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BNP Paribas Real Estate: property report RETAIL IN EUROPE, 3 Q 2011

DEMAND FOCUSED ON PRIME LOCATIONS

With the slowdown in consumer spending the outlook for retail has become more challenging. Nevertheless, the prime segment holds up well in terms of both
footfall and turnover. Prime rents have mainly risen in 2011. Retail has maintained its attractiveness for investors thanks to its characteristics as a more secure asset in the current uncertain economic environment.

Economic outlook has deteriorated significantly since Q2 2011

• Even core economies have slowed down significantly in the second half of 2011
• Private consumption recovery was prevented by austerity measures

High-street retail remained resilient

• Ongoing strong demand lead by foreign retailers
• Since last year, prime rents have risen in Germany and significantly in Central London
• A general stability in rents is expected for 2012

Retail investment volume still rising, though at a slower pace

• Investors favour Germany amongst core European markets
• The UK is slowing down, but Central London holds up well
• Yields for prime assets are currently stabilising

MACROECONOMIC CONTEXT

The Euro zone recovery came to a halt in Q2, with a mere 0.2% expansion in economic activity relative to the previous quarter. This follows the significant quarterly expansion recorded in Q1. Most importantly the weak economic activity has become broadly based in terms of sectors and countries; the core economies of Germany,
France and the UK also slowed significantly, recording growths of 0.1%, 0.0% and 0.2% respectively in Q2 2011. At the heart of this was a sharp fall in business andconsumer confidence on the outlook for the global economy; amidst worsening public sector debt. Although European leaders have now agreed on a measure that it is hoped will stem the worsening public debt positions, its impact on confidence is now well entrained. In the UK consumer confidence has now fallen to its lowest point in two and a half years.

Declining confidence, rising unemployment and weak real wage growth are all now contriving to depress consumer spending across Europe. In France and Germany household demand fell by 0.6% and 0.7% respectively, despite improving unemployment rate and moderate inflationary pressure. But for consumer demand, sensitive countries, such as the UK and Spain consumer spending fell by 0.5% and 0.2%, respectively. Nonetheless, with falling employment and declining real wages, particularly in the UK, the near term outlook for consumer spending in these economies remains weak. Indeed the outlook for the European economies over the next three quarters remains fragile. As such, we expect GDP growth in Europe to be significantly lower in 2011 (+1.5%) and 2012 (+0.7%) than had been anticipated.

In prime retail markets, strong occupier demand from international retailers expanding in key European cities, combined with a shortage of supply are pushing rents higher. Central London is recording the fastest rental growth, prompted by international retailers selecting the capital as their first location for overseas expansion. In Germany, in the Big Six1 cities, high-street prime rents increased by 5% on average in the first half of 2011 compared to the same period last year. In Spain, the occupier market is still tough and experienced continued drop in rents in 2011. European retail investment has been steadily increasing since early 2009 and investor interest is expected to remain significant for retail, as a defensive asset in the current uncertain macroeconomic context. Although the UK remained the leading retail investment market in Q3 2011, Germany has recorded the strongest growth in retail investment volume in 2011 so far. In Milan, thanks to some sizeable transactions, retail investment grew sharply on a rolling year basis. Globally, due to strong demand for prime retail assets,
yields continued to drop slightly in 2011 and are currently stabilising in all markets.

STRONG DEMAND FROM INTERNATIONAL RETAILERS

Consumer outlook has worsened across the Euro area in Q3 2011. Retail sales are currently under last year’s levels in the 5 major European countries, with Spain still recording negative annual growth. Despite the uncertain economic environment, demand in the prime high-street retail segment is resilient and remains high
thanks to the activity of foreign retailers. Indeed, especially fashion retailers keep expanding in A-locations where footfall is the highest. Therefore, prime rents either increased further in the first half of 2011 or stabilised at high levels.

In the UK, following the adoption of fiscal austerity measures, the retail market has been impacted since the previous year. Due to higher inflation, household spending has been reduced significantly in 2011. In the retail market, overall vacancy rate has finally stabilised but remains at high levels, above 14%. Prime rents have
been unchanged in 2011 so far except in Central London, where foreign retailer demand pushed the rent up to € 8,900/m²/year which represents an almost 30% annual rental growth. Central London’s high-street retail remains clearly on a different path compared to the rest of the UK and confirms its position as main destination for international retailers.

In Germany, the retail market remained dynamic with several new openings and expansions from both domestic and foreign retailers. Its attractiveness is due to the good economic conditions reflected in the strength of consumer confidence. Due to high demand and limited supply, rents in A-locations continued to increase by 5% on average over Q3 2010, the strongest rental growth being recorded in Frankfurt (+8%). With € 3,900/m²/year, Munich remains the most expensive retail market and was the only city to record a further increase in rents in Q3 2011. As economic prospects point to a sharp slowdown in activity, rents are likely to stabilise by the end of the year.

In France, economic conditions deteriorated following a weak Q2. Due to weakened household consumption, retailers’ expectations for sales have become gloomier. An exception is fashion retailers whose turnover is on a rising trend. During 2011, foreign retailers increased their presence further in the French market, also targeting regional cities besides the traditional Parisian high-streets. Following the opening of Abercrombie & Fitch on the Champs-Elysées in April, Marks & Spencer and Banana Republic are to open their stores in November and December respectively. Currently, prime rents on the Champs-Elysées are negotiated between € 5,500 and 11,000/m²/ year. Just like in Central London, the luxury segment is strengthening; therefore a high concentration of brands is behind the rental growth
in streets such as Boulevard Saint-Germain.

In Spain, 2011 has been another challenging year in the retail market following the adverse impacts of recent fiscal austerity measures on consumer spending. Prime rent in Calle Serrano (Madrid) has dropped by 16% since the end of last year as it is currently under € 1,920. Total rental fall has reached 50% since the peak of the market. Nevertheless, rents are starting to stabilise and the same trend is expected for 2012, when retail sales should slightly increase after four years of contraction.

LACK OF SHOPPING CENTRE DEVELOPMENT IN WESTERN EUROPE

Globally, shopping centre completions in the major European countries remained at low levels in 2011 and no significant increase in deliveries is to be seen before 2013. Besides the difficulties related to the financing of projects, the launch of new schemes is taking place in a context of falling consumer spending and economic slowdown. The number of projects delayed or even postponed remains high and developers are increasingly focusing on refurbishing or extending already established shopping centres. The catchment area is indeed decisive in the future performance of a shopping centre; those well- placed at strategic locations are opening with high occupancy rates. In the UK, shopping centre development is clearly on a downward trend. Total new supply should only reach 260,000 m² for 3 projects, about one third of 2008 levels. This year’s main event was the opening in September of Europe’s largest shopping mall, "Westfield Stratford" (Greater London). Besides benefiting from a very large catchment area, thanks to its location the mall should enjoy especially high footfall at the time of the 2012 Olympic Games. This 176,000 m² mall has been the largest project of its kind in London since the completion of "Westfield London" in White City (west London) in 2008. In 2012, no completions are expected in the UK and only by 2013 with the delivery of "Trinity Leeds" will the market receive new shopping centre supply again.

Construction activity in Germany is on an upward trend with several shopping centre projects in the pipeline within the next couple of years as developers are comforted by the resilience of the German economy and the rising demand for retail. Following approximately 126,000 m² delivered in 2010, modern shopping centre stock is expected to increase by more than 200,000 m² in 2011. Amongst these projects we can notice a high share of refurbishments of old shopping centres as well as extensions, which have gained importance lately. For instance, the "Altmarkt-Galerie" in Dresden was extended by 26,000 m² in March 2011 to reach a total GLA of 44,000 m².

In France, thanks to their resilience in turnover, at least in prime shopping centres no rental declines were recorded. After a slowdown in completions in 2010, shopping centres in the pipeline are on the rise for 2011-2012. The major development in 2011, and even that of the past 10 years, has been the 56,000 m² "Le Millénaire" in Aubervilliers (Central Paris) which opened in April. For 2012 amongst the significant projects will be "Lyon Confluence" with 53,000 m² GLA. In the future, a new concept of shopping centre will arise and this will be associated to sports infrastructure. For instance, stadium construction activity in preparation for the Euro 2016 football tournament will bring such new shopping space.

In Spain, shopping centre completions remained very low compared to 2008. The next largest new project is the 90,000 m² "Espacio Cañaveral" in Madrid, expected to open in 2014. In Italy, amongst the recent openings we can mention a new concept of shopping centre; a 34,000 m² mall is actually hosted within the Juventus football club’s new stadium.

RETAIL PROPERTY RETAINS ITS APPEAL FOR INVESTORS

Following a sharp increase in 2010, retail investment volume in the 5 major European countries carried on its progression but at a relatively slower pace with a 12% rise on the first three quarters of 2010. In the meantime, retail continued to gain market share compared to other products. Within the 5 countries analysed, retail currently represents 35% of total investment, well above the long term average.

In the UK, weakened GDP growth and falling consumer confidence following the austerity measures adopted are impacting on investment. Indeed, activity has been on a downward trend since Q1 2011, which was marked by the year’s two largest deals so far, "Trafford Park" shopping centre in Manchester for € 1.8bn and a Tesco sale & leaseback portfolio worth € 780 million. Central London remains a bright spot for investors as it is still the most attractive European city for international retailers looking for expansion, a trend that underlines the good prospects for the London high-street segment. On the other hand, the rest of the UK recorded a slowdown in volumes invested in retail in 2011. As regards the breakdown by retail categories, shopping centres were the most requested followed by retail warehouses.

Within the core European markets, investors remained increasingly focused on Germany, the best performing economy in 2011. For the second consecutive quarter, Germany with € 2.5bn during Q3 invested in retail took the lead and outpaced the United Kingdom. Amongst the Big Six markets, in the first 3 quarters of 2011 retail investment in Munich, Frankfurt and Düsseldorf is already above the total volume recorded in 2010. This upward trend can be seen for different retail categories too, where shopping centres were dominant with a 43% market share for the whole Germany.

Retail has been particularly attractive to investors in France thanks to the resilience of household consumption. Following a very good result recorded last year, retail investment volume contracted in the first three quarters of 2011, but this downward trend is mainly due to the lack of large shopping centre transactions that dominated the market in 2010. On the other hand, investment in out-of-town retail held up well as did city-centre deals that are quite dynamic in 2011 so far, driven by portfolio transactions.

In Italy, retail assets are witnessing particularly strong interest from investors. For instance, Q3 2011 saw the highest investment volume recorded since early 2008. The strong demand was driven by a sale & leaseback of a Metro cash & carry portfolio as well as particularly strong interest for street retail. Contrary to last year, Milan attracted more investment than Rome in the first three quarters of 2011, thanks mainly to the € 472 million "Rinascente" department store deal. In Spain, retail investment volume dropped by 27% in Q3 2011 on a rolling year basis. This negative trend can be explained by the weak economic activity and especially household consumption, as retail sales are expected to contract for a 4th consecutive year in 2011. Consequently, investors are only focusing on prime assets
located in core areas.

Current economic conditions are making investors particularly cautious. Because of the uncertain outlook and weaker economic growth anticipated for the second half of the year, retail investment could slow down, along with the total volume. Nevertheless, retail should remain amongst the most favoured assets thanks to its
defensive characteristics.

PRIME RETAIL YIELDS ARE STABILISING

Following last year’s common trend of yield drops in Western Europe, no significant movement occurred in prime retail yields since early 2011. In the third quarter, prime yields were already stable in almost all markets. With the current uncertain environment prime retail should continue to be strongly demanded as investors focus on locations offering the best prospects thanks to strong footfall and decreasing vacancy rates.

In the UK, no yield movement has been recorded in 2011 so far for prime high-street and shopping centres, with yields stabilising at 4.65% and 5.75% respectively. On the other hand, slight yield drop occurred in the out-of-town retail category, for fashion parks. Fashion retailers are increasingly present outside the town thus offering a
real alternative to city centre shops. This type of retail format has become more and more attractive for consumers.

In Germany, prime retail locations continued to face strong demand. Besides slight drops in the first quarter, yields have stabilised since in all of the Big Six markets. Currently, high street prime yields are ranged between 4.20% for Munich and 4.50% for Berlin. On the other hand, during 2011 the prime shopping centre yield decreased from 5.40% to 5%, the level reached in the first half of 2008, thanks to strong demand for best located centres.

In France, following the downward trend in 2010 high street prime yield was stable in 2011 at 4.40%. Behind, the attractiveness of high street retail is the low level of vacancy rate and therefore the resilience in rental values. Investor interest for shopping centres remained quite strong, therefore prime yield dropped sharply since
the end of last year to just 4.75%. As regards out-of town retail yields, they were flat at 6.50% in Q3 2011.

In Italy, retail yields were flat last year, but in 2011, the prime retail yield dropped by 50bp to 4.50%, reflecting the increased interest from investors for core high-street areas at the expense of shopping centres. Indeed, high-street prime retail is considered as a relatively safer investment at a time when the Italian market is regarded as riskier by investors. In Spain, although prime locations in both Madrid and Barcelona remained resilient, yields have been unchanged for more than one year. Currently at 5.50%, Spanish high-street prime yields are relatively high compared to core European markets.

Retail investment is in the 5 major European countries should exceed last year’s total volume, but a slowdown is expected from Q4 2011 onwards. In the meantime, government bond yields are rising across Eurozone countries and the risk premium has been reduced significantly especially for retail assets. Therefore, further yield drops are quite unlikely in the short term, even in the markets witnessing the strongest demand. However, the yield gap between prime assets and the rest of the retail market should widen further as consumer sentiment is expected to worsen.

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