market attractiveness of cities
TRANSCRIPT
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)20 599 62 62 | E [email protected] | www.redevco.com
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Amsterdam, September 2015
REDEVCO’S VIEW
MARKET ATTRACTIVENESS OF CITIESWHERE TO INVEST IN RETAIL PROPERTY
PROPERTY MARKET
CITY QUALITY
POPULATION
ECONOMY
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.
ON THE BASIS OF WHAT ARE THE CITIES RANKED?
Redevco’s View: Quality will continue
to outperform
Structural change in the retail land-
scape 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 out-
perform as it combines all the things
that the modern consumer is looking for.
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.
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.
THE JOURNEY FROM A COLLECTION OF FACTS TOWARDS A WELL-SUBSTANTIATED VIEW
THE NEED FOR A CITY ATTRACTIVENESS MODEL
PROPERTY MARKETPOPULATION CITY QUALITYECONOMY
Population Size
CatchmentArea
FuturePopulation
Growth
EmploymentGrowth
Disposible Income
Volatility
Retail Sales per Capita
Retail Sales Growth
Unemployment
Yield LevelRental Level
Deal FlowInternational
RetailersVacancyDevelopment Pipeline
Average Age
Tourism
Historical Points of Interest
CreativeProfessions
OUTCOME
REDEVCO CITY ATTRACTIVENESS MODEL
Vienna, AustriaAmsterdam, NetherlandsParis, FranceLondon, United Kingdom
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
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.
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 catch-
ment 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.
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 funda-
mentals, 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 develop-
ments 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.
REDEVCO’S MOST ATTRACTIVE EUROPEAN CITIES FOR HIGH STREET INVESTMENTS
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.
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.
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.
DELVING DEEPLY INTO THE CONTENT OF THE CITY ATTRACTIVENESS MODEL
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 popula-
tion 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.
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.
0 10
City Attractiveness scorePopulation Size
Catchment AreaFuture Population Growth
Economic VolatilityDisposable Income
Employment GrowthUnemployment Rate
Retail Sales per CapitaFuture Retail Sales Growth
Vacancy RateDevelopment PipelineInvestment Deal Flow
Rental LevelYield Level
International RetailersCreative Professions
TourismAverage Age
Historic Points of Interest
0 10
City Attractiveness scorePopulation Size
Catchment AreaFuture Population Growth
Economic VolatilityDisposable Income
Employment GrowthUnemployment Rate
Retail Sales per CapitaFuture Retail Sales Growth
Vacancy RateDevelopment PipelineInvestment Deal Flow
Rental LevelYield Level
International RetailersCreative Professions
TourismAverage Age
Historic Points of Interest