December 7, 2007

Talk with Jones Lang Lasalle CEO Colin Dyer

Colin Dyer, CEO Jones Lang Lasalle (photo: JLS)
Colin Dyer: "We are often on the ground before the retailers get there"
It took a three-way conference call with Chicago and London as well as a lot of juggling with time zones to set up this interview. But it was worth the effort for some cross sector insight.

Colin Dyer (56) is CEO & President of Jones Lang Lasalle Inc., the world's leading real estate services firm, and is based at the group holding in Chicago.

He was assisted by fellow Englishman Richard Bloxam, Director European Retail Capital Markets, who works from corporate headquarters in London.

Can these guys really help retailers achieve good returns on their commercial real estate base and leverage the latent profitability within a property portfolio?

Or does becoming a tenant in your own store just create long-term costs?

Is there still hope for department stores? And where are the global hotspots for commercial real estate?
Jones Lang Lasalle (JLL) posted revenues in 2008 of $2.7bn (€1.9bn). In its latest annual report, the company defines itself as "a financial and professional services firm specializing in real estate services and investment management". JLL  maintains 750 locations in 60 countries.


Mr Dyer, Mr Bloxam, you work for a major global group. Why bother at all with a saturated market like Germany?

Colin Dyer: The market is very stable, and we are positive on the long-term macroeconomics. So we find it a very attractive country to invest.

But a third too much shop space chases too few customers?

Dyer:  I’ve been working in Europe and the US for over 25 years and for the whole time there has been the same issue, but somehow life seems to go on.

However, if you take the prime annual rent in euros per metre, Germany has three of the Top 10 and five of the Top 15 cities in Europe in terms of cost per square metre. So it might be oversupplied, but in the key places the rents are very high, and people really still want to go there.

Richard Bloxam: It’s all about quality. The oversupply is often misinterpreted. It should be viewed as the creation of better quality space at the expense of poorer quality space.

A lot of the new development and shopping floor space is reconstituting poorer quality department stores etc. Buildings are being extended, refreshed and refurbished. The losers are those on the fringes of the city centre in secondary and tertiary locations.

If you look at, for instance, the German department store sector, however, it has long been in crisis whereas such operators as Selfridges, Debenhams, Harvey Nichols or Harrods thrive in the UK.

Bloxam: Your statement is unfair to German department stores because it compares all of them with some particularly successful operators in London. It is all about location.

There are plenty of department stores in tertiary towns in the UK which have struggled just as much as their German counterparts. But, if you look at KaDeWe in Berlin, it can easily compare with Selfridges, and there are plenty of other positive examples in Germany’s big five cities.

Dyer: The same challenge is in France where Galeries Lafayette and Printemps have typically drawn their horns in at their regional provincial stores, but are still doing pretty well on the Boulevard Haussmann.

Does it really all come down to location, or are there also architectural reasons for the current difficulties in Germany’s department store segment?

Bloxam: In whatever country, the key is to have sufficient footfall so as to be able to get enough people to draw them vertically through the location.

Dyer: In, for example, the centre of Paris there are enough people to flow through six floors and still make a good return on floor space.

But, if you look at the expansion of Neiman Marcus, Macy’s or Bloomingdale’s in the United States, they are typically doing so on one or two floors in shopping centres rather than in traditional high-stacked stores.

Thus, many of the German department store operators face a big challenge working from their multi-level outlet store base.

Bloxam: This is why some operators have recapitalised in order to focus on investing in new concepts which will pull customers through multiple store levels.

Where do you stand in the current debate among international retailers as to the sale & leaseback of stores?

Dyer: The main reason for doing this is the separation of real estate from the rest of a company’s business activities in order to increase capital efficiency so that one area isn’t compensating or disguising the other.

The retailer can then reinvest capital in the business by expanding and/or modernising his store base.

Bloxam: It is also a way of obtaining equity in order to expand their businesses into new geographies.

Where cost of debt is expensive in new geographies for expanding the business, for instance, in China or Russia, it is often much cheaper to leverage your Western European assets to develop one’s business.

Metro Group has decided not to sell retail properties due to fears that its credit rating could be downgraded by credit agencies who view long-term rentals as balance sheet debt. Should other European retailers take note?

Dyer: I’d rather not comment on specific retailers. In general, however, accountants are increasingly treating long-term leases as liabilities on balance sheets.

At the end of the day, what does the downgrading of creditworthiness mean? It means just an increased cost of debt. If the retailer reinvests the money in the business profitably, it can more than outweigh the cost of debt and bring the rating back up higher later on.

Property specialists such as Robert Tchenguiz and Delta Two have tried to acquire J. Sainsbury in the UK. Do you welcome such bids for retailers, or do you believe that they should stick to their own business?

Dyer: J. Sainsbury are a client of ours, so we wouldn’t want to comment on the specifics. That said, all public companies need to produce market-level returns from their commercial real estate base.

Why must buildings be profitable? In the past few retailers cared much about them except as an asset to depreciate on the balance sheet.

Dyer: Because on today’s markets, if they refuse to consider propco-opcos, they may become vulnerable to leveraged operators who can separate the assets from the operating business.

JLL is now one of the world’s Top 5 real estate investment managers in terms of assets under management. Would you ever consider buying a retailer?

Dyer: We are a real estate advisory and investment management company with specific retail expertise, but we are not in the business of buying companies whose core business is not real estate.

Why have institutional investors invested such large flows of international equity capital to work in retail estate over the last five, or so, years?

Dyer: They see it as an attractive long-term asset class with good cash returns and good growth prospects.

To what extent has the recent turbulence on the US subprime market affected your industry?

Dyer: The amount of equity capital trying to get into real estate assets has not diminished. Players have merely focussed more strongly on quality assets, such as city-centre offices, high-quality retail centres and city centre retail sites, and away from lesser-quality office, retail or industrial real estate.

Your main work with major retailers is helping them with their international expansion. What would you regard as the ideal retail format to capture business in emerging markets?

Bloxam: Within reason all formats can work. In emerging markets, where there is limited protection in the planning system from future competing development, large scale formats tend to be popular with retailers as they are intrinsically more defensive.

To what extent is it strategically better for a retailer to be a pioneer rather than a follower when entering a foreign market?

Dyer: It doesn’t really matter, whether you are a first-mover or coming into a mature market. You’ve still got to have done careful research, have a long-term plan and be totally clear about where your competitive advantage really lies.

Bloxam: Either way, what you should be looking for, particularly if you are making your first move into a market, is professional advice.

Which you can provide?

Dyer: We can provide retailers with cost estimates for any type of location as well as detailed information on likely footfall and the demographics of the shoppers in the street and site concerned.

They can then plug this into their retail profit & loss model and work out whether that site is likely to be profitable for them. We can also find, negotiate and manage locations for them.

Bloxam: Because we act for many different customers, we can provide first-time entrants with advice not only on rental levels but also on negotiating rental terms, rent-free periods, contributions to fit-outs etc. with local landlords.

Why should a retailer use JLL rather than his own development teams?

Dyer: There is an increasing trend towards outsourcing because independent and objective advice is an essential part of the decision-making process, especially when a retailer is going to a new geography. We are often on the ground before the major retailers get there.

Should retailers buy or rent their sites when entering new markets?           

Dyer: It depends on their business plan, retail format, and the availability of floor space on the market concerned. If you are a high-end brand, then renting can be a very good option.

If you are a big box retailer like Ikea wanting to move into secondary Russian cities, you may have someone to develop a specific site tailor-made for you, in which case ownership would be the best option.

Bloxam: Retailers also have to consider how best to employ their capital. Building your own site when entering a new market carries considerable risk and complications can distract from concentrating on one’s core business. So having too much cost up-front might be prejudicial to your future success.

So what would you suggest?

Bloxam: For instance, engaging with a major shopping centre owner/manager, such as ECE or UnibailRodamco can take a lot of the pain away and provide considerable help in setting up business beyond just providing a location.

Currently, Metro Group is the only major German retailer expanding in India, others, however, will doubtless follow in time. How do you view the country as retail estate developers?

Dyer: India used to be very bureaucratic regarding sites, but there has been substantial reform. Growth there is impressive. In 2003 there were 100 malls in India; by 2010 there will be 500.

So a lot of retail space is being developed for the emerging middle class who by 2010 could number 200 to 300 million people.

What consequences does this have for western retailers?

Dyer: It means that retail space will be easier to find, but there are still complications such as supply chain issues, which makes working with a local partner to fully understand the arena a good idea.

You already help major retailers expand in India. What one piece of advice would you give to new market entrants?

Dyer: In India, whether you are talking sites or office space, they are mostly controlled by Indian families and developers. So the essential thing is to partner with local developers or corporate organisations, which is where we can help.

Does the same apply to China?

Dyer: Wal-Mart and Carrefour have been relatively successful there because they partnered early on with different local Chinese companies in different regions.

Here again, we are well-positioned to provide advice and services across a broad range of primary and secondary cities.

Turning now to Russia, how about security of tenure in Russia’s major cities, for example, in Moscow?

Bloxam: Tenure and legality are clear, although it is clearly advisable to take proper legal and property advice in advance to avoid costly mistakes.

Specifically regarding Moscow, most foreign retailers are locating within the Mkad. Typically the Moscow city government offers 49-year leases for everything within the Mkad. 

Landowners in Russia, Turkey, China, India or Brazil have at least one thing in common; they seem to believe that they can milk western investors dry.

Dyer: These countries were very hard to do business with 15 years ago, but there has been a very rapid change in transparency. Corruption and bureaucracy are far less, legal systems have greatly improved, and returns on real estate are consequently far more easy to calculate.

Why is this?

Dyer: The answer is logical. All threshold economies want high-quality retailers and capital in their countries. In order to accommodate this, they have to provide a transparent trustworthy environment in which to operate.

Yet property prices, building costs and rentals are considerably higher in, for example, Russia than in Western Europe, but consumer spending power is far less. Why should western retailers still go there?

Bloxam: Downtown Moscow has the third highest property prices per square metre in Europe after Paris and Dublin. St. Petersburg is also in the Top 10. Investors are prepared to pay these prices for one very simple reason: long-term growth.

Where are the European hotspots in retail real estate?

Bloxam: Moscow and Istanbul. In terms of volume and people you must put them on a par with London and Paris. Although the total population of Russia is decreasing, that of Moscow is increasing.

Istanbul is attractive because it is the largest city in Europe with high population and disposable income growth. Also, longer-term, you should not forget Bucharest, Tallinn, Kiev and Warsaw.

Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 49, 07.12.2007

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