{{Facilitator}}

{{Gaël Thomas}} {Business Immo}

{{Speakers}}
{{Richard Broadhead}} Group Head of Sales and Operations {Freeport}	{{Chris Pope}} Investment director {Kenmore Property Group}

{{Gaël THOMAS}}
_ In 2007, office, logistics and trading property covered 260,000 square meters in France, or half the surface area accounted for in 1993. In view of the projects that are either underway, under study or already authorised, this surface area will soon rise to 343,000 m². With a trading surface area of 86,000 square metres and with the major actors of this sector present in the area, Troyes is the European brand centre capital.
France is in fourth position in the European rankings, it will soon be 3rd, and there are a total of 150 brand centres in Europe.

{{Richard BROADHEAD}}
_ Freeport is a European factory outlet developer that exists since 1994. It developed a portfolio of outlet centres during the 90s and early 2000s, including six centres in the UK. In 2003-04 it sold its UK interests. Now run by Carlyle Realm, its business focuses on Europe, namely one in Sweden, Portugal and in the Czech/Austrian border. Freeport specialises in outlets, we find the land, get the consensus, negotiate the contract, build the development, lease it, we launch it and operate it.
I have been with Freeport for 18 months but most of my work experience stems from the retail business specifically Marks and Spencer, which has well equipped me to work on the property side in order to be able to experience both sides of the business.
_ A shopping centre, either it is outlet or high street, will only be judged on how well its operator and developer work in partnership with the retailers.

{{Chris POPE}}
_ Kenmore Property Group is a Scottish co-investing, a trading and development property group, that has been in the business for the past 20 years. Kenmore has offices in mainland Europe since 2002-03 and one in Dubai. It operates across the main sectors in the property industry. In 2005 Kenmore purchased one centre in Germany. In 2004, Kenmore opened the office in Paris which I have run since then. In a shopping centre, either it is a traditional or factory outlet, the manager is the key.

{{Gaël THOMAS}}
_ What are the advantages of brand centres in relation to more traditional shopping centres or other office property from the point of view of a property investor?

{{Chris POPE}}
_ Kenmore is interested in the diversification of its portfolio where opportunities still exist outside the UK, in mainland Europe for instance, which allows for higher returns and sustained cash flows together with opportunities to enhance value through management initiatives and to protect the value, created by the barriers, through entry, such as getting the planning permit. The advantages of building up a portfolio, which brings benefits from economies of scale through which numerous relationships are built, are abundant and are more rewarding than a traditional shopping centre.

{{Gaël THOMAS}}
_ What interested Carlyle, a non-specialist company, in the acquisition of Freeport, an specialist investor?

{{Richard BROADHEAD}}
_ Carlyle, a private equity firm, was amongst many suitors who wanted to purchase Freeport PLC. Freeport PLC shareholders accepted the offer from Carlyle Group for 4 pounds 10 pence of the issued share capital. Freeport shares will be cancelled from listing, trading from the Official List and will be registered as a private company. Carlyle saw the potential in Freeport’s operational expertise combined with Carlyle’s financial know-how to conquer the European market as a private company.

{{Gaël THOMAS}}
_ Can the acquisitions model of companies and promoters specialised in brand centres also be part of a Kenmore strategy to build up a true international network?

{{Chris POPE}}
_ Kenmore is interested in buying assets and at the moment since very few companies specialise in factory outlet markets, we are looking for opportunities to further acquire portfolio of assets. We cannot invest into well managed centres at the value of current market prices, we prefer opportunities at the beginning for which there is still income growth and potential to generate.
_ In terms of amounts, Kenmore is driven by the market. For a successful factory outlet centre, the size of the centre is crucial. A small centre of 10,000 square meters or less, with no potential to be extended, has no interest. However a centre of 15,000 sq. m. or more can offer great potential.

{{Gaël THOMAS}}
_ What differences can be seen today in yields from existing centres and from centres being developed in emerging regions?

{{Chris POPE}}
_ When looking at pre-summer market values, prime year in the UK for an up-and-running cent' », prices were at 5 ¼ cent, whereas in Continental Europe for the same they were at 5 ¾. At the early stages of the development process, when looking at development costs, a year long cost will be much higher.

{{Richard BROADHEAD}}
_ When speaking about opportunities, it clearly depends which market we are speaking of. The UK market is saturated, also part of Portugal’s market except maybe Algarve, however many of the Eastern European markets yield a greater return and have more opportunities to offer which can become successful outlets, such as, Bulgaria, Croatia, Romania, Poland, Ukraine. There are still unlocked potentials in Germany and Central and Southern France. The key is to create well connected local partnerships which will enhance the chance to develop real businesses. Freeport is not looking to sell but to develop, operate and build a European portfolio.

{{Gaël THOMAS}}
_ Are there still any development prospects in France? Does not the existence of too many brand centres present a risk in terms of the centres’ catchment area and product attractiveness?

{{Chris POPE}}
_ This is a very good point. When comparing the situation with the UK, France is far from being overcrowded by outlet centres. There are still opportunities in South of France where there are no significant centres.

{{Richard BROADHEAD}}
_ There are many market opportunities in France. Freeport has long talked about setting up an outlet in France, there are opportunities in the South, near Lyon, St-Tropez, and in Provence just to name a few.
If the outlet is well thought out with a strong partnership with the town or city authorities, it will be beneficial.

{{Chris POPE}}
_ Yes, combined with the fact that France is a popular tourist destination, factory outlet centre are linked with tourism which emphasizes the attraction to France for this kind of activity.

{{Gaël THOMAS}}
_ Can this concept be exported to Eastern European countries?

{{Chris POPE}}
_ Eastern European countries are more liberal, there are more sites available but the risks are also higher. The markets are also less developed, therefore setting up outlets that sell brands at a discount, where there was no previous demand, at higher value prices, in city centres, can be risky.

{{Richard BROADHEAD}}
_ There are many opportunities to gain from the emerging markets. Brands do exist in places like Zagreb or in Polish cities. Also MAPIC invited numerous representatives from emerging markets who were there to sell their new development projects. The risks are higher, the lack of restrictions can be erroneous therefore a right reputable counterpart, which includes the local rules and which delivers exciting schemes, is crucial.
_ Freeport has experience in risk taking and failure. Taking this into account, we need to have a look at the consumer profile, the brands that are present on the market, consult the brand providers, determine the infrastructure and transport possibilities (air, train, road), and naturally competition. All in all, a sound catchment is important. Finally, a major experience Freeport learnt is to hire well-staffed local people who speak the language and who can run the business, such as in the Czech Republic and in Lisbon.
With the right partner, an open minded perspective, and a good plan, the risks will be diminished and the yield can be outstanding. For emerging markets there are many new growth opportunities.

{{Chris POPE}}
_ Adding on, as opposed to the risk perspective, it is essential to see how to improve a centre, its marketing budget and flexibility on the lease terms, to communicate with tenants on their performance and to reallocate these around to suit everyone.

{{Richard BROADHEAD}}
_ Concerning marketing, it is essential to plan it well. The experience with the Czech/Austrian border outlet centre is a good example of how Freeport did not evaluate the difficulty. Two different countries operating with different – currencies, – priorities, -customer profile and different culture increased the complexity and challenge of running a centre.

{{Gaël THOMAS}}
_ Do specific regional features act as a brake on the construction of world-wide and international networks?

{{Richard BROADHEAD}}
_ To be successful in an emerging market, partnership needs to be strong with locals who can help with the whole process in getting the approval, building the site and developing the centre.

{{Gaël THOMAS}}
_ With respect to product design, are the modules and formats always the same or does the centre have to be specifically adapted each time?

{{Richard BROADHEAD}}
_ From country to country, there is consistency in the layout of the centres and choice of brands. Brands are often in the same sized unit. International brands will always be relevant in every country. In specific countries, there needs to be a good representation of the brands that are already known by the local consumers. It is about understanding the international platform and including the other layers, such as operators and retailers who are local and regional, that are relevant to that local market.

{{Chris POPE}}
_ The architectural input, both for the local and regional features, is becoming more and more important in the design of a shopping centre. As you are treating more with leisure experiences, one has to put more efforts into the conception of the outlet centre.

{{Gaël THOMAS}}
_ Are there new sector prospects in order to continue to attract the consumer?

{{Richard BROADHEAD}}
_ The core business of outlet factories is clothing apparel and sporting brands of which respectively represent 80 % and 20 % of the turnover. Therefore putting international and well-known sports and clothing apparel brands will encourage the success of the outlet operator.
When looking at the trend in which people aspire to own and take care of their home, I think that home wear will become more important in the next few years. These can be purchases that you can bring with you in the car unlike beds and furniture.
There are other sectors that one could try, books, electronics and confections but ancillary to the core big brands. Developers should pay more attention to the local and regional operators who care to sell their crafts, allocating 30 to 50 square metres which would provide local traders (the opportunity) to be involved in the centre. Consumers will appreciate this and it will also build genuine partnership with the town and the city. Freeport will be more focused on the future, on catering to local traders and consumers, which adds a new dimension to the outlet centre.

{{Gaël THOMAS}}
_ Would you buy from a brand centre that had small traders in it?

{{Chris POPE}}
_ If the centre contained only local traders one would have to study the situation but it does raise an interesting issue. When looking at standard office or industrial investments, the quality of the covenants the tenant has signed for the lease is key but, with a factory outlet, the quality of the brand matters. It does not have a big financial weight and trading with the right brands adds considerable value to the centre. Letting local people have a representation in the centre is important.

{{Discussions with the floor}}

{{From the floor}}
_ Is there a real advantage in possessing a share of the market compared to these « major shareholders » and these brands?

{{Chris POPE}}
_ Speaking from Kenmore, we only have one outlet centre at the moment. Clearly, we see the attraction of having a critical mass. If you have a network of centres you will have a lot more of the same tenants in each centre through which you can develop good relationships. Tenants will want to expand or reduce in one centre, which brings a lot of cross-fertilisation. How many centres? Three to four centres at least would be a good start.

{{Richard BROADHEAD}}
_ Yes, Freeport sees an importance in networking. There are big advantages on building up a network. Developers generally have a good relationship with retailers and that is one of the reasons why one can witness a consistency of centres operated by the same developer, such as the great Mac Arthur Glen schemes.
There are some economies to be gained from it, in reality not as strong as they could be. However if you have an operation with three or four centres in the same country you have an opportunity to aggregate certain parts of your business, such as awarding contracts covering the four sites, carrying out operational functions in one location rather than paying the facility in all four locations.
This conference talks little about the operational functions of a centre which is a crucial part, building and opening, which we covered, are only part of the whole scheme. Indeed the success of a centre is about the ‘brand’ but in terms of network it is about partnership and trust with retailers.

{{From the floor}}
_ The network umbrella brand covers the store brands; what is the target marketing cost that this involves? What marketing costs does a network have to incur for it to make sense for the consumer?

{{Richard BROADHEAD}}
_ In terms of networks with retailers, generally if the operator can build a strong relationship with the retailer and understands their needs, there is good chance of becoming a successful outlet operator and developer. For instance there are a number of retailers here today, such as the MD of Mango, who represent the key people we should be liaising with.
In terms of turning brands away, it needs to be done. If a centre is strong on sports and a new sports operator approaches you, you need to judge whether it will be beneficial to do business together.
In the past, the sex shop company ‘Bertuso’ was refused in Freeport outlet centres which looking back was an ignorant decision. Today we are dealing with them again. Bertuso is a very well known brand, sex is part of peoples lives, and the retailer is found in many markets in Austria. Freeport is sometimes approached by certain ideas that do not benefit the brand, such as a company that wanted to set up a tattoo shop in the outlet centre, which does not fit the designer outlet concept. It is all about finding the right balance and good judgment call.

{{From the floor}}
_ Do you have a value and a goodwill for the brand-name for Freeport or otherwise why would consumers go to the shopping centre?

{{Richard BROADHEAD}}
_ We believe that Freeport has a value according to research done by consumers and non-consumers. It is a solid brand, even though bad choices were made that could have damaged the name, and the fact that Carlyle is willing to spend nearly 2 million pounds demonstrates the value that they put in the brand.

{{From the floor}}
_ What is the marketing cost attached for the brand?

{{Richard BROADHEAD}}
_ We spend a significant amount on marketing, more than the retailer’s marketing contribution. More than 2 million euros are spent from the sites, which is an investment to be spent wisely and is essential.

{{Gaël THOMAS}}
_ Are marketing costs carried over into the rent paid by the outlets or are they, on the contrary, necessary to attract the brand outlets?

{{Richard BROADHEAD}}
_ All of the sites are different. We have introduced flexible rental arrangements, which depend on the value of the brand. Leases are relatively short term, averaging five years, which varies from site to site and retail to retail. Some have a base rent and turnover percentage situation, some have a simple turnover arrangement. Crucial is to make money from the investments and the retailers in order to make a profit. We also charge our occupiers a set fee for the service charge, for cleaning and security, and a set fee for marketing. These are occupancy costs for the retailer to remain in the outlet centre. Freeport tops up what the retailers provide for marketing because we value marketing.

{{Gaël THOMAS}}
_ Could not being known by the brands constitute an obstacle for a non-specialised institutional investor, like Kenmore?

{{Chris POPE}}
_ I do not think so. I am not sure that the branding is an issue. The consumer would want to visit an outlet centre that is well run, has value retail and is a good experience to go to.

{{Richard BROADHEAD}}
_ The brand has value. It is not our intention to change the name of Freeport to Carlyle. Stronger recognised brands do benefit from that.

{{From the floor}}
_ Mr Broadhead, do you ever have to approach the brands in order to fill the outlet space on certain projects or is it always the brands who are fighting to obtain their premises? Mr Pope, brand centres are becoming smaller and smaller – could you invest in small surface areas with a relatively unknown start-up?

{{Chris POPE}}
_ In terms of size, speaking as a non specialist of this sector, critical mass, as earlier mentioned, is important. The centres that approach 20, 000 or plus square metres trade the best. If business fundamentals are good we would invest with a start up developer.

{{Richard BROADHEAD}}
_ We chase and we are chased by brands. The mix you have and the question of how you better serve the consumer, by providing new and international brands, needs to be incorporated in your plan.

{{Frédéric Willems}} (Legal representative of the National Clothing Federation)
_ How do we ensure that brand centres do not become just ordinary shopping centres?

{{Richard BROADHEAD}}
_ Although the identity of the outlet centre still needs to be further developed, brands will need an exit for their stock and the function an outlet serves is very important. International and big brands at discount are the core business of outlets, and it is the developers, the town and city interests’ to develop extra attractions in addition to the fundamentals of the business.

{{From the floor}}
_ As far as your European experiences, could you tell us about the general trends of yields in Europe?

{{Richard BROADHEAD}}
_ The general trends is that yields are going down and stagnating. Sub-prime lending, financial markets, it will be an interesting two years. For the UK it is an interesting turning point where people are queuing at banks to retrieve their money.