Global ViewPoint | Shopping Centre Development

CBRE Global ViewPoint

GLOBAL RESEARCH AND CONSULTING

June 2012

SHOPPING CENTRE DEVELOPMENT THE MOST ACTIVE GLOBAL CITIES

Author: Neville Moss, Head of EMEA Retail Research Contributors: Ronald Chan, Senior Manager Asia Research, Hong Kong and James Costello, Managing Director, Head of Research Investment Consulting, Americas

OVERVIEW Global shopping centre development continues apace, with unprecedented levels of construction and new openings taking place. 7.8 million sq m of new space opened in 2011 and a further 29.6 million sq m is under construction equivalent to all the combined existing space in France, UK and Germany. Emerging markets are far more active than mature ones. In 2011, new centres opened in 63 (35%) of the 180 cities covered in the survey, of which 50 were in emerging markets. In contrast only five cites in western Europe saw the development of a new centre last year. Looking ahead, a similar theme is evident. Half (50%) of all space under construction is in China, with Asia accounting for 70% of all schemes currently being built. The development market is also highly active in parts of eastern Europe, the Middle East and Latin America. The shopping centre concept, once the preserve of the western world, is therefore becoming ubiquitous. Retailers seeking to grow their businesses in emerging markets have benefited significantly from the development of new centres, whilst extensions to existing schemes and redevelopment plays an important part in attracting new international retailers to more mature markets. However, with retailers increasingly focused on accessing the best space in the top locations, demand for prime space continues to outstrip supply in most markets even in China.

INTRODUCTION CBRE has measured the level of shopping centre development in 180 of the worlds major cities. The survey was based on new centres of over 20,000 sq m and excluded retail warehousing and factory outlet centres. The definition used in this analysis is set out in full in the back of this report. The purpose of this Viewpoint is twofold: To identify the most active shopping centre development markets at city level, both in terms of 2011 completions and space currently under construction. To assess the importance of new development in attracting cross border retailers. FULL OF EASTERN PROMISE China was by far the most active development market last year with four cities in the top five in terms of the amount of new space completed. Shenyang (8.1 million people) was the runaway leader. Six new centres totalling over one million sq metres opened there in 2011. In second place was Wuhan (9.8 million people) where 574,000 sq m of new space opened, also in six centres. The Most Active Shopping Centre Development Markets in 2011 (sq m completed)
Shenyang, China Wuhan, China Chengdu, China Guangzhou, China Istanbul, Turkey Kuala Lumpur, Malaysia Mumbai, India Ankara, Turkey Chongqing, China Bangalore, India Mexico City, Mexico London, UK Seoul, South Korea Osaka, Japan New Delhi, India St Petersburg, Russia Moscow, Russia Hanoi, Vietnam Tianjin, China Manila, Phillipines Beijing, China Sao Paulo, Brazil 0 500,000 1,000,000

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Cities with more than 100,000 sq m of new shopping centre space in 2011 Source: CBRE

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Whilst the amount of new space built in Chinas Tier 1 and Tier 2 cities in 2011 was huge, this level of development has been sustained for a number of years and in many cities there is more to come. China too much too quickly? Even though Chinas economic boom and growing middle class has led to a major increase in consumer spending, the rapid expansion of shopping centre space has in many cities outpaced consumer demand. Development has been fuelled by a lax planning regime, the belief on the part of developers that retail provides the best returns and a lack of understanding among some local developers of how much space is required to satisfy consumer demand. Nevertheless there are still opportunities for new developments, particularly for modern high quality shopping centres as department stores - the first retail developments become less popular with both retailers and consumers. Development activity was high in all the BRIC countries (Brazil, Russia, India and China) in 2011, and also in cities such as Kuala Lumpur, Mexico City, Hanoi, Istanbul and Ankara. Limited development in mature markets In Europe, new shopping centres were completed in just 15 out of the 96 cities covered in the survey. Outside of Russia and Turkey only Ukraine (Kiev and Kharkov) and Italy (Milan and Turin) saw the completion of more than one new centre. This reflects not only the maturity of the shopping centre market in much of Europe but also the difficult economic environment. Likewise there was virtually no new development in the mature shopping centre markets of North America and the Pacific region in 2011. Activity in other mature markets was also limited. In total, only three mature cities saw more than 100,000 sq m of completions in 2011: Seoul with two very large schemes, London, with the completion of Westfield Stratford City, and Osaka where three centres opened. CROSS BORDER RETAILING AND NEW CENTRES New centres attract new retailers....... New shopping centres play a key role in attracting international retailers to emerging countries and cities, principally because there is an historic lack of high quality, prime space in these markets. In recent years, for example, new centres have been instrumental in attracting retailers to Dubai, China and India. And this was also the case in 2011. Of the top ten cities in terms of new retailer market entries, as identified in CBREs How Global is the Business of Retail? report, new shopping centres were completed in five of these: Page 2
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Moscow (2 schemes), Kiev (1), Ho Chi Minh City (1), Seoul (2) and Kharkov (1). The anomaly was Kazakhstan where 18 new market entries were recorded in 2011, but no new shopping centres opened. However, six centres have been completed in recent years and another seven are under construction, suggesting that 2011 was a blip year during an extended period of development. The retailers entering Kazakhstan last year took space in the centres that opened in 2009 and 2010. ....... but it is not the only factor As emerging markets evolve new retailer entrants typically have more choice of quality product to choose from and will not necessarily seek out or indeed have access to a new centre. This was the case in Warsaw (6 new market entrants) where no new shopping centres opened in 2011. Retailers are initially attracted to the trading opportunity for their brand in a new market, but the ability to access the right type of space is equally important to a retailers success, particularly in an emerging market in the early stages of its evolution. But accessing the right type of space can also be an issue in mature markets, as retailers are increasingly targeting prime locations only. With shopping centre development at very low levels in mature markets, due to a difficult consumer environment and a lack of development financing, smaller scale development and extensions to existing space are facilitating retailers ability to enter some markets. For example, high street units refurbished to a high standard helped Sydney to attract four new international retailers in 2011. Prime space remains in short supply even in China In China, international retailers already have a considerable presence in Shanghai and Beijing but penetration levels further down the retail hierarchy are more limited. However, many retailers that have a presence in the Tier 1 cities are now actively looking to expand elsewhere within the country, on the back of infrastructure improvements and rising incomes. For a new brand entering a new Chinese city there is intense competition for prime space and securing the best site can sometimes take several years. Whilst there is a significant pipeline of shopping centre stock coming through, much of the pipeline is in emerging areas of major cities, and not in the prime areas where international retailers want to locate. Thus, in all Chinese cities demand for prime space typically outweighs supply, and consequently absorption rates are also high. The rapid growth of shopping centre stock in the emerging submarkets of Tier 1 and Tier 2 cities, and in the smaller markets (typically with populations of over 1 million people) has inevitably led to some instances of high vacancy.

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For example, in Chengdu, the average vacancy rate is 11.6% but this ranges from below 4% in its core submarket (Chunxi Rd and Yanshikou) to over 40% in Xinnan Tiandi an emerging submarket. In time, local retail chains are expected to expand their networks into much of this new stock, bringing down vacancy levels. In other rapidly growing markets, such as Brazil and Mexico, vacancy is generally very low because of strong occupier demand and a lack of modern retail space. New centres typically open at least 85% let with little difference between the best and secondary centres. India was not among the top countries for new entrants in 2011 in spite of an active development market, but it did top the rankings in 2010 with new shopping centres playing a key role. Even though many international retailers have built up a presence in India (25% of the retailers in CBREs How Global is the Business of Retail? survey are present there), Foreign Direct Investment (FDI) restrictions have made India less appealing to others. This is now changing. In November 2011, the government announced that FDI of up to 51% would be permitted in multi-brand retail, although the implementation of the proposal has been delayed due to political pressures and protests by domestic retailers. Consequently, retailers such as Walmart, Tesco and Carrefour are still awaiting final approval from the government. The easing of FDI restrictions together with a strong shopping centre pipeline should encourage a new wave of retailer entrants over coming years. CHINA HAS THE LARGEST PIPELINE Chinese cities continue to dominate development activity. Seven out of the top 10 most active development markets globally are in China. And Chinese cities account for exactly half of all the shopping centre space under construction in the 180 cities analysed. Heading the list is Tianjin where 2.45 million sq m is currently under construction. To put that into perspective, in Europe, only Paris and Moscow have more existing shopping centre space. The development pipelines are equally impressive in Shenyang (2.17 million sq m) and Chengdu (1.89 million sq m). Activity levels are high in many emerging markets Outside of China, the most active markets are Abu Dhabi, Hanoi, Kuala Lumpur (Klang Valley), New Delhi and Sao Paolo five countries in three regions.

Shopping Centre Space Under Construction (sq m)

Tianjin, China Shenyang, China Chengdu, China Abu Dhabi, UAE Wuhan, China Hanoi, Vietnam Beijing, China Shanghai, China Kuala Lumpur, Malaysia Xi'an, China Shenzhen, China Chongqing, China Nanjing, China Guangzhou, China New Delhi, India Sao Paulo, Brazil Hangzhou, China Rio De Janerio, Brazil Istanbul, Turkey St Petersburg, Russia Bangkok, Thailand Dalian, China Ho Chi Minh City, Vietnam Moscow, Russia Seoul, South Korea Kiev, Ukraine Chennai, India Hong Kong, Hong Kong Almaty, Kazakhstan Mexico City, Mexico Nizhny Novgorod, Russia Qingdao, China Bangalore, India Sofia, Bulgaria Mumbai, India Dubai, UAE Paris, France Johannesburg, South Africa Hyderabad, India Ankara, Turkey Guadalajara, Mexico Brussels, Belgium Winnipeg, Canada Berlin, Germany Athens, Greece Bucharest, Romania Singapore, Singapore Samara, Russia Zaragoza, Spain 0 1,000,000 2,000,000

Cities with more than 100,000 sq m of new shopping centre space under construction as at January 2012 Source: CBRE

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In the Middle East, Dubai has been the focus for shopping centre development, with 10 new centres completed in 2005-2009 but activity is now shifting towards Abu Dhabi with almost one million sq metres under construction in 9 schemes. India is the second most active market. Developers are currently building 32 shopping centres in five cities, which will add 1.7 million sq m to the total stock. Brazil is leading the development in new shopping centres in Latin America, with new centres also under construction in Mexico, Argentina and Panama. In Africa, only South Africa has a highly developed shopping centre industry. But this is starting to change, with for example, two new centres currently under construction in Morocco, one in Casablanca and one in Rabat. In Europe, development activity is restricted largely to the emerging markets of Turkey and Russia, with Istanbul and St Petersburg forecast to be the most active in coming years. Moscow, Kiev, Almaty, Nizhny Novogorod, Ankara and Samara also feature in the Top 50 most active global cities. There is also a handful of new centres under construction in mature markets, most notably in Brussels where shopping centres have historically been in short supply due to a restrictive planning regime and in Paris where two new centres will fill some of the few remaining retail gaps in the capital. Too much retail space is one reason why development activity in western Europe is low but this ignores the fact that there is still a lack of quality of space in many markets. Modern units of the size, type and in the location that retailers require remain in short supply. This suggests that redevelopment of existing retail space, whether in shopping centres or high street locations will remain the focus of development activity over coming years. Equally, new shopping centre completions are expected to pick up as economic conditions improve - there are still significant opportunities in some locations. In the US, redevelopment and extensions to existing schemes have dominated new development for many years. But with retailers and shoppers increasingly gravitating towards the biggest and best centres, it is only the top 150 or so centres that are attracting new investment. William Taubman, COO of Taubman Centres recently estimated that 50% of investment spending goes on the just the top 10% of shopping centres. As with other mature markets, development activity is forecast to increase as the economy recovers, but not to the levels previously seen. Finally, we cannot ignore the rapid growth in online retailing. What impact will it have on shopping centre development over the next 10 years particularly in the mature markets where retailers are reviewing their retail real estate strategies to reflect their multichannel platform? In emerging markets, shiny new shopping centres are likely to hold the attention of shoppers for some time to come, but the rapid evolution in online retailing suggests that even here, ecommerce will soon be shaping the demand for new retail space. We shall return to this theme in a future Viewpoint. CONCLUSION Global shopping centre development continues apace, with unprecedented levels of construction and new openings taking place. But activity is heavily focused on emerging markets. Growing middle class populations, particularly in the BRIC markets has led to an upsurge in new development which is also evident in Turkey, Mexico, Malaysia and Vietnam amongst others. China has led the way in recent years and with huge opportunities still existing in its Tier 2 cities, it is likely to remain the most active development market over coming years. The maturity of the retail sector in western Europe and North America has resulted in much lower levels of development, but it has also forced retailers from these markets to cross borders in order to grow their businesses. This trend is expected to continue and is helping to underpin the development of high quality, new retail space in emerging markets. SHOPPING CENTRE DEFINITION
For the purposes of this analysis, shopping centres have been defined as purpose-built and centrally managed schemes with a gross lettable area of over 20,000 sq m. The analysis includes only new centres and major extensions (20,000 sq m and above) to existing schemes. Retail warehousing and factory outlet centres have been excluded. Whilst every effort was made to provide data on a consistent basis there are some differences by country and region. In Asia, the analysis includes retail shopping malls and standalone department stores over 20,000 sq m. It excludes department stores which lease space as tenants within larger shopping centres. In North America, the analysis included regional malls, lifestyle centres, and power centres and also includes all extensions to existing schemes (albeit there was very little new space under construction).

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Global ViewPoint | Shopping Centre Development

For more information regarding the ViewPoint, please contact: Neville Moss Head of EMEA Retail Research Henrietta House Henrietta Place London W1G 0NB +44 20 7182 3183 neville.moss@cbre.com Anthony Buono Managing Director, Retail Services The Americas 350 Tenth Avenue, Suite 800 San Diego, CA 92101 +1 619 696 8302 anthony.buono@cbre.com Peter Gold Head of Cross Border Retail - EMEA Henrietta House Henrietta Place London W1G 0NB +44 20 7182 2969 peter.gold@cbre.com Sebastian Skiff Executive Director Asia, CBRE Retail 11/F Tower 2, Prosper Center, No.5 Guanghua Road, Chaoyana District Beijing 100020, P.R.C + 8610 8588 0678 sebastian.skiff@cbre.com

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FOR MORE INFORMATION REGARDING GLOBAL RESEARCH ACTIVITY PLEASE CONTACT: Nick Axford, Ph.D. Head of Research, Asia Pacific and Senior Managing Director, Global Research and Consulting +852 2820 8198 nick.axford@cbre.com.hk Asieh Mansour, Ph.D. Head of Research, Americas and Senior Managing Director, Global Research and Consulting +415 772 0258 asieh.mansour@cbre.com

Peter Damesick, Ph.D. EMEA Chief Economist and Senior Managing Director, Global Research and Consulting +44 20 7182 3163 peter.damesick@cbre.com

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Disclaimer

CBRE Limited (CBRE) confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist.

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