for 2010. However, we can assume that they will once again become active in Italy after the end of the year, with the prospect of carrying out acquisitions for 2010.

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Office57%

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Retail23%

H1 2008 H1 2009

Hotel8%

Office32%

Other6%

Retail54%

The objective of this report is to monitor development of the retail sector in Italy. Created thanks to the trustworthiness and leadership ofJones Lang LaSalle in Europe, it highlights the key factors of the Italian market during the first half of 2009 and the main trends expectedover the medium term. The Retail Agency Department, the Retail Capital Markets team and the Research Department would be more thanwilling to answer any queries and provide additional information on the retail sector in Italy.

Contacts Davide Dalmiglio National Director Retail Capital Markets Milan + 39 (0) 02 85 86 86 649 davide.dalmiglio@eu.jll.com Simone Burasanis Associate Director Retail Agency Milan + 39 (0) 02 85 86 86 630 simone.burasanis@eu.jll.com Elisabetta Terzariol Senior Analyst Research Milan + 39 (0) 02 36 010 578 elisabetta.terzariol@eu.jll.com

Shopping Centre Report H1 2009 – October 2009 OnPoint reports by Jones Lang LaSalle provide key indicators of the real estate market and specialised surveys and forecasts on a half-yearly and annual basis, highlighting emerging market trends.

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