For professional investors only – not for use by retail investors or advisers

Roaring Meg, Stevenage Apple Store, Brent Cross Shopping Centre

Accessible Retail 2017

Andrew Allen, Head of Global Property Research & Strategy October 2017

2

Agenda

• Aberdeen Standard Investments

• Some key retail themes

• Beware the ‘Age Quake’

• Mind the (Yield) Gap

• No longer the Mall* the merrier?

Despite considerable changing dynamics retail will

remain a key component across our portfolios * Or retail park

3

Aberdeen Standard Investments

4

• Total UK retail assets under management extending to

circa 28million square feet *

• Largest manager of UK Retail Warehousing at

13.7million square feet, including 98 retail parks**

• Major UK landlord of Shopping Centres at 8.7million

square feet across 29 centres*

• High Street holdings extend to 5.5million square feet

across more than 200 assets*

Aberdeen Standard Investments is a brand of the

investment businesses of Aberdeen Asset Management

and Standard Life Investments.

* AAM / SLI 2017

**Trevor Wood Associates 2017

Source: Aberdeen Standard Investments, 30 September 2017.

Aberdeen Standard Investments - Retail

5

Beware the ‘Age Quake’

6

Median disposable income by age of main breadwinner (£’000 adjusted for inflation)*

*Figures in 2014/15 prices, adjusted for inflation using implied expenditure deflator for the household sector

Source: ONS, Oct 16

Beware the ‘Age Quake’ The fundamental shift of income and wealth by age group has considerable implications for retailing and retail real estate

The young, relatively, have less to spend

7

Older demographics have become wealthier since the GFC

Absolute change in median household wealth by household type, 2008-2014

Source: National Statistics, Wealth and Assets Survey, 2015.

NB: 60/65 refers to women aged up to 60 and men aged up to 65.

Whilst wealth has decreased, even in nominal terms, for most household types

-5000 0 5000 10000 15000 20000 25000

Couple both over 60/65, no children

Couple 1 over/1 under 60/65, no children

Single household, over 60/65

Lone parent, dependent children

Single household, under 60/65

Lone parent, non-dependent children

Couple, dependent children

2 + households/other household type

Couple both under 60/65, no children

Couple, non-dependent children

Change in median household wealth, 2008-14

The old, relatively, have more to spend

8

Age Quake – some questions

• What age group is most tech literate / adopts most e-commerce

• What is the impact of

• lower home ownership rates? Or indeed high ownership rates amongst mature adults?

• pensions auto-enrolment? Or indeed DB pension schemes?

• flexible labour market?

• university fees / student loans? Or indeed healthcare provisions?

• Is your retail designed to be inclusive to everyone? And if it is will even that be sufficient?

Retailers and landlords will need to

embrace all potential consumers

9

Mind the (yield) Gap

10

Mind the (yield) gap!

Property yields, gilt yields and yield gap

Source: MSCI, Thomson Reuters Datastream, Aberdeen Asset Management, Jun 17. Past performance is not a guide to future results.

Wider yield gap compelling on the face of it for the relative investor; BUT weaker rental growth means more yield required

Real retail rental growth, 5y rolling (% p.a.)

0

1

2

3

4

5

6

7

8

9

10

-200

-100

0

100

200

300

400

500

600

700

800

Ma

y-9

7

Ma

y-9

8

Ma

y-9

9

Ma

y-0

0

Ma

y-0

1

Ma

y-0

2

Ma

y-0

3

Ma

y-0

4

Ma

y-0

5

Ma

y-0

6

Ma

y-0

7

Ma

y-0

8

Ma

y-0

9

Ma

y-1

0

Ma

y-1

1

Ma

y-1

2

Ma

y-1

3

Ma

y-1

4

Ma

y-1

5

Ma

y-1

6

Ma

y-1

7

% Basis points

Retail yield gap (LHS)

Retail initial yield (RHS)

10 yr Govt. Bond yield (RHS)

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

11

Shorter leases, more breaks, poorer outcomes at lease events …income streams are more at risk and at risk more often. Retail fares better than offices and industrial but has still weakened

New leases by lease length, weighted by rent

Source: MSCI/Strutt & Parker, Aberdeen Asset Management, Nov 16. All property - data

not available at sector level

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2007 2016

1-4yr 5-9yr 10-14yr 15-19yr 20yr+

Source: MSCI, Strutt & Parker Lease Events Review, Nov 16. Where not renewed, outcome

is measured at end of calendar year in which the lease expired.

Falling vacant at lease expiry (% income)

0

10

20

30

40

50

60

70

80

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

% Retail Office Industrial

12

Mind the (yield) gap – some thoughts

• With

• Shorter leases

• Greater likelihood of tenants leaving at lease expiry

• Lower long term rental growth

• Higher likelihood of (and higher absolute) capital expenditure

• In investment language we require additional compensation for the risk, a higher ‘risk premium’

• The importance of strong and dedicated asset management rises, own quality!

Retail isn’t necessarily less appealing, but much of

it really is and ‘yield gaps’ can be misleading

13

No longer the mall* the merrier? * or retail park?

14

Trajectory of non-store sales shows no sign of changing

Retail sales index (2013 = 100)

Source: National Statistics, Sep 17

While profit densities in-store fall, making a strong case for store rationalisation

40

60

80

100

120

140

160

180

Jul-0

7

Jan…

Jul-0

8

Jan…

Jul-0

9

Jan…

Jul-1

0

Jan…

Jul-1

1

Jan…

Jul-1

2

Jan…

Jul-1

3

Jan…

Jul-1

4

Jan…

Jul-1

5

Jan…

Jul-1

6

Jan…

Jul-1

7

Index Values Non-food Stores Values Non-store

Volumes Non-food Stores Volumes Non-store

H&M – profit density (EBIT per m2 SKr)

0

2,000

4,000

6,000

8,000

10,000

12,000

20

05/6

20

06/7

20

07/8

20

08/9

20

09/1

0

20

10/1

1

20

11/1

2

20

12/1

3

20

13/1

4

20

14/1

5

20

15/1

6e

Source: H&M Company Accounts, Morgan Stanley, Nov 16

The growth of non-store trade is not a question of ‘life

or death’, rather an erosion of store profitability

15

• Online retailers opening physical stores - a White Knight or Trojan Horse?

Amazon Books, Seattle (March 2016) Amazon Go, Seattle (December 2016) Wholefoods Market (June 2017)

• Retail is naturally innovative – but at what cost to the landlord?

– Eg Street Food: Can retail owners embrace and capitalise on the innovations?

No longer ‘the Mall the merrier’ Innovations come at a cost

Q: Do such innovations provide improvement?

A: Yes (retailers and consumers?) and No (landlords?)

16

Conclusions

• Aberdeen Standard Investments

• Despite considerable changing dynamics retail will remain a key component across our portfolios

• Beware the ‘Age Quake’

• We simply must not avoid the discussion around wealth, demographics and spending patterns

• What we have grown up believing is subject to significant change – Be inclusive

• Mind the (Yield) Gap

• Investment risks are higher, the work required to maintain assets higher and it will cost more

• Focus on assets with long term quality and have strong asset management capability

• No longer the Mall* the merrier?

• Retailers will be forced to consolidate / rationalise

• Innovations are a clear benefit to retailers and consumers, and landlords have to embrace change

* Or retail park

17

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