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 Figure 1: Growth of stock
the global markets have begun to appear in the real economy, ,000 sq.m

demonstrated by the figures recorded in early 2009. The Italian 16.000

economy has entered a recession, with a 0.5% decline in GDP 14.000

during Q2 2009 compared to the prior quarter, equal to a 6% trend 12.000

variation (source: ISTAT). This result is mainly due to the decline in 10.000

industrial production and the drop in exports, following the collapse 8.000

of international trade, particularly during the first three months of the 6.000

year. According to ISTAT figures, the unemployment rate rose to 4.000

7.4% during Q2 2009, compared to 6.7% during the same period of 2.000

2008. Forecasts for the end of 2009 call for a further increase in this 0
<1980
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H1 2009
rate. The inflation rate remained low at around 1%, and the year-end
outlook confirms that this figure will remain below 1%. Minimum 5.000 sq.m GLA and 10 units
Source: Jones Lang LaSalle Research Italy

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 Figure 2: Density – sqm of GLA per 1000 inhabitants
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
Source: Jones Lang LaSalle Research Italy
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.
 Shopping Centre Report H1 2009 – October 2009 3

Demand by retailers Developments

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
€/sq.m/year
950,0
800,0
650,0
500,0
350,0
200,0
50,0
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
,000 sq.m
4000
3500 Stock
by end of 2010
3000
2500
2000
1500
1000
500
0
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2006 2007 2008 H1 2009 H2 2009

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Shopping Centres- top location Retail parks - top location

iV
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Shopping Centres - average Retail parks - average

Fr

Source: Jones Lang LaSalle Research Italy Source: Jones Lang LaSalle Research Italy
4 Shopping Centre Report H1 2009 – October 2009
Investments
Figure 5: Growth of retail investments in Italy
2.500
2.000
1.500
€ ,000
1.000
500
0 0
2002 2003 2004 2005 2006 2007 2008
volume number
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.
50
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
n. of transactions
25
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
H1 2009
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).
 Shopping Centre Report H1 2009 – October 2009 5

Outlook

Figure 6: Italy: investment by sector The sense of uncertainty that characterised the first half of the year
will almost surely be a dominant factor during the second half of
H1 2008 H1 2009
2009 as well. The difficult economic situation is not expected to
Hotel
Retail 10%
Hotel
8%
improve in the near future, with a recovery envisaged for second
23% Industrial quarter 2010.
9%

Other
1%
Office
32%
Demand by retailers for new space will continue to focus on prime
Retail
54% locations, while the gap between demand for prime locations and
demand for secondary locations will continue to expand. In terms of
Office
Other rent, a stabilisation in values, which declined significantly during the
6%
57%
first half of the year for secondary locations, is expected for the
second part of the year.
Source: Jones Lang LaSalle Research Italy

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
Figure 7: Growth in gross yields
their business plans. In terms of investments, equity buyers are
Forecasts

Shopping Centres Retail Park Leisure

certain to occupy a dominant position, despite clear signs of distress
10,0% within this segment as well, particularly as regards open-ended
9,0%
German funds and their attempt to handle the redemption requests
of many institutional investors. New funds with more
8,0%
aggressive/opportunistic profiles are about to enter the retail sector.
7,0% In past years, these funds did not find the right opportunities to
achieve their expected return levels and, in particular, aimed for
6,0%
high-risk development projects in order to achieve specific multiples
5,0% for their risk capital. The same return expectations are now
2006

2010

2011
2007

2008

2009

“magically” possible for existing products, which therefore have a

Source: Jones Lang LaSalle Research Italy 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.
The objective of this report is to monitor development of the retail sector in Italy. Created thanks to the trustworthiness and leadership of
Jones Lang LaSalle in Europe, it highlights the key factors of the Italian market during the first half of 2009 and the main trends expected
over the medium term. The Retail Agency Department, the Retail Capital Markets team and the Research Department would be more than
willing 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

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