Value Retail Western Europe to Northern Italy

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Value Retail Western Europe to Northern Italy. Faridatou Alao, Kay Ford, DeniceThomas. Agenda. Provide Background Info on Value Retail Summarize the Nature of the Project Highlight the Risks Analyze Feasibility from the Study’s Data Analyze Feasibility with an Alternate Solution
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Value RetailWestern Europe to Northern ItalyFaridatou Alao, Kay Ford, DeniceThomasAgenda
  • Provide Background Info on Value Retail
  • Summarize the Nature of the Project
  • Highlight the Risks
  • Analyze Feasibility from the Study’s Data
  • Analyze Feasibility with an Alternate Solution
  • Answer Questions from the Board of Directors
  • BACKGROUND Scott Malkin, CEO, MBA, JD
  • Left family development firm and founded VR
  • Likes retail ventures because their complexity makes for less competition
  • Experience syndicating for and developing
  • big projects in Western Europe and the U.S.A.Experience in European Real Estate
  • Bicester Village
  • 62 miles from London
  • 75,000 SF luxury outlet mall
  • 95 stores and 1750 parking lot spaces
  • Opened in 1995 and was successful by 2002
  • Sales of £600 /SF on average
  • Stores paid base rent of £ 35 /SF or 12.5% VAT and paid their share of Operating costs
  • Experience in European Real Estate
  • Within 4 years, Value Retail expanded to
  • Barcelona , Brussels, Paris and Madrid
  • Each village was a stand alone investment with holding period of 10 years but sales could occur within 5 to 7 years
  • Investors were able to sell their partnership interests for 10x their original investment for example in Bicester
  • Village Development Criteria•Locating within one hour of a large urban area•assembling the highest quality portfolio of brands•providing quality goods which were typically at least one year old•ensuring that pricing was 30% to 70% reduced from original prices•customizing each village to the local culture (architecture, merchandise mix and personnel)Village Development Criteria•building demand over time and minimize up-front risks by phasing development•making each village a tourist destination in itself•keeping brands on short term, cancellable service contracts•maintaining the highest standards and integrity with brands, employees, investors and the community at largeBoard of Directors-Can you say “Proven Track Record”? Bicester Village in Bicester, Oxfordshire, EnglandITALIAN MARKETFIDENZA VILLAGE VENTUREITALIAN RETAIL MARKET
  • An underserved retail market
  • Most goods were sold through specialty stores and boutiques
  • Few malls or department stores
  • Retail density was low at only 4 sf per capita versus 31 sf per capita in U.S.A and large cities in Europe
  • Multiple retailers only 3% of sales
  • Fidenza alone would capture 2.1% of sales (3.1 billion pounds)
  • THE ULTIMATE SHOPPING EXPERIENCE•120 Luxury Brand Shops•2,116 Parking Spaces•Mostly local building materials •Design inspired by: -Giuseppe Verdi’s opera houses-Medieval fortress towns-Ancient Egyptian monuments-19th century Italian palazzosLOCATIONAL CHARACTERISTICS
  • Fidenza is located 98 km south of Milan and 111 km north of Bologna
  • Catchment within 120 km of 26 million residents
  • Annual traffic count of 18.5 million cars
  • 4.35 million foreign tourists visit the region annually
  • 12 million domestic visitors from Italy
  • Minimal infrastructure work needed for access and egress
  • THE LOCATIONLease Structure
  • 6 year leases with option to renew another 6 years
  • Annual Rent increases based on 75% of Inflation Factor
  • Base rent of 450 euros/sm plus operating expenses offset by 12.5% of sales
  • No ability for pre-leasing due to lack of anchors
  • CHALLENGE...RISKSDecentralized Decision Making
  • Pleasing the influential locals and ensuring the “status quo”
  • Contract local contractor with good reputation
  • Lengthy and Inflexible Process
  • Obtaining approval from local councils, regional authority, and Sovraintendenza ai Beni Pubblici
  • If denied, appeal process was even longer and had more fees associated with it.
  • Scarcity of Information
  • Italian culture is secretive about their wealth.
  • Real Estate transaction information is difficult to come by
  • Laws Favor Tenants
  • Nearly impossible to evict tenants.
  • Tenants are able to break a lease “gravi motivi” (serious motives)
  • Tenants can sell Key Money for exorbitant prices or use as leverage for lower rents
  • Tenants can sublease space without consent of landlord
  • FINANCIAL ANALYSISBreak Down of Major CostsCash Flow from OperationsFinance Terms56.2 million in total development costs Loan Terms:39 million (70% LTV)7.5% interest no amortization in first 5 years of 20 yr termSFFA FRONT DOORBCTFIS THIS A GOOD INVESTMENT?Cost
  • Development Costs =€ 56,212,524.00
  • Net Present Value = € 64,378,791.01
  • Risk
  • Laws favoring tenants creates uncertainty in the revenue
  • Laws favoring tenants could allow change in mix of retail that could adversely affect the “Retail Village Brand”
  • Market very different from markets Value Retail is used to
  • RECOMMENDATIONDO ITHolding time is key
  • the longer the property is held the more valuable it becomes.
  • Hold a minimum of five years then sell it
  • If the laws do not change staying in the market could be problematic.
  • It takes years to build a reputation and an instant to tear it down.
  • QUESTIONS?
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