MARKET ATTRACTIVENESS OF CITIES

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Sharon Patrick
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1 REDEVCO S VIEW MARKET ATTRACTIVENESS OF CITIES WHERE TO INVEST IN RETAIL PROPERTY

THE NEED FOR A CITY ATTRACTIVENESS MODEL Escalating location risk As a pan European investment manager specialised in retail property, it is our business to identify those markets

Over the past years location selection has become even more important.

Reinforcing the need for a navigation tool This volatile environment requires a well substantiated view on the most attractive cities for our business.

It now ranks more than 800 European cities in terms of attractiveness for High Street investments and is used to inform investment decisions and develop business strategies.

data derived from 39 sources into 19 different and meaningful indicators with regard to various aspects of retail real estate.

2 THE NEED FOR A CITY ATTRACTIVENESS MODEL Escalating location risk As a pan European investment manager specialised in retail property, it is our business to identify those markets that contribute to the success of the retailer and that of our investors and thus to our own success now and in the future. Over the past years location selection has become even more important. Location risk has leapt up the agenda as, amongst other factors, e commerce is changing the retail landscape at an astonishing speed. Reinforcing the need for a navigation tool This volatile environment requires a well substantiated view on the most attractive cities for our business. During the past three years, Redevco has carried out extensive research to develop its City Attractiveness Model. It now ranks more than 800 European cities in terms of attractiveness for High Street investments and is used to inform investment decisions and develop business strategies. THE JOURNEY FROM A COLLECTION OF FACTS TOWARDS A WELL-SUBSTANTIATED VIEW POPULATION ECONOMY PROPERTY MARKET CITY QUALITY Redevco s Research & Strategy team has combined best in class data derived from 39 sources into 19 different and meaningful indicators with regard to various aspects of retail real estate. The indicators are grouped into four categories: population, economy, retail property market and city quality. These are weighted to calculate a city s attractiveness score. This weighting is enriched with local knowledge of Redevco s seven country teams that enables the locations to be grouped into five quality baskets ranging from Excellent to Poor. Extensive scenario analysis and testing of the results has now resulted in a robust model, which is able to statistically explain nearly 70% of the variance in rent and yield levels between the cities included in the model.

Soft factors increasingly important for a city s attractiveness At the start of this study Redevco hypothesised that the increasingly critical consumer attaches more and more value to the quality of

The most attractive shopping destinations are those which offer a pleasant atmosphere and where shopping can be combined with other opportunities such as dining out and cultural experiences.

attractiveness for High Street investments.

explanatory power of the model. The research also shows that rental value growth and yield compression are strongest over time in those cities that score well on soft factors.

3 Soft factors increasingly important for a city s attractiveness At the start of this study Redevco hypothesised that the increasingly critical consumer attaches more and more value to the quality of the shopping environment, in addition to the shop offering. The most attractive shopping destinations are those which offer a pleasant atmosphere and where shopping can be combined with other opportunities such as dining out and cultural experiences. The City Attractiveness Model demonstrates that, in addition to the fundamentals like economy and demography, soft factors are indeed increasingly important in determining a city s overall attractiveness for High Street investments. Factors like the presence of a relatively high share of creative professions, a high number of historical points of interest and a relatively young population significantly contribute to the explanatory power of the model. The research also shows that rental value growth and yield compression are strongest over time in those cities that score well on soft factors. Redevco s View: Quality will continue to outperform Structural change in the retail landscape is causing polarisation in terms of property performance. Our City Attractiveness Model contributes to our understanding of what drives performance in retail real estate investments and helps us to make the right investment decisions in a relatively opaque market. But it has also strengthened our belief that High Street retail in Europe s most attractive cities will continue to outperform as it combines all the things that the modern consumer is looking for.

DELVING DEEPLY INTO THE CONTENT OF THE CITY ATTRACTIVENESS MODEL Bigger cities have better prospects Retailing is fundamentally a consumer oriented activity.

The drawing power of the city and the competition in the surrounding areas is also essential when assessing a city s quality for retailing.

Research shows that urbanisation is causing bigger cities to have better growth prospects at the expense of smaller ones.

Balancing retail sales volume with future growth and economic stability The category Economy is used to quantify the quality of the population in a city.

4 DELVING DEEPLY INTO THE CONTENT OF THE CITY ATTRACTIVENESS MODEL Bigger cities have better prospects Retailing is fundamentally a consumer oriented activity. The first category in the model therefore concerns Population. Size, dynamics and nature of the population in a city are of fundamental importance for retailer performance. The drawing power of the city and the competition in the surrounding areas is also essential when assessing a city s quality for retailing. This makes catchment area characteristics of significant value as well. Ultimately, it is the bigger cities that are deemed most attractive in this category. Research shows that urbanisation is causing bigger cities to have better growth prospects at the expense of smaller ones. However, further analysis has shown that a big population in itself is not necessarily enough. Balancing retail sales volume with future growth and economic stability The category Economy is used to quantify the quality of the population in a city. A big population does not necessarily translate into high retail sales. High unemployment or relatively low prosperity can result in adverse spending behaviour or negative growth prospects. Also, some areas in Europe that are displaying low retail sales volumes at the moment are expected to experience the highest growth rates and will therefore be much more attractive in the future. Acknowledging that both the current and future levels of retail sales are important, we have combined variables relating to actual and future retail sales levels. In addition, this category looks at economic stability.

The crossroad of investor and retailer demand For Redevco, the ideal retail real-estate investment market combines a healthy stock, with strong retailer

For instance, while investment activity is mostly limited to the most mature countries in Europe, retailer demand generally can be strong in a number of

In this category we choose to reward low vacancy rates and high investment volumes as well as the presence of international retailers.

Soft factors matter There is more to attractiveness than what has been described above.

For instance, the presence of creative professions is an indirect indicator for city attractiveness.

5 The crossroad of investor and retailer demand For Redevco, the ideal retail real-estate investment market combines a healthy stock, with strong retailer and investor demand, but in reality a situation of imbalance often occurs. For instance, while investment activity is mostly limited to the most mature countries in Europe, retailer demand generally can be strong in a number of developing economies too. Also, investors are sometimes willing to pay high prices for assets in cities where retailer demand is not so strong. In this category we choose to reward low vacancy rates and high investment volumes as well as the presence of international retailers. We have taken the view that higher rents and lower yields indicate higher demand from retailers and investors. Soft factors matter There is more to attractiveness than what has been described above. The shopping experience depends to a large extent on soft factors that we take into account in the category City Quality. For instance, the presence of creative professions is an indirect indicator for city attractiveness. Creative people choose interesting cities to live in and also generate a certain atmosphere. Tourism is an important indicator for attractiveness as well. Not only because tourists generate retail sales, but also because they select attractive cities, very often with a rich history. Statistical analysis shows evidence that cities with a good score on soft factors, in addition to fundamentals like population and economy, show a better property performance over time.

REDEVCO S MOST ATTRACTIVE EUROPEAN CITIES FOR HIGH STREET INVESTMENTS 1. London 14. Barcelona 2. Paris 15. Rome 3. Munich 16. Zürich 4. Berlin 17. Cologne 5. Hamburg 18. Prague 6. Vienna 19.

Oslo Top 25: Solid and best in class Out of the more than 800 cities ranked in the City Attractiveness Model, the cities in the table on the left are the Top 25 most attractive cities.

The quality and performance of these cities remains undisputed.

German cities occupy seven of the 25 highest places, as the weight of money from investors targeting the market has led to a solid performance for retail property.

6 REDEVCO S MOST ATTRACTIVE EUROPEAN CITIES FOR HIGH STREET INVESTMENTS 1. London 14. Barcelona 2. Paris 15. Rome 3. Munich 16. Zürich 4. Berlin 17. Cologne 5. Hamburg 18. Prague 6. Vienna 19. Frankfurt 7. Stockholm 20. Stuttgart 8. Milan 21. Düsseldorf 9. Amsterdam 22. Glasgow 10. Copenhagen 23. Edinburgh 11. Manchester 24. Dublin 12. Madrid 25. Istanbul 13. Oslo Top 25: Solid and best in class Out of the more than 800 cities ranked in the City Attractiveness Model, the cities in the table on the left are the Top 25 most attractive cities. During the past three years in which Redevco has developed and tested the City Attractiveness Model, the Top 25 has remained nearly unchanged. The quality and performance of these cities remains undisputed. London and Paris hold the top two spots, reflecting their status as global retail destinations commanding the highest European prices and rents. German cities occupy seven of the 25 highest places, as the weight of money from investors targeting the market has led to a solid performance for retail property. Top 200: Redevco s investment-grade cities Only about 25% out of the more than 800 cities that have been ranked in the City Attractiveness Model have been identified as investment grade cities by Redevco, which means that the company is interested in acquiring and managing real estate in these cities. This assessment has been made by combining the score from the City Attractiveness Model with the judgement from Redevco s seven local teams in order to group the cities into five quality baskets ranging from Excellent to Poor. Only those cities that fall into the three best categories ( Excellent, Very good and Good ) are deemed investment grade. Redevco uses the quality baskets to stipulate investment strategies. The higher the quality grade, the lower the risk and associated return expectation. London, United Kingdom Paris, France Amsterdam, Netherlands Vienna, Austria

CASE STUDIES The City Attractiveness Model enables Redevco to select the most attractive cities in Europe for retail real estate investments based on analysis of various indicators.

0 10 City Attractiveness score Population Size Catchment Area Future Population Growth Economic Volatility Disposable Income Employment Growth Unemployment Rate Retail Sales per Capita Future Retail

7 CASE STUDIES The City Attractiveness Model enables Redevco to select the most attractive cities in Europe for retail real estate investments based on analysis of various indicators. Every city has its own story. The two examples below of Stockholm and Bordeaux illustrate this City Attractiveness score Population Size Catchment Area Future Population Growth Economic Volatility Disposable Income Employment Growth Unemployment Rate Retail Sales per Capita Future Retail Sales Growth Vacancy Rate Development Pipeline Investment Deal Flow Rental Level Yield Level International Retailers Creative Professions Tourism Average Age Historic Points of Interest Stockholm, Sweden Stockholm belongs to the Excellent category, which means it has been awarded a very high attractiveness score. This score can partly be explained by the size of the population and catchment area. The city is also known for a stable economy and an affluent population which, in European perspective, tends to spend a relatively large share of its disposable income on retail. Furthermore, Stockholm is regarded as a vibrant city with a very high-quality living environment and an attractive historical city center, much in favour with tourists. All of these characteristics result in a strong demand from domestic and international retailers, such as H&M, Zara and Desigual City Attractiveness score Population Size Catchment Area Future Population Growth Economic Volatility Disposable Income Employment Growth Unemployment Rate Retail Sales per Capita Future Retail Sales Growth Vacancy Rate Development Pipeline Investment Deal Flow Rental Level Yield Level International Retailers Creative Professions Tourism Average Age Historic Points of Interest Bordeaux, France Bordeaux has been awarded a Very Good classification. The cities key strength is that it has no real weaknesses. Although significantly smaller in terms of absolute size compared to Stockholm, Bordeaux clearly functions as a regional shopping destination with a relatively large catchment area. Because of the combination of strong fundamentals, a rich history and growth potential Bordeaux is a very attractive city for retailers, investors and tourists. The attractiveness of the city in combination with ongoing structural inner-city developments aimed at a further revitalization and rejuvenation of the city inspired Redevco to (re)develop Promenade Sainte Catherine, in the heart of the historical city centre.

8 REDEVCO CITY ATTRACTIVENESS MODEL ON THE BASIS OF WHAT ARE THE CITIES RANKED? POPULATION Population Size Catchment Area Future Population Growth ECONOMY Retail Sales per Capita Disposible Income PROPERTY MARKET Employment Growth Volatility Unemployment Retail Sales Growth Deal Flow Vacancy International Retailers Development Pipeline Rental Level Yield Level CITY QUALITY Historical Points of Interest Tourism Average Age Creative Professions OUTCOME If you are interested to know more about Redevco s View on the Market attractiveness of cities, please contact Redevco. Redevco B.V. T +31 (0) E info@redevco.com This Brochure is printed on TOP10 Green Gloss paper 100% postconsumer FSC Recycled fibre and PCF (Processed Chlorine Free) Amsterdam, September 2015

JLL Office Property Clock Q2 2017

Research Report JLL JLL Office Property Clock Q2 2017 1 Q2 office leasing activity saw the highest take up in Western Europe since 2006 Q2 2017 European office take-up was down marginally on Q2 2016 (-3%),