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Richard Akers
Managing Director, Retail Portfolio

Our plan for the retail portfolio has delivered a strong performance despite the challenging economic climate.

We’ve grown our net income in our like-for-like portfolio, and we’ve led the market by restarting major development ahead of others with Trinity Leeds and now Buchanan Street in Glasgow.

Our actions have ensured that we’ve created value out of existing assets, executed some key lettings to major retailers and secured valuable planning permissions to create extra space, particularly in our out of town assets.

In this tough market, we’ve secured 270 new lettings and significantly driven down voids, thereby improving occupancy levels. In doing this, we have addressed major retailers strong desire to grow market share and adapt to their customers’ changing requirements.

As part of our plan, we’ve also successfully recycled capital to enable investment in our development programme and in properties which have growth potential.

This coming year will remain challenging and there is no prospect of an immediate return to market-wide rental growth but strong retailers will continue to expand and we’re in a great position to offer the right space in the right location.

It’s our pro-active approach to asset management, the execution of our current developments and the selective increase in development activity - particularly out of town - that will keep us on course delivering a solid performance.


“High levels of activity by our team have created value across our portfolio. We have bought and sold successfully, worked closely with retailers and applied our management expertise to open up new opportunities. We were also the first to restart major retail development.”



Progress on our key objectives for 2010/11

Outperform IPD

  • Retail Portfolio – outperformed IPD benchmark by 2.6%
  • Shopping centres – outperformed IPD benchmark by 1.6%
  • Retail warehouses – outperformed IPD benchmark by 5.0%

Expand our out-of-town presence through new acquisitions and development

  • Two new stores completed and opened for Sainsbury’s
  • Two new stores in development for John Lewis at home
  • Planning resolution achieved for major foodstore and reconfiguration at Meteor Retail Park, Derby
  • Terms agreed and planning permission achieved for Primark store at Westwood Cross, Thanet
  • Valuable planning permissions won at Banbridge, Northern Ireland and at Lakeside Retail Park in Thurrock

Meet pre-letting targets for development schemes, including Trinity Leeds

  • Trinity Leeds is now 53% pre-let and 4.5% in solicitors' hands. Restarted on site in August 2010
  • 185-221 Buchanan Street (formerly The Atlas Site), Glasgow was 69% pre-let and work on site now under way

Protect income across our portfolio

  • £15.2m of investment lettings across the portfolio with a further £7.7m in solicitors’ hands
  • Like-for-like assets in Retail Portfolio showed good growth in net rental income of 6.3%

Maintain effective cost control, including capital expenditure and irrecoverable costs associated with shopping centres

  • Voids across like-for-like Retail Portfolio down to 4.5% compared to 5.5% at March 2010
  • Units in administration across portfolio down to 0.6% from 3.2% in March 2010

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How we create value

We aim to deliver growing rental income streams, higher investment values and future development opportunities by:

  • Owning assets able to thrive in a fast-changing retail environment
  • Using our asset management expertise to make locations more attractive to shoppers and retailers
  • Developing major new shopping and leisure assets that can transform undervalued areas into thriving destinations
  • Forming close relationships with retailers and local authorities, so we can respond to people’s changing needs and ensure our portfolio fits the market
  • Recycling capital to find and improve under-used assets so we can unlock value.

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Our market

Demand for space has been resilient, with successful retailers using the current availability of space to grow market share and increase their property portfolios. We have seen particularly strong demand for larger stores and out-of-town space. The investment market for retail property has continued to be firm, with relatively few assets coming to the market and strong demand for quality assets from a wide range of investors.

Along with these dynamics, the retail property market continues to face significant challenges. Retailer insolvencies have reduced since the downturn, but there is still a relatively high level of available space nationally and the internet is taking an increasing share of customer spend. For these reasons, we are not anticipating an immediate resumption of rental growth across the retail property sector as a whole.

The central London market is not typical of the picture nationally. Here, an attractive exchange rate has boosted tourism and this has helped drive relatively strong rental growth in the capital. As a result, we are seeing something of a divide appear between the north and south of the country, an effect exacerbated by fears around what may happen within public sector employment and the knock-on effect of this on consumer spending.

In last year’s Annual Report we said that the consumer preference for the choice provided by big centres will mean that retail sales will keep moving to the biggest locations. We see no reason to adjust our view. The potential casualties will be shops in medium size towns where there is a low quality offer.

While bigger destinations are likely to do better, we believe the upper quartile of secondary centres may well outperform prime assets. This reflects retailers’ focus on profitability, and the strong attractions of less expensive space that consistently trades well. For example, our Gunwharf Quays centre in Portsmouth has shown sustained demand through the downturn. We are also seeing strong demand for space that attracts well-defined groups of consumers, such as the O2 Centre, NW3, which we acquired this year.

Views on the relationship between the internet and retail are evolving. There is less anxiety about trade in general shifting to the internet and a growing realisation that multi-channel retailing may be the way forward for retailers. Many now transact on the internet and fulfil through their physical stores. We believe multi-channel retailing will provide sustained demand for property, but there will be implications around accessibility, configuration and size of units. This is likely to create opportunities for us, with changing requirements often leading to new asset management initiatives and development opportunities. We also see evidence that consumers continue to value the immediacy, convenience and community offered by physical shops – together with the ability to see, feel and take home products.

Rental recovery is likely to reflect all of these trends, becoming polarised across UK towns and cities according to the level of vacancies and the attraction of individual assets. We also anticipate the polarisation to be reflected in the investment market, where the number and range of potential buyers favour prime assets.

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Our strategy

Meeting the space requirements of retailers drives our approach to the management and development of our retail property assets. We aim to provide retailers with new or more efficient space to drive their own profits, and through that, we will create value across both asset management and development activities. Over the last year, it has been our focus on customer requirements that has enabled us to restart retail developments before others, having first secured significant pre-lettings to major retailers.

At the same time, we are committed to active recycling of capital, buying and selling assets to ensure we are investing in those properties with the greatest opportunity for improvement and for growth.

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Our Retail Portfolio, valued at £4,823.9m at 31 March 2011, produced a valuation surplus for the year of 8.5% overall, with shopping centres and shops up 7.5% and retail warehouses and food stores up 11.2%. Rental values on our like-for-like portfolio decreased marginally by 0.3% for our shopping centres and shops but increased by 0.4% for our retail warehouses and food stores.

Our Retail Portfolio produced an ungeared total property return of 15.4%, outperforming the sector benchmark in the IPD Quarterly Universe by 2.6%. Our shopping centres outperformed the IPD sector benchmark by 1.6% and our retail warehouses exceeded their sector benchmark by a wide margin of 5.0%.

Table 36 – One year performance relative to IPD

Ungeared total returns – year to 31 March 2011 Land
IPD Sector
Shopping centres 14.7 12.9
Retail warehouses 16.91 11.3
  1. Including supermarkets.

Voids across our like-for-like Retail Portfolio were 4.5% at March 2011 compared to 5.5% at March 2010. Units in administration across the portfolio were 0.6%, down from 3.2% in March 2010.

We also measure underlying performance indicators including footfall, retailer sales and retailers’ rent/sales ratio. Footfall in our shopping centre portfolio was up 4.3% on the previous year against a national benchmark which was down 0.5%. Our measured same store like-for-like sales were down 1.1% against the British Retail Consortium (BRC) benchmark which was up 0.1%.

Our retailers’ rent/sales ratio for the year was 10.4% with total occupancy costs (including rent, rates, service charge and insurance) representing 17.4% of sales.

The like-for-like assets in the Retail Portfolio showed good growth in net rental income of 6.3%, driven primarily by new lettings and also rental income growth in our Accor hotel portfolio. However, this was more than offset by the income lost from asset sales in the previous year when we executed our plan to sell assets to reduce balance sheet gearing.

Table 37 – Net rental income

31 March 2011
31 March 2010
Like-for-like investment properties 226.3 212.8 13.5
Proposed developments 1.2 1.2
Development programme 8.4 9.0 (0.6)
Completed developments 18.2 17.1 1.1
Acquisitions since 1 April 2009 10.3 (0.2) 10.5
Sales since 1 April 2009 7.8 35.6 (27.8)
Non-property related income 3.3 3.7 (0.4)
Net rental income 275.5 279.2 (3.7)

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Sales and acquisitions

We continued to recycle our capital during the year, exiting four major assets and buying three. Asset sales generated £264.1m and acquisitions totalled £329.8m. The disposals made during the year achieved prices that, on average, were 6.1% above March 2010 valuation figures. Our asset sales were at a yield of 6.0% while our acquisitions, which performed ahead of IPD before acquisition costs in the first year of ownership, were at a yield of 6.3%.

Key transactions during the year included:

  • The O2 Centre, Finchley Road, NW3
    We acquired this asset for £125.9m. The centre is in an excellent location and has the potential to generate further value through asset management activity, which is already under way, and longer-term development opportunities.
  • Westgate Centre, Oxford
    We acquired a 50% stake in the Westgate Centre, Oxford – in partnership with The Crown Estate – for £27.4m. Here we have taken steps to enhance the shopping experience for customers in the short term while we assess its development potential. Our initial work on this is encouraging.
  • Overgate, Dundee
    Acquired for £141.0m, this 39,000m2 centre opened in 2000 and is the dominant retail offer in Scotland’s fourth largest city. It attracts more than 14 million shopper visits a year. We have moved quickly on asset management activity at the centre, filling four voids, relocating an underperforming occupier, moving in three new retailers and extending a lease with an imminent expiry. These improvements will provide us with an opportunity to grow rents.
  • Metro Shopping Fund
    We sold two assets from the Metro Shopping Fund, which is held 50/50 with Delancey. The N1 Shopping Centre in Islington was sold for £55.8m (our share), and we sold Notting Hill Gate for £65.5m (our share). These disposals have enabled us to repay relatively expensive debt held within the fund.
  • Stratford Shopping Centre
    We sold the centre and associated office buildings for £91.6m. Our decision to sell reflects the competitive risks emerging in this location, together with the view that our asset management initiatives had already created value and that our capital could now be put to better use.
  • Christ’s Lane, Cambridge
    We sold this prime high street asset in Cambridge for £33.2m. In line with our market outlook and strategy, we are reinvesting the proceeds of the sale in larger retail assets with greater potential for growth in rental income.

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Asset management

We have seen a slight increase in the level of demand from retailers for new space, but the environment remains tough with relatively little competitive bidding for units across the portfolio. While leasing has been challenging, we have used our close relationships with major retailers and our asset management skills to secure new lettings in the year. There has also been a subtle but important change in the planning environment. Through the localism agenda, local authorities are placing more emphasis on growth and job creation and whilst this can pose a risk for some established assets, it is also an opportunity for us. In addition to the examples below, we have won valuable planning permissions in Banbridge, Northern Ireland, the White Rose Centre in Leeds, and at Lakeside Retail Park in Thurrock.

Key activity during the year included:

  • Primark
    We are constructing a 6,500m2 store for Primark at The Centre in Livingston, and we have planning permission for a 5,550m2 Primark store at our Bridges shopping centre in Sunderland. Primark will further enhance the fashion offer at the Bridges, which has recently seen the arrival of fashion brands Bank, Blue Inc and Schuh to go alongside existing retailers such as Topshop, H&M, New Look and River Island. Planning permission has also been achieved for an out-of-town store for Primark at Westwood Cross, Thanet.
  • John Lewis Partnership
    During the year we exchanged contracts with John Lewis to open two new John Lewis at home shops, in Exeter and Chester. This builds on the success of the UK’s first John Lewis at home at our retail park in Poole. In Chester, John Lewis will occupy 5,500m2 over two floors at our Greyhound Retail Park – the first John Lewis at home shop in the north of England – opening in autumn 2011. In Exeter, John Lewis agreed to occupy 1/11 Sidwell Street, which has been vacant since our Princesshay shopping centre opened in 2007.
  • The Harvest Limited Partnership
    Supermarket operators remain dynamic players in the market, and during the year we completed new and extended stores for Sainsbury’s in Livingston and Lincoln. The Lincoln development is the first store to be completed as part of the Harvest Limited Partnership joint venture we set up with Sainsbury’s in 2007. We have achieved consent for the development of an extended Sainsbury’s store and a Premier Inn hotel on Garratt Lane in Wandsworth, London. Since the financial year end, the store and extension have been sold on a forward funded basis to The M&G Secured Property Income Fund managed by PRUPIM.
  • Brand Empire
    This concept for introducing overseas retailers to the UK is still at a relatively early stage but it has succeeded in adding to the mix in our shopping centres. The White Rose Centre in Leeds hosted the first stores to trade under this initiative, with Grupo Cortefiel’s women’secret brand opening in September 2010 and its Springfield brand a month later. Further stores have opened in Livingston, Cardiff and One New Change, EC4. Initial trading was affected by heavy discounting from established retailers, but the effect of this reduced as we moved further into 2011.
  • Meteor Retail Park, Derby
    We made a planning application for a 9,290m2 food superstore, five new retail units, a petrol filling station and car wash, which will be created through a reconfiguration of the existing retail park. We obtained a minded to grant decision from the Council in April 2011.

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Development and planning

We continue to see a high degree of caution towards large-scale retail development schemes in the UK. Our Trinity Leeds scheme was the only large retail development project to start on site across the UK during the year. Our decision to restart construction at Trinity Leeds reflects the quality of the site – which is in a prime position in a top five city – and our success on pre-lettings. Having reached a level of over 40% before committing to build, we now have 53.0% pre-let and 4.5% in solicitors’ hands, by income. Construction work commenced in July 2010 and the scheme is due to open in March 2013. Confirmed occupants include Marks & Spencer; BHS; H&M; Boots; Primark; Topshop/Topman; River Island; Next; Hollister and Cult.

During the year we also made good progress on our development at 185-221 Buchanan Street, Glasgow. We bought this from an administrator acting for a bank and have now resolved all remaining ownership issues and obtained a revised planning permission. Discussions with major retailers have proved fruitful, and at March 2011 we had 68.7% pre-lettings in place. The scheme is due to open in March 2013, with work starting on site in May 2011.

In December 2010, our St David’s Dewi Sant in Cardiff won the Supreme Gold Award 2010 from the British Council of Shopping Centres. The Cardiff centre, a joint venture between Land Securities and Capital Shopping Centres, was highly praised for its innovative architectural integration into the city’s established streetscape.

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Looking ahead

The retail landscape is undergoing fundamental change as the impact of changing consumer behaviours and the rise of the internet continue. This will create winners and losers in terms of retailers, locations and property assets. We understand these dynamics. Our strategy is well-matched to the changes taking place. And we are in an excellent position to address the opportunities that will appear as our market continues to evolve.

In the absence of market-wide rental value growth, it is possible, as we have demonstrated over the last year, to create value through key lettings to expanding retailers. We expect this to be the pattern for the next year as well. Fundamental to our approach is the close relationships we build with retailers and leisure operators. By understanding and addressing their changing needs we increase the scope of future opportunities and mitigate risk. These strengths will stand us in good stead as we go into a new year.

Looking to the next 12 months, we anticipate some further buying opportunities and we will take forward further asset management and development opportunities within our portfolio. There may be pressures on consumer expenditure, but we see opportunity to unlock value in the year ahead by supporting the growth plans of the most successful retailers.

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Key objectives for 2011/12

  • Outperform IPD
  • Expand our out-of-town development programme
  • Achieve planning permissions for specific out-of-town developments
  • Progress development lettings in St David's Dewi Sant, Cardiff, Trinity Leeds and 185-221 Buchanan Street, Glasgow
  • Reduce non-recoverable costs in the shopping centre portfolio
  • Progress discussions with local authorities and anchor stores for our development opportunities at Westgate, Oxford and Buchanan Galleries, Glasgow
  • Achieve rental growth through investment lettings above current ERV

Table 38 – Rent reviews and lease expiries and breaks1

Retail Portfolio Out-
Total 2011-16
Rents passing from leases subject to review 43.7 73.1 26.8 45.0 26.0 14.0 228.6
Current ERV 44.0 72.6 25.4 42.7 25.4 14.1 224.2
Over-renting* (2.8) (2.6) (2.3) (3.3) (1.4) (1.2) (13.6)
Gross reversion under lease provisions 3.1 2.1 0.9 1.0 0.8 1.3 9.2
  • *Not crystallised at rent review because of upward only rent review provisions.
Retail Portfolio Out-
Total 2011-16
Rents passing from leases subject to expiries or breaks 10.2 14.1 8.9 18.7 15.9 18.1 85.9
Current ERV 14.7 15.0 8.4 16.8 16.0 18.7 89.6
Potential rent change 4.5 0.9 (0.5) (1.9) 0.1 0.6 3.7
  1. This is not a forecast and takes no account of increases or decreases in rental values before the relevant review dates.

Table 39 – Yield changes – like-for-like portfolio

31 March 2010 31 March 2011
Retail Portfolio Net initial
Net initial
Topped-up net
initial yield1
Shopping centres and shops 6.5 7.0
6.2 6.5 6.5
Retail warehouses and food stores 5.8 6.3
5.2 5.4 5.7
Combined retail 6.4 6.4 6.0 6.2 6.4
  1. Net initial yield adjusted to reflect the annualised cash rent that will apply at the expiry of current lease incentives.

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