Dutch retail sector heads towards multichannel to combat e-commerce and population aging

Retailers in the Netherlands must embrace a multichannel future if they are to combat the threats from e-commerce and population aging, a new retail Report by Dutch real estate investor Bouwinvest suggests.

The unique characteristics of the Dutch retail sector have so far helped it fend off the e-commerce incursion affecting so many other global markets, but pressure is growing and with it the fortunes of large and smaller cities will increasingly diverge.

Collin Boelhouwer, Director Dutch Retail Investments at Bouwinvest, explains:

“Retail property markets are under pressure in many countries around the world due to the growth of e-commerce, demographic developments, economic uncertainties and changing consumer preferences. Retail locations in the biggest cities in the Netherlands though have performed better in the past decade, with low or only slightly rising vacancy rates, in comparison with the majority of smaller urban centres. We expect this trend to continue in the next 15 years, as the big cities look set to book the strongest population growth and be least affected by the greying of the population. As retail becomes increasingly ‘multichannel,’ the strongest and weakest retail locations across the Netherlands will become more and more polarised.”

The Netherlands ranks third in mainland Europe behind Austria and Belgium by retail space per inhabitant, with 1.59 sqm – although that is lower than the U.S., U.K. and Australia. The resilience of the Dutch retail sector has been helped by the market’s unique characteristics, including the compact nature of the country, the key role of convenience shopping centres in local neighbourhoods, and stringent urban planning regulations that have helped check the development of hypermarkets and out-of-town retail parks.

However, significant variations exist across the Netherlands. Dutch retail vacancy rates remain modest in the densely-populated Randstad conurbation in the west of the country, in particular in the big cities including Amsterdam, Utrecht and Leiden, which are seeing only a limited decline in the number of people within the 15-65 year old age bracket – comprising the vast majority of consumers in inner-city shopping areas. In contrast, provincial cities such as Alkmaar, Alphen, Apeldoorn and Venlo, with structurally older populations, are experiencing a decline in the vibrancy and diversity of retail offerings.

Jeroen Jansen, Research Manager Dutch Commercial Markets, explains:

“The Netherlands is not immune to the fallout from negative sentiment in the international retail market and, in the first half of 2019, retail investment volumes were half the level of the comparable 2018 period. Both rental and property values have been declining across the country, but since retailers want to continue renting in strong locations, we do not expect major fluctuations in rental levels there. Secondary inner-city shopping streets in the largest cities and large-scale retail centres are also well positioned, although the latter show a greater deviation in terms of total returns.”

In addition to rising e-commerce penetration – which is expected to virtually double in the Netherlands to 19% by 2025 – retailers are grappling with socio-economic developments such as declining disposable incomes among large population groups, and a shift towards services and spending on healthcare. In terms of retail segments, Dutch supermarkets have held their own in the past decade, and retail landlords are keen to have them as anchor tenants of local convenience centres and regional shopping malls. Other retail segments such as fashion, toys and consumer electronics are bearing the brunt of the growth in online sales at the expense of bricks-and-mortar stores.

Jeroen Jansen concluded:

“In the future there will be fewer stores, but the retailers will be better, and we expect a far-reaching symbiosis between online channels and physical stores. There is only one way forward: the future of the Dutch retail sector is multichannel.”


AEW: European real estate outlook positive despite worsening global economic growth and sentiment forecasts

The outlook for property has improved despite worsening global economic growth and business confidence, AEW predicts in its 2020 European Outlook.

In reaction to declining business confidence and slowing economic growth central banks cut interest rates, pushing bond yields lower for longer. In turn, these lower for longer bond yields are expected to keep property yields more stable than previously expected. AEW has found that more than 80 of the 100 markets assessed are attractive or neutral. This is a significant improvement from half of the 90 markets covered to last year.

While lower economic growth is expected to limit rental increases, the positive effect of lower for longer property yields more than offsets this negative income impact. The degree of this change varies across markets, but is generally positive. AEW’s approach of 100 market segments (which are catagorised by property type and are city specific – with each city allowed a maximum of four property types) helps it to identify the most attractive opportunities. This has translated into an improved outlook with values expected to remain stable in the medium term, with limited downside risk.

More specifically, the results show that 26 of 39 retail markets are classified as attractive or neutral, despite the prevailing negative sentiment and structural changes to consumer behaviour; London West End and City are amongst the best ranked office markets, regardless of the prolonged uncertainty of Brexit; and Dublin logistics is an unexpected beneficiary from Brexit-related supply chain re-alignment, as supply chains are re-aligned directly into the Irish capital rather than via mainland Britain.

Practically, the overall outlook is positive for core investors across the board. But, value-add strategies in UK retail with a focus on change-of-use and redevelopment can be attractive. Also, development in urban logistics should fit with core plus risk appetite in attractive markets.

Rob Wilkinson, CEO of AEW in Europe explain:

“After the recent central bank policy reversals, the lower-for-longer scenario has now become our base and, perhaps counter intuitively, this can mean good news for real estate investors. With bond and property yields expected to remain at current levels for some time to come, strong competition for deals will continue. For those with an intimate on-the-ground knowledge of specific markets, value can still very much be found, often in places that might seem out of favour, although stock selection remains crucial.”

Hans Vrensen, Head of Research & Strategy at AEW in Europe added:

“As the European property market cycle is extended, the sector can focus on adopting the latest best practice ESG processes and reporting procedures, especially on the building level. This is consistent with our positive market outlook, as the usual cyclical risks of excessive new supply of space and use of debt are now less of a concern. We could call it the calm before the storm – with no clouds on the horizon yet.”


‘More growth to come in CEE office and logistics’

A fast-rising sector is Business Process Outsourcing (BPO) shared services centres.

The office and logistics sectors are poised for further growth in CEE, experts agreed at Real Asset Media’s CEE Investment Briefing, which was held at Colliers International’s London offices last week.

‘From an occupier perspective CEE is a very attractive proposition,’ said Stuart Beety, Senior Vice President Business Development, Skanska Commercial Development Europe. ‘The cities are outperforming in terms of growth and connectivity but also talent, with a highly educated workforce’.

A fast-rising sector is Business Process Outsourcing (BPO) shared services centres. ‘Poland is now third in the world after China and India in the BPO market, because it allows significant operational savings for large companies,’ he said.

Stuart Beety, Senior Vice President Business Development, Skanska Commercial Development Europe, Wojciech Koczara, Partner, Head of CEE Real Estate, CMS, Freddie James, Assistant Fund Manager, Tritax, Dorota Wysokińska-Kuzdra, Senior Partner, Head of Corporate Finance CEE, Colliers International and Kevin Turpin, Regional Director of Research, CEE, Colliers International discuss the opportunities available in the CEE Real Estate Investment market. Filmed at the CEE Investment Briefing, London, November 2019 by Real Asset Media.

The trend started in the regional cities and has reached Warsaw only recently. ‘It has grown tremendously quickly,’ Beety said. ‘The market for back office has just started and it will lead to more demand for offices’.

At the moment the percentage of office space per inhabitant is 1.6% in Warsaw, compared to 5% in the German cities, so there is a long way to go. ‘Supply is increasing by 20% in the Polish capital, but demand and investor appetite are growing faster’, he said. Despite the additional stock, there is still a shortage.

‘There is a huge amount of investment going into BPO shared services centres,’ said Kevin Turpin, Regional Director of Research, CEE, Colliers International. ‘They are very cost sensitive, so wage growth is a negative for BPO centres, while it is positive for retail because people have money and enjoy spending it’. 

Unemployment is at record lows and salaries have been rising in the region but from a very low base, he said: ‘Labour costs have been going up but they are still low in comparison to Western Europe. They are now 50% instead of a third, so there is still a massive gap and big savings for companies’. 

Existing and future infrastructure is another incentive for logistics investors in a region which already has geography on its side.  

‘Poland and in particular the Lodz region is in a perfect location at the crossroads of Europe between East and West, road links are great and infrastructure is improving all the time,’ said Freddie James, Assistant Fund Manager, Tritax. ‘Now it also has the Chinese rail link which allows freight to reach China in 12 days, half the time it takes to ship to the same location’. 

With a strong domestic market and good access to strong neighbouring markets and countries beyond, Poland is an obvious choice for logistics investors, he said: ‘We like the quality of the real estate, of the covenants and of the people. We are a newcomer to the region, but we hope to invest more in the future’.

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Demand drivers across Europe’s largest healthcare markets underpinned by diverging trends

Significant cultural differences in how people plan to spend their retirements within European markets inform the relative attractiveness of the healthcare investment markets, a new survey shows.

Fifty-two percent of French people rely primarily on themselves for their long-term care arrangements, well above the proportion of Germans (26%), Italians (29%) and Spaniards (21%), according to a survey commissioned by Primonial, the French partner of AviaRent Invest AG. The same applies to Italians (35%), although 28% say they will rely on their children to assist them as they get older. In southern Europe, inter-generational solidarity appears to be more prominent than in the north.

Primonial surveyed around 4,000 European seniors in the four most populous euro zone countries: Germany, France, Spain and Italy.

Mathias Giebken, CEO and founder of AviaRent Invest AG, explains:

“The disparity in family solidarity in Europe seems to be directly related to the comparatively much higher levels of investment in northern Europe. Germany and France invested EUR 1.5 billion, three times as much as Italy and Spain in 2017. The study also concludes that Germany and France are the most attractive countries for investments in healthcare real estate because of their high purchasing power and demographic potential.”

While the markets in Germany and France have the most attractive risk-return ratios, Spain and northern Italy are more balanced markets in terms of longer-term investment opportunities and demand. At the same time, the 6% prime yields on investments in these southern European countries in 2017 were higher than the 5.0% to 5.5% yields in Germany and the 4.2% to 5.25% available in France.

Giebken added:

“By 2050 the proportion of the population over the age of 80 in Europe will more than double as the generation of baby boomers ages. Given the fact that there is already very strong demand for care facilities, we are facing an acute housing problem across the whole of Europe. In Germany alone, around 80 billion will have to be invested in new and modernised care facilities over the next 10 years. In future, investors should increasingly develop partnerships with international players who focus on urbanised and qualitative locations with high purchasing power and strong demographic potential.”

The study by BVA Opinion also concludes that there is an investment potential of several billion euros in healthcare real estate to redress the existing undersupply of nursing places. Due to the massive effects of demographic change, public health care funds will be limited by budget constraints, especially in Europe, and the private sector will play an increasingly important role.

Giebken added:

“The decisive criterion is the choice of location. Proximity to city centres or to larger metropolitan areas should be ensured in order to guarantee high market liquidity. We also invest in rural regions, but only where our intensive location analyses have registered net population growth. We are certainly seeing growing interest in larger-scale developments and our Assisted Living Plus product line, which creates senior residences with a neighbourhood character. Demand is growing for small residential parks, communities with day-care centres, shared canteens and outpatient care. We are seeing a real shift away from pure care facilities towards new forms of living.”


WeWork rescue a wake-up call for industry on systemic risk in heavy coworking concentration

WeWork’s aborted IPO and $9.5 billion rescue by Softbank has been a wake-up call for those in the industry happy to lease large proportions of their office portfolios to the coworking behemoth at inflated rents and long-term lease contracts, says UBS.

WeWork, which become the most active serviced office provider in Europe in terms of take-up, will have to adjust to a new environment with their ego heavily deflated, UBS says, along with renewed scrutiny on the business models’ mismatch between long and short-term lease liabilities.

Zachary Gauge, European real estate analyst, at UBS-AM Real Estate and Private Markets, explains:

“The liability mismatch is a risk from the operational side, and whether this type of business is sustainable remains to be seen, but the attraction to the corporate occupier is clear and it has raised the bar for what is expected from traditional landlords.

“The end result of this for the investor is ultimately higher capex and management requirements in return for shorter terms of guaranteed income, leading to lower overall returns from the asset class over the longer term. This is not necessarily an issue as many investors now accept that we are operating in a lower growth, lower return environment, but it is particularly important that sensible assumptions on future capex, vacancy and re-leasing costs are factored into the cash flows at the acquisition stage to avoid unpleasant surprises further down the line.”

Despite UBS’ concerns over the business model employed by serviced office providers, the fund manager expects the sector to remain a significant part of European occupational markets for the foreseeable future. The challenge is trying to understand where the equilibrium rate of penetration is, and acknowledge that individual markets will have different levels based on some of the factors outlined earlier, says UBS.

Zachary Gauge added:

“In reality, we will probably only find out the true equilibrium levels once the European market has entered a significant downturn on the occupational side, which would stress test the business models of the operators. It is difficult to predict exactly how this would play out, as much would depend on the severity and length of the downturn itself.

“We would expect that the providers that survive the downturn are the largest, with the strongest capitalisation, lowest levels of leverage and the lower average rental costs across their portfolio. We would also expect to see a fair amount of consolidation within the sector as it becomes more mature and providers focus towards the corporate leasing side, which requires greater scale. And this is where we see the longer-term challenges for traditional landlords really developing.

“Taking aside any weakness in the individual covenant strength of the providers, there is a clear systemic risk of having a serviced provider as a tenant. The issue is that the serviced providers’ model is ultimately driven by the same as the landlords’ office investment portfolio; ie. occupational demand. So, in a downturn scenario, while traditional occupiers’ businesses might suffer, the attributed risk would be nowhere near as intrinsic as the serviced office providers’ and the landlords’.


‘Poland has a lot to look forward to’

The Polish market is already large, developed, liquid and mature as the presence of good local asset managers shows

Poland has a lot to look forward to, delegates heard at Real Asset Media’s CEE Investment Briefing, which was held at Colliers International’s London offices last week.

The bad news is that legislation to establish a REIT regime has not been approved yet, but the good news is that the market has matured to such an extent that it is ready to hit the ground running as soon as it gets the green light.

‘Lack of domestic capital is a pity, because we cannot buy in our country in an institutional way, so to speak,’ said Dorota Wysokinska-Kuzdra, Senior Partner, Head of Corporate Finance CEE, Colliers International. ‘But on the other hand it creates an opportunity, because once we have the REIT legislation allowing pension funds to invest directly into real estate this will create even more liquidity very quickly’.

The Polish market is already large, developed, liquid and mature as the presence of good local asset managers shows, she said. Adding domestic capital ‘will make Poland even more attractive, because we know that liquidity is key for any investor in any market’.

There are some early, positive signs that the new government will be more business-friendly, experts agreed. 

Stuart Beety, Senior Vice President Business Development, Skanska Commercial Development Europe, Wojciech Koczara, Partner, Head of CEE Real Estate, CMS, Freddie James, Assistant Fund Manager, Tritax, Dorota Wysokińska-Kuzdra, Senior Partner, Head of Corporate Finance CEE, Colliers International and Kevin Turpin, Regional Director of Research, CEE, Colliers International discuss the opportunities available in the CEE Real Estate Investment market. Filmed at the CEE Investment Briefing, London, November 2019 by Real Asset Media.

‘Poland has seen tremendous growth despite an illiberal government, which four years ago passed laws restraining economic development and restricting business activity,’ said Wojciech Koczara, Partner, Head of CEE Real Estate, CMS. ‘Now we are seeing a reverse trend, new laws that are helping businesses to develop and even correcting the mistakes that were made. I hope this trend will continue’.

Looking at the number of buildings and the development of the real estate sector in ‘an unfriendly environment’, he said, it is legitimate to look at the future with renewed confidence and to expect even more growth.

‘Poland seems politically stable to us and that’s what matters,’ said Freddie James, Assistant Fund Manager, Tritax. ‘There are many international developers, so we feel we are in good company. We are confident it will remain a good market to be in’.

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Why Berlin is the hottest office market in Europe

Office take-up in Berlin is breaking all previous records: a total of 319,600 sq m, the third quarter of 2019 was not only the strongest quarter of the year, but also unmatched in the history of Germany’s capital city, according to Savills data.

Total office space take-up in the first nine months of the year was 795,200 sq m, an increase of 22.6 per cent on 2018, and could surpass 1 million sq m by year end which would be another record, Savills data shows.

According to Jan-Niklas Rotberg, teamleader office agency Berlin at Savills Germany, three things stand out when trying to understand why the Berlin office market is the hottest in Europe.

Although the volume of completed office space will increase by 384,000 sq m in 2019 and by 782,400 sq m in 2020 at an above-average rate, 92 per cent and 67 per cent respectively of this space has already been pre-let. What has been particularly striking has been the large size brackets of deals, with 19 in the last 12 months being over 10,000 sq m.

The key driver behind this is that, with vacancies as low as 1.3 per cent, many companies are securing the opportunity for future growth, says Savills’ Jan-Niklas Rotberg. And while prime office rents in Berlin stood at €458.4 per sq m per annum for Q3 2019, this is still considerably lower than other European capitals such as London (West End: €1,454.4, City: €1,059.1), Paris CBD (€845), Stockholm (€727.7), Dublin (€700) or Milan (€600).

Jan-Niklas Rotberg explains:

“Berlin has always been the start-up capital of Germany, attracting 28.5 per cent of the 130 start-ups registered every month in the country in 2018, but it is increasingly attracting large corporates too. Examples this year alone include Sony Music relocating its offices from Munich to Berlin Schöneberg, with Savills advising, and Amazon announcing it will take 28 of the 35 floors of the ‘EDGE East Side Berlin’ office building which is currently being developed near the Warschauer Bridge. This will see Amazon’s employees in Berlin rise from zero in 2011 to almost 2,000 in 2019.

“Sony and Amazon are just two of the many overseas companies that are focusing on the German capital. Currently, many large tech corporates and start-ups from the US in particular are establishing a very strong presence in the city. We expect this to have a pull effect over the next few years, which will also bring other tech corporates and related companies to Berlin. As a result of these developments, there’s currently no end in sight for the booming Berlin office market.”


US real estate risk premium increases as uncertainty weighs on sentiment

Falling interest rates eased upward pressure on cap rates in US real estate, but the risk premium has increased, says UBS in its latest real estate outlook, reflecting a broad-based uptick in uncertainty.

Fundamental strength in the US economy acts as a stabilising factor by supporting income growth at the property level. A tight labour market and optimistic confidence measures reinforce UBS’ expectations for relatively good occupancy rates and continued rent growth in the US real estate sector.

In its quarterly global outlook, UBS wrote:

“Beginning in early 2016, US real estate entered a widely-anticipated period of income-driven performance. On the whole, US properties are appreciating at about the pace of inflation. Appreciation relates back to the positive rent growth generated by properties, as opposed to the out-sized influence of capital flows the US experienced in 2014 and 2015.

“Income-generated performance is consistent with a long-term expectation for private commercial real estate investments. Looking more closely at the drivers of income, rent growth is the true powerhouse behind the gains. Property-level income growth should outpace today’s modest inflation even as the pace of growth moderated in recent years.

“Even though 2018’s rising interest rate environment reversed and long-term interest rates fell during 2019, uncertainty remains and the increased risk premium appears warranted. Capital investment into stabilised assets is increasing, an expected outcome in a long expansion. Debt and equity capital is seeking growth strategies, and existing assets are under pressure to compete with new construction. Investors should pay careful attention to the risk-return expectations for incremental capital.”

Investment activity US commercial real estate sales volume was $499 billion in the 12 months to Q3, up slightly compared to the prior 12-month period. During the three quarters of 2019, the volume of hotel, office, and retail properties sales remained consistent with the previous two years. However, apartment sales volume has maintained a rising trend and industrial sales volume increased over the prior year.

Enduring low interest rates are supporting the low cap rate environment and cheap real estate debt. However, liquidity is not as abundant as the period prior to the lead-in to the last downturn.

UBS added:

“The spread between property yields and the cost of debt decompressed somewhat in 2019. However, banks must contend with a flat yield curve. When both short and long-term rates are nearly the same, it becomes difficult to pay depositors a market rate while charging a competitive interest rate on loans. On the whole, US debt markets can be described as operational but not excessive, which encourages development but not an abundance of supply.

“With little movement in cap rates, the downward move in Treasury rates widened the spread available on stabilised US real estate. While the real estate spread is no longer compressing, the higher risk premium seems warranted as uncertainty around future economic growth also increased. That said, there is no obvious distress in the market that might place stronger upward pressure on cap rates.”


‘Investors like the CEE story’

Asian, European and domestic investment has replaced US and South African capital in CEE

Asian, European and domestic investment has replaced US and South African capital in CEE, delegates heard at Real Asset Media’s CEE Investment Briefing, which was held at Colliers International’s London offices last week.

‘Investors like the CEE story’, Kevin Turpin, Regional Director of Research, CEE, Colliers International, said in his keynote address.

By the end of Q3 investments had reached the €9 mln mark, with the pace picking up towards the second half of the year. ‘We are optimistic that we will come close to the €13 bln mark like last year,’ he said. ‘The issue is product availability rather than investor appetite’. 

CEE keynote: Kevin Turpin, Regional Director of Research, CEE, Colliers International

Poland continues to dominate the region, accounting for about 50% of total investment volumes, followed by the Czech Republic, Hungary and then Romania, Bulgaria and Slovakia. 

Offices remain a positive story, with 60% of investment going into the sector and strong interest from international investors.

Foreign capital is still pouring in, but its provenance is changing. Historically a lot of capital came from the UK, Germany, Austria and other European players and the US. 

Europeans are even more active, going up from 19% of total volumes last year to 28% this year, while Americans have been net sellers, shrinking from 19% to 6% and South African investment has halved to 7%. 

Asian capital has stepped in to replace them, shooting up from 6% to 16% this year, said Turpin: ‘We’ve seen Singaporean money, Malaysian pension money and quite a bit of South Korean capital in the last 12 to 18 months, so quite a diverse group’.

The really significant development in the last few years has been the rise in domestic CEE cross-border investment, which has increased from 23% to 25% in 2019. 

‘Most importantly, we have seen capital from Czech Republic and Hungary investing into their own markets but also in other countries in the region,’ he said. ‘Poland doesn’t have a REIT structure yet, but if things change we’ll see more money coming from there as well’. 

The macro picture looks healthy, but the slowdown in Germany is a bit of concern, said Turpin, because most of the economies in the region are closely linked to their neighbour from a manufacturing and a demand perspective. 

However, ‘CEE economies have diversified quite considerably and we believe they are quite robust now’, Turpin said. ‘We see rents pushing upwards, development pipelines are relatively strong but demand outstrips supply so our view on the region is positive’. 

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INREV: Diversification benefits of real estate top priority in all markets except Germany

Diversification benefits within a multi-asset portfolio is the most dominant reason for investment in real estate, according to INREV’s Investor Universe Study, followed by return enhancement.

This reflects that uncorrelated assets are highly prized and real estate has a long track record of delivering a slightly different pattern of returns to other asset types, says INREV. Diversification benefits were considered the most important reason for investing in real estate in each of the countries covered, with the exception of Germany. Here diversification was rated marginally less important than income return and return enhancement.

A number of German investors see return enhancement as a consequence of real estate’s dependence on land as a significant value driver, which INREV says implied that long-term trends in population growth, urbanisation and productivity growth have resulted in above average returns for real estate investors.

The emphasis on income return was also shared by UK investors, where many defined benefit pension schemes are maturing and there is a growing need to meet pension obligations from assets’ cash flows. The income-generating character of real estate has proven especially welcome in an era of low interest rates, during which it has maintained a yield differential over bonds.

For the surveyed investors as a whole, risk-adjusted performance relative to other asset types was judged to be slightly more important than income return. Risk-adjusted performance came second to diversification in both Sweden and Italy, while income return was ranked second in Finland and France.

Real estate’s inflation hedging properties were seen as the least important of the five proposed reasons for allocating to the asset class, right across the European sample of investors and in every country except Sweden, where income return was viewed as least important.

In its Investor Universe Study, INREV wrote:

“The investors overwhelmingly favour core assets in their real estate allocations, suggesting a relatively risk averse approach to the asset class. Across Europe as a whole, the investors have 84.9% of their real estate AUM in core holdings. French investors have the highest allocation to core real estate, 93.9%, and here the insurance investors who dominate the sample value the perceived stability and relative predictability of core real estate. Meanwhile, Swedish, Finnish and Italian investors have the lowest core allocations at just over 70%.”

Value added assets account for most of the non-core real estate investments across the sample, with the exception of the Netherlands, where opportunity holdings account for 13.1% of the allocation, significantly higher than elsewhere in Europe. At least in part, this may reflect Dutch investors’ higher allocations to non-domestic real estate than for investors from other countries. Finnish investors also indicated that they would be more likely to adopt value add and opportunity strategies when investing abroad.

Perhaps surprisingly, investors from different countries in the study show substantial variations in the balance of the real estate sectors to which they allocate, although this may partly reflect the types of institutional grade investment stock available in their home market. Overall, real estate investors in general are increasingly international in their outlook.