Leasing redesigned: Designer Outlets prosper within Retail sector

Leasing redesigned: Designer Outlets prosper within Retail sector

 

Recently Mike Ashley described the UK’s high streets as “at the bottom of the swimming pool, dead”, so if I said there was an area of the retail property market that has seen rental increases of 30-40% over the last five years, you might be surprised. 

Retail property is often associated with oversized stores, dated shop-fits, over-renting and CVAs, so it’s no wonder investors are nervous right now.  Not only impacted by the internet, the UK retail sector has struggled with headwinds in the form of imported inflation, increases to the living wage and business rates that have reduced rather slowly, or continued to increase.

This is the second in a series of blogs on leasing structures and landlord-tenant partnerships, here we principally explore the outlet sector and why it has seen enviable turnover and rental income growth in contrast to the wider retail sector.

Misleadingly perceived to be recession-friendly discount centres, designer outlets have enjoyed success for many reasons, not least because of their lease structures. Although no different in length (five to ten years), flexibility is built-in whereby the landlord – and in some cases tenant – can break the lease when sales turnover falls below a specified level. Inclusion of this provision helps to keep the brand mix on-trend, where underperformers can be rightsized, exited by agreement or improved with the assistance of the landlord’s own team of retail advisers.

Outlet centres have undeniably benefited from a rising number of quality brands embracing outlet as a channel, particularly higher price point fashion, beauty and lifestyle brands. Standards of stock packages, merchandising and shop-fit have improved over the years and now in many stores the only difference a customer would notice is the price tag. Importantly, interests are aligned between landlord and tenant, with rent based on turnover and the landlord providing extensive marketing input, retail advice for the brands when they need it, and a comprehensive diary of events and campaigns.

Admittedly not every brand wants a landlord’s input into its day-to-day operations, so the outlet model may have its limitations in a traditional full price retail environment. Nevertheless, sharing turnover data can help identify and manage potential tenant failures and rightsizing or exiting underperforming occupiers can avert or delay the risk of covenant failure.

Data is becoming ever more central to retail and to brands’ location decisions, and having full clarity of turnover information means a landlord can measure the impact of a new brand’s arrival on other brands in the same centre; similarly, the impact of events, campaigns etc can also be quantified and used to refine and improve future strategy.

Shorter leases and turnover rents are becoming more commonplace in all retail property, but rather than being proactively sought by landlords they have often been accepted in the absence of a better offer. Further, some brands – often the successful ones – don’t like turnover rents because they can erode profits. Why pay more when you don’t have to? Partial roll out of such a leasing strategy will always be a challenge as it gives a mixed signal to the market; outlets have used it as a blueprint from the start and it is considered standard practice; if this structure became the norm in full price, perhaps some of these hurdles would be easier to overcome.

It is not without risk, clearly, as turnover rent can go down as well as up and nobody yet (as far as I know) has found a way of convincing a brand to share some of their online sales generated by brand awareness from their store. The outlet sector has generally (but not always) operated in a different mindset to full price, and at the heart of this is the landlord and tenant relationship, which is founded principally on partnership rather than opposition. Clearly each side will negotiate to their advantage, but in the challenging retail environment we find ourselves in, which is neither temporary nor cyclical, working together by sharing data, expertise and rewards, would seem to increase the odds of success.

My next blog will explore what the future shopping centre might contain and how flexibility leasing structures might support it.

Jonathan Adams

Jonathan Adams

Senior Director, Retail

+44 20 7182 2388
jonathan.adams@cbre.com

UK Monthly Index Call – December 2018

UK Monthly Index Call – December 2018

UK commercial property values fall -0.4% in November thanks to continuing Retail troubles.

  • At the All Property level, UK commercial property capital values decreased -0.4% in November while rental values fell -0.2%.
  • Retail sector capital values fell -1.9% over the month, thanks to a -3.0% for Retail Warehouses.
  • Office and Industrial capital values increased 0.2% and 1.0% respectively in November.
  • All UK Property total returns for 2018 to date reached 6.4%.

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Listen to the December Monthly Index Call

Featuring Nick Knight, Robin Honeyman, Julian Eade

UK Residential Investment Yields | December 2018

UK Residential Investment Yields | December 2018

Big deals dominate Q4 so far 

Since we issued our September yield benchmark the larger deals have caught the headlines.

At the start of the quarter, the Delancey led group and Lonestar appeared to come within a hair’s breath of creating a true goliath for Build to Rent in the UK. If the former had successfully acquired Quintain and Wembley Park it would have led a combined pipeline of more than 13,000 dwellings. For the time being at least their respective platforms of Get Living and Tipi will go head to head in spearheading large scale BTR in London.

The most significant transaction of Q4 has been Grainger’s continued investment in the sector by acquiring APG’s stake in their GRIP REIT partnership in a deal that valued the London focussed portfolio at more than £700m. The fact that the purchase was supported by shareholders and a fully underwritten share issue provides a great boost for confidence to the London market.

We leave our key yields unchanged over the quarter reflecting the continued strength of pricing in this sector.

Jason Hardman

Jason Hardman

Executive Director

t: +44(0)20 7182 2802
jason.hardman@cbre.com

UK Monthly Index – November 2018

UK Monthly Index – November 2018

UK commercial property values fall -0.4% in November thanks to continuing Retail troubles. 

  • At the All Property level, UK commercial property values decreased -0.4% in November while rental values -0.2%.
  • Retail sector capital values fell -1.9% over the month, thanks to a -3.0% for Retail Warehouse.
  • Office and Industrial capital values increase 0.2% and 1.0% respectively in November.
  • All UK Property total returns for 2018 to date reached 6.4%.

Find out more

Download the full report
Property Investment Yields | December 2018

Property Investment Yields | December 2018

David Tudor

David Tudor

Senior Director, UK Valuation & Advisory Services

+44 207 182 2689
david.tudor@cbre.com

Retail problems overshadow stability in other sectors.

  • Rapidly reducing rents and weaker yields continue to pull down capital values in the High Street, shopping centre and out of town retail sub sectors
  • Very thin demand for traditional retail assets
  • Industrial sector yields stabilising as rental growth overtakes as driver for growth
  • Investor demand particularly strong for London and South East assets
  • More stock available in the office sector but most not likely to transact until Q1 of next year
  • Development opportunities in core Central London markets are popular

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Student housing capital values rise

Student housing capital values rise

Dominic Smith

Dominic Smith

Senior Director

Jo Winchester

Jo Winchester

Executive Director - Valuation & Advisory Services

Student Accommodation Index | Year to September 2018

New CBRE Student Accommodation Index shows strong increase in capital values

  • Student Accommodation in Central London outperformed Regional properties by some margin, with annual total returns of 17.5%
  • Outside of Central London, Student Accommodation annual total returns were 10.5%
  • With capital values increasing 7.2%, large Student Accommodation properties (500+ beds) slightly outperformed small (less than 250 beds) and medium (250-500 beds) properties
  • In towns (excluding London) where the number of university applications increased from 2016/17 to 2017/18, total returns for Student Accommodation reached 11.3% in the year to September 2018

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