Key Points: - Four shopping centre transactions took place in 2010, reaching a total volume of approximately 314 million Euros. - The first quarter of 2011 has already seen Doughty Hanson purchase two shopping centres from Sonae Sierra for 120 million Euros. - Additionally, there has been much interest surrounding schemes such as San Cugat and Puerto Venecia as well as the Royal Bank of Scotland loan portfolio. - Continual demand from international and pan-European investors as well as opportunistic funds is leading to fierce competition for prime assets. - The sustained gap between purchaser and vendor price expectations, together with a general lack of product in line with investor criteria, is resulting in a continued absence of investment activity. - Unstructured and badly managed sales processes have damaged the marketability of many good products, leaving them loosely hanging on the investment market whilst investors have moved on to new opportunities.

1. Research
Spanish retail market
march 2011
investment
report
a NEW PARADIGM for 2011
This crisis has represented not only a turbulent time but also
fundamental change in the way this industry will be driven in the
coming years.
Indicators towards the new environment will be:
• Shopping centres are meeting points: it is not only about creating a
purchasing experience but also a social experience.
• Tenant´s interest to be part of a scheme will be a fundamental key
driver for its survival.
• Scheme´s stakeholders need to learn to live with higher vacancy
ratios: transform vacancy into an opportunity to differentiate in
tenant-mix.
• Purchase/sales processes with a different approach: equity buyers
make the rules.
• Tenancy schedules already reflect all the bad news: incentives are
no longer incentives, they are new rent levels.

2. Spanish retail market
march 2011 investment report
Key points
Figure 2
• Four shopping centre transactions took place in 2010, Consumer confidence index
reaching a total volume of approximately 314 million Euros.
• The first quarter of 2011 has already seen Doughty
Hanson purchase two shopping centres from Sonae
Sierra for 120 million Euros.
• Additionally, there has been much interest surrounding
schemes such as San Cugat and Puerto Venecia as well
as the Royal Bank of Scotland loan portfolio.
• Continual demand from international and pan-European
investors as well as opportunistic funds is leading to Source: ICO
fierce competition for prime assets.
Figure 3
• The sustained gap between purchaser and vendor price Evolution GLA
expectations, together with a general lack of product in
line with investor criteria, is resulting in a continued
absence of investment activity.
• Unstructured and badly managed sales processes have
damaged the marketability of many good products,
leaving them loosely hanging on the investment market
whilst investors have moved on to new opportunities.
Outlook Source: AECC
Sales Vacancy rates
According to Spain´s National Statistics Institute (INE), the fall The general increase in vacancy over all shopping centres
in sales continues to slow which is reflected in the stabilization means that only very prime centres are able to boast the high
of consumer confidence, a positive sign that the worst is over. levels of occupancy that investors were used to seeing before
2008. This is equally reflected in new projects where it is now
commonplace to see shopping centres open with vacancy rates
in the region of 20%.
Figure 1
Changes on the Spanish market over the last few years have
Retail Sales 2007-2010
uncovered what can be perceived as real structural vacancy; a
vacancy that is likely to remain uncovered into the medium term
until the Spanish economy recovers. In today´s climate, shopping
centres with vacancy rates of between 5% and 10% can now be
considered the norm and not necessarily an indication of poor
performance. At the same time, schemes with up to 18% vacancy
can be considered as in need of management and only those with
over 18% as really problematic.
This structural vacancy raises issues for investors when bench
marking the quality of a centre and capitalising rental income.
Investors are finding new formula for assigning value to vacant
* Without petrol stations.
space based on higher yields, sustainable ERV (Estimated
Source: INE Rental Value) and offsetting with deferred payments dependent
on future letting.
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Rent levels Retailers
As the Spanish market moves towards stabilization, in general Knight Frank believes that retailers will drive the future success
rental discounts, despite their continual presence, are of schemes, choosing only those centres that meet criteria in
becoming less weighty in terms of both value and duration. terms of location and catchment area and those which offer
complementary operators and attractive rivals, hence,
Knight Frank estimates that over half of all existing lease commercial mix being as important as ever.
contracts have been reviewed over the last 36 months meaning
that income from at least 50% of shopping centres has now Many new international brands such as Apple, Deichmann,
been adjusted to market rent. Investors ready to invest over the Ardene, Butlers, Hollister, Abercrombie & Fitch, Cos, Forever 21,
next year will do so off lower adjusted rents, offering potential Aldo, amongst others have sought to benefit from adjusted
increases dependent on market recovery and centre rent levels in order to enter the Spanish market. However, many
improvements. of these brands are having difficulties in finding units that fit
space requirements in their first preference locations, as the
The table below shows the average rent levels registered in most prime centres continue to boast high occupation levels.
2010 according to different activities.
This has created an opportunity for managers of well-located,
but less prime shopping centres to offer attractive incentives to
Table 1 these new operators, who due to lack of space in the very prime
Average rent levels schemes, are now beginning to consider more secondary
centres where space is available. This is allowing managers to
Category Average 2010 ERV €/sq m/month
substantially improve commercial mix by offering a differen-
Auto Center 12 - 13 tiating element in terms of new brands in order to compete with
Cinemas 10 - 11 the more prime and fully let schemes.
DIY 10 - 11
The experience and capacity to manage vacancy correctly can
Electronics 12 - 13 create an excellent opportunity to improve the attraction power
Fashion 20 - 22 of the scheme, through the introduction of new anchor tenants
Food 10 - 11 and original retailers, specialization or refurbishment. The
opportunity to specialize in specific activities is a concept that
Gym 16 - 17 has been little developed on the Spanish market, but one which
Household 15 - 16 allows the creation of a highly differentiating element. Equally,
Jewellery 53 - 59 refurbishment which permits the centre to offer a more modern
Leisure 9 - 10 and user friendly design, can allow smaller schemes to offer
customer convenience as a way of competing with larger
Phone 54 - 60 centres. Both new projects and refurbishments need to take
Restaurants 23 - 25 into account that shopping centres need become meeting
Services 25 - 28 points: it is not only about creating a purchasing experience
Sports 13 - 15 but also a social experience which is increasingly important to
consumers.
Toys 14 - 15
Source: Knight Frank
3

4. Spanish retail market
2011 investment report
Investment
Demand
The continued absence of investment activity is by no Many investors consider
means attributable to lack of demand, as despite the this year as a window of
country-risk perceived outside of Spain, international and opportunity to invest in
pan-European investors remain interested in seeking well Spain, taking advantage of
consolidated, dominant shopping centres, located in the lower rents and with the
larger Spanish cities, whilst opportunistic funds continue to expectation of being able to
be in pursuit of discounted prices. purchase off higher yields
than those now available in
Despite the continuous, albeit gentle, decline in sales, the other traditional European
general view is that shopping centres remain a good long markets.
term investment option, particularly in times of recession,
as although private consumption remains lower than in Some investors are
previous years, consumers do continue to shop. beginning to readjust
investment criteria to the
This has been seen throughout the rest of Europe where new market situation to
shopping centres remain a key investment. Direct include centres with
investment in retail assets in Europe has been estimated to vacancy that offer value
be up by almost 70% compared to 2009 which has resulted added opportunity.
in a general yield compression across European markets However, it remains difficult
over 2010. for investors to obtain
adequately priced finance
for the purchase of non-
core products to be
worthwhile.
Figure 4
Prime Shopping Centre Yields in Europe (%)
Source: Knight Frank
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5. www.knightfrank.com
Supply Transactions and Yields
Changes on the Spanish retail market mean that only very Four shopping centre We should also note the
prime centres are able to boast the occupancy rates transactions took place in sale and lease back
generally sought by investors. This is creating fierce 2010, reaching a total transactions carried out
competition for this type of product. An example of this is volume of approximately by Eroski, amounting to
the frustrated sale of prime shopping centre San Cugat in 314 million euros which is over 245 million euros to
Barcelona, owned by Altarea. This deal has generated down by almost 40% in investors WP Carey, AEW
much interest amongst traditional Spanish shopping terms of volume when Europe and Tristan Capital
centre investors as well as new players. However, despite compared to the four Partners, and Rockspring.
aggressive offers reflecting yields in the region of 6%, the transactions which took These transactions
transaction has not yet been completed due to the price place in 2009 (500 million included the transfer of
gap that still exists between vendor and purchaser euros approx.). almost 50 supermarkets
expectations. as well as 2 retail
In addition to shopping warehouses.
In general, lending banks have not created the distressed centre transactions two
opportunities that opportunist funds have been expecting retail parks changed The first quarter of 2011
and have opted to refinance debt before foreclosing on ownership in 2010 has seen the purchase of
assets. However, as refinancing could become more amounting to a further two shopping centres by
expensive, this could lead to a change in the dynamics of investment volume of Doughty Hanson for 120
the market with banks increasingly considering the sale of approximately 53 million million Euros from Sonae
existing loan portfolios at discounted prices and vendors euros. It is worth noting in Sierra. Plaza Eboli is
having to take steps towards closing the price gap. particular the transaction located in Pinto in the
of the Meixueiro retail South of Madrid and has a
The exchange of outstanding loan portfolios is providing a park in the north western GLA of approximately
platform opportunity for new funds and international town of Vigo en Galicia 31.000 m², including the
investors looking to enter the Spanish market or to increase which was purchased by owner operated Eroski
their exposure in Spain; their secondary aim, in many cases, Henderson for approxi- hypermarket (11.400 m²
being to recover possession of the asset in the future. mately 35 million euros at approx.). El Rosal is
Despite the complicated legal process involved in this a yield in the region of located in the town of
repossession, this type of process has created speculation 7%, confirming the Ponferrada
concerning potential direct asset transactions. demand for this type of (northwest of Spain) with
product. a GLA of approximately
There still remain value added opportunities for experienced 51.000m² and is anchored
investors to invest in well located secondary centres with by a Carrefour
potential to improve tenant mix via re-letting and moderni- hypermarket. The two
zation management plans. schemes are fashion
based and include brands
from the Inditex and
Cortefiel groups, as well as
H&M and C&A. Both suffer
from vacancy rates of between
15-25%. The blended yield for
the two assets is estimated at
7.75%.
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6. Spanish retail market
march 2011 investment report
Table 2 This transaction shows that
Transactions 2010 experienced investors remain
confident in the Spanish retail
market and are seeing
Shopping Centres opportunities to acquire value
added assets involving
Vendor Purchaser Shopping Centre Location GLA Volume*
secondary cities or second-
Multi Corporación Corio C.C. Espacio Torrelodones Torrelodones, Madrid 18.970 65.000.000 tier shopping centres which
Avantis Alpha Tiger Centro comercial H2Ocio Rivas Vaciamadrid, Madrid 49.516 83.300.000 require management,
Eroski ING Centro comercial Bilbondo Basauri, Vizcaya 37.834 50.000.000 particularly with regards to
Eroski Deka Centro comercial Ballonti Portugalete, Bilbao 52.523 116.000.000 vacant space.
Retail Parks Additionally, Eroski are
currently in advanced
Vendor Purchaser Shopping Centre Location GLA Volume* negotiations with rival
Family Office Confidential Parque Ronda Sur Murcia 9,247 18.000.000 supermarket operator Leclerc
for the purchase of 7
Confidential Henderson Meixueiro Vigo 18.200 35.000.000
supermarkets in Madrid,
* Knight Frank estimated volume whilst there continues to be
much interest surrounding
Table 3
deals such as San Cugat,
Transactions 2011 Puerto Venecia, both still
pending closure, as well as
Shopping Centres the Royal Bank of Scotland
loan portfolio.
Vendor Purchaser Shopping Centre Location GLA Volume *
Sonae Sierra Doughty Hanson Centro comerical Plaza Eboli Pinto, Madrid 31.000 35.000.000** In the latter, Knight Frank
Sonae Sierra Doughty Hanson Centro comercial El Rosal Ponferrada 51.000 85.000.000 advised an international
* Knight Frank estimated volume
financial services firm in their
* * Transaction does not include Eroski hypermarket or cinemas – GLA transaction estimated at 17.600 m² Due Diligence, providing
opinion and advise on over 12
Figure 5 retail assets, held as loan
Investment volumes
securities, located throughout
Spain, with a total GLA
exceeding 185.500 sqm.
These movements, together
with the transaction carried
out by Doughty Hanson and
the purchase of the Ballonti
scheme in Bilbao by Deka at
the end of last year, underline
the renewed interest and
confidence from International
and German funds for
Source: Knight Frank
Spanish retail.
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7. www.knightfrank.es
Figure 5
Yield differentials
As in our previous report,
Knight Frank predicts that
yields will continue to
remain stable, prime yields
continuing at 7% and
secondary at 8%. Returns
on 10 year government
bonds compared to returns
on commercial property
show that the spread
between debt and real
estate assets is narrowing.
The expected rise in
interest rates will again
decrease this gap. A lesser
margin between bonds and
prime office yields makes Source: Knight Frank
the purchase of retail
assets increasingly
attractive.
7

8. Spanish retail market
march 2011 investment report
As we have seen, increase Figure 6
Prime Yields - 10 years government bonds yield
in investment activity has
already led to yield
compression throughout
Europe, making Spanish
returns increasingly more
appealing. This will
continue to generate
sufficient interest to keep
yields stable and could
even lead to yield
compression over the next
12 months particularly in
light of the competition for
prime assets. Potential for
asset management,
alignment of price
expectations and finance Source: Knight Frank
will remain key to
transactions over 2011.
Investment Retail
Mario Verdyguer Duo José Díaz Mérediz-Hevia www.knightfrank.es
Head of Retail Investment - MRICS Retail Partner Suero de Quiñones, 34-36
mario.verdyguer@es.knightfrank.com jose.diaz-merediz@es.knightfrank.com
28002 - Madrid
T: +34 91 59 59 000 F: +34 91 575 73 23
Elaine Beachill Rosa Madrid
Investment Retail - MRICS Retail Partner
elaine.beachill@es.knightfrank.com rosa.madrid@es.knightfrank.com
© Knight Frank 2011. This report is published for general information only. Although high standards have
been used in the preparation of the information, analysis, views and projections presented in this report, no
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Valuations Retail resultant from the contents of this document. As a general report, this material does not necessarily represent
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