Preface
The financial crisis which manifested itself at the end of 2007, spreading from the United States to the rest of the world, ultimately also had consequences for the economy in 2008. The effect was exacerbated by the combination of a shrinking economy and a shortage of credit that prevented companies, both large and small, financing the growth of their businesses. The financial world and the economy faced several setbacks in 2008, of a kind previously thought impossible. Rescue operations by central governments for both banks and companies, following the example set by the United States, are no longer an exception in Europe. The economic decline has also led to job losses, directly impacting on disposable incomes in some regions. This has translated into lower consumer spending, initially on durable goods and later spreading to other sectors, which in turn has brought pressure to bear on retailers’ profits. So far, this seems to be affecting mainly B and C class locations and it is likely that a clearer distinction will emerge between the performance of A, B and C class properties in the years ahead.
For the Corio portfolio, the effects on revenues have been relatively minor. France and the Netherlands are currently among the most stable markets in Europe and these two countries account for two-thirds of Corio’s cash flow. Our Italian centres are also still performing relatively well, with visitor numbers and revenue both higher in 2008. This spread of home markets within the Corio portfolio, in which Spain and Turkey together represent no more than approximately 13% of net rental income (including associates), gave good protection against the crisis as it developed in 2008.
Most Corio centres are dominant in their catchment areas and lower spending will therefore affect them later and less severely than their competitors. Furthermore, the mix of retailers is such that day-to-day necessities such as food and personal care products account for a high proportion of revenue. With the exception of Spain and Turkey, the Corio centres are performing relatively well in terms of the relevant indicators, such as visitor numbers and average tenant revenues. Also the centres in Spain and Turkey are still doing well considering the weaker market conditions.
Last but not least, Corio’s business model contributed to its good performance. In-house centre management and letting enables both threats and opportunities to be identified earlier. The basic information is reported immediately and unfiltered, so that action can be taken faster, working directly in contact with our tenants. Especially in a market downturn, this business model has a competitive advantage: hands-on management, with in-house centre managers and letting managers, gives better protection against the effects of a market in decline than outsourced property management. This ensures that, even in the present conditions, Corio is still able to achieve excellent results on its operating portfolio, as evidenced for example by the fact that 8.1% of the retail contracts have been extended or replaced, generating a 16.6% increase in the rents affected.
The occupancy rate for the retail portfolio remained high at 97.7%, with net like-for-like growth in rental income of 4.0%. The total portfolio now generates annual revenues of € 413.1 million (including our share of minority interests). As well as growth through new investments and rent indexation, there is scope to increase this revenue by letting vacant space (3.2%) and reviewing leases currently on below-market terms.
The strong revenue growth in 2008 also helped to keep negative revaluations relatively low. In common with the rest of the market, Corio faced higher property yield requirements. The increase varied from one country to another, for Corio averaging 40 basis points compared with year-end 2007. The sharp increase in rents limited the negative revaluation of the operating portfolio to 5.4%.
Corio reviewed its strategy in early 2008. On the basis of a further analysis of the European market and the company’s competences, it was concluded that more growth could be generated with the portfolio without increasing the risk. It was decided to expand Corio’s share in emerging markets in due course, to a maximum of 20% of the total portfolio. A change to the law on FBIs (fiscal investment institutions) also provided an opportunity to improve performance in in-house development activities, resulting inter alia in the establishment of a property development company Corio Vastgoed Ontwikkeling.
In the meantime, a more active acquisition and disposals policy would also enable Corio to benefit from an indirect result and the company is thus aiming for a higher deal flow. Obviously, in the current market conditions, Corio is taking an extremely cautious approach to the implementation of this revised strategy. Growth in emerging markets and increased development activity remain important goals in the long term, but in the coming period Corio will focus on managing the existing cash flow, the pipeline and its existing home markets: the motto is ‘back to basics’. The key issues are consumer confidence, consumer loyalty and the appeal of our centres, which keeps consumers coming back and spending, thus preserving Corio’s solid foundations.
Through active management of the pipeline, Corio reduced the committed portion from € 1.2 billion in mid-2008 to about € 500 million at year-end 2008. The pipeline remains an important source of growth for Corio.
It is the good quality of the pipeline that enables it to continue contributing to Corio’s results, even in the current market conditions. In response to these conditions, the focal point of the pipeline has deliberately been shifted further into the future, which we expect to yield better results in both letting new centres and financing the investments. This improvement will more than offset the effects of the delay. The focal point is being moved forward from 2009 and early 2010 to 2011 and beyond.
In the investment field, a number of new centres were opened in 2008. The operating portfolio in Turkey grew by € 86.3 million, with the opening of centres in Adapazari, Denizli and Ankara. We took the opportunity to build our organisation there in advance, so that we could apply the Corio business model as soon as the centres opened. Marketing, letting and management are in the hands of Corio staff. Another inner-city centre was added in Tekirdag at the beginning of this year. In France, Grand Littoral in Marseille was added to the operating portfolio. The expected rental performance in the first year of operation was ahead of the projection. The most important investment project in the Netherlands was the Pieter Vreedeplein centre in Tilburg, which gained in value immediately after opening, reflecting the quality of the centre and the favourable terms on which it had been acquired.
It was announced in 2007 that it had been decided for strategic reasons to dispose of the office and industrial portfolio. With the sale of a large part of its Dutch office and industrial property portfolio in 2008, Corio took an important step towards becoming a pure retail player. In April, a contract was signed with White Estate Investments (WEI) for the sale of all of the offices and industrial properties in the Dutch portfolio. That sale was executed on 30 September 2008, for all but four of the properties that were transferred at a later date, at a price of € 622 million. The management organisation, until then operating under the name Corio Nederland Kantoren, was transferred to WEI together with this portfolio. The staff had worked for Corio for many years and had made a maximum contribution to the growth in the value of this part of the portfolio. They continued to deliver an excellent performance right up to the date of the transfer, which was greatly appreciated.
Corio reassesses all individual projects each year in terms of their fit with the Corio strategy and their added value. Their size and their contribution to future profit growth are the most important factors. In 2007, we identified 22 retail projects in the Netherlands as non-strategic on this basis. Of the identified projects, totalling about € 190 million, 13 projects, were sold in the course of 2008, for a price of approximately
€ 80 million.
The success of shopping centres depends entirely on consumers and whether they choose to shop, stay and meet friends there and return. Corio positions its centres as the heart of their catchment areas. Corio sees shopping centres increasingly as playing a social role in the communities and is keen to respond to this, for example by making contact with consumers, listening to what they regard as important and following up on this information. This approach helps Corio to build customer loyalty and ensure that the investments under its management are economically sustainable. This role and function also entail a responsibility to foster sustainability in other areas. Corio accepts that responsibility, which is expressed primarily in social and environmental sustainability. Corio is convinced that these three sides of the CSR triangle (economic, social and environmental) are inextricably linked. Good progress was made in 2008 with the implementation of Corio’s CSR policy.
When I took over the helm from Jan de Kreij in May 2008, I could not have imagined that the year would end with the events that we have witnessed. It is not least because of the quality of Corio, the management, the portfolio and the financing, that Jan de Kreij put in place and handed over to me that the company has proved so resilient in these difficult economic times. The way in which our share price has moved during the year under pressure from the financial markets has been disappointing. Those price movements do not do justice to the quality of Corio, its staff or the portfolio.
The company worked hard in 2008 to raise that quality still further, generating the good results for the year we present in this report. Given that dedication, I look forward to 2009 with confidence.
I would like to take this opportunity to thank all Corio staff for their efforts and commitment in 2008.
Gerard Groener
CEO
Source: Annual Report 2008, Chapter Overview & Strategy, page 8 (PDF, 476 kB)
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