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

Retail in decline, Industrial leads the way

Retail in decline, Industrial leads the way


Positive capital value performance continued in Europe, albeit at a slightly slower pace than seen in Q2 2018. The All Property Index moved up (+1.0%) on the quarter vs (+1.2%) the previous quarter, driven by value growth in Germany, The Netherlands and Benelux.

 

  • The Industrial sector was once again the leading performer, with value growth of 2.9% in Q3. Offices saw the next largest increase: rising by 1.1%, although modest in comparison to last quarter’s 1.7%. Retail recorded a negative capital value change standing at -0.2%. Industrial values benefitted mainly from yield compression, although rental growth also contributed
  • Over the quarter, the retail sector under-performed at -0.2% in accordance with the previous quarter Q2 2018 (-0.6%). Behind the headline figure it is notable that the Shopping Centre sub-sector saw the weakest value performance (-0.3%). That tendency is mainly driven by the CEE countries (-1.9%), The Netherlands (-1.4%) and UK (-1.3%)
  • All Property values rose by 0.3% in the UK on the quarter which followed the same trend as the preceding quarter Q2 2018 (0.6%) but was significantly slower than Q4 2017 (1.9%). Retail is one of the main drivers of this downturn, specifically the Shopping Centre sector
  • On an annualised basis, the CEE countries continued to grow at 3.1% vs 2.9% Q2 2018, a significant increase compared to Q1 2018 at 0.3%. Overall, all the countries rose at a slower pace except for the Netherlands 9.4% vs 8.5% and Benelux 5.8% vs 4.4% (all year on year)
  • Grouping equivalent yields into quartiles, we see that there was yield compression across all quartiles. The European market is continuing to see yield compression across most asset types. This is likely to be a sign of the limited availability of top quality assets along with the historically low interest rates
Richard Holberton

Richard Holberton

Senior Director, EMEA Research

+44 20 7182 3348
richard.holberton@cbre.com

Clémentine Grégoire

Clémentine Grégoire

Analyst, Valuation & Advisory Services

+44 20 7182 3895 Clementine.Gregoire@cbre.com

Simon Threlfall

Simon Threlfall

Senior Director, Valuation and Advisory Services

+44 20 7182 2530
simon.threlfall@cbre.com

Chris Lyde

Chris Lyde

Senior Analyst, Valuation & Advisory Services

+44 20 7182 2927
chris.lyde@cbre.com

Just in: The Property Perspective | London | Q3 2018

Just in: The Property Perspective | London | Q3 2018

Jonathan White

Jonathan White

Executive Director

Neil Adams

Neil Adams

Director

 


The Property Perspective | London | Q3 2018

Market resilience in the face of uncertainty

This quarterly report features our unrivalled market analysis and outlook for the Office,  Retail, Residential and Hotel sectors. Our Global City feature provides an overview of the New York office market, where strong leasing is driven by the financial, legal and tech sectors. Lewisham, one of the most affordable boroughs in London, is our borough feature. Here new and planned transport improvements are driving substantial redevelopment and the borough’s continued transformation.

Find out more

Download the full report
European Valuation Monitor  | Q2 2018

European Valuation Monitor | Q2 2018

 

Retail recedes, Industrial performs best

The positive annual capital value performance in Europe rose at a faster pace than seen in Q1 2018. The All Property Index moved up (+1.2%) on the quarter vs (+1.1%) the previous quarter, driven by value growth in The Netherlands, Germany and France.

  • The Industrial sector was once again the leading performer, with value growth of 3.0% in Q2. Offices saw the next biggest increase rising by 1.7% whilst retail recorded a negative capital value change -0.6%. Industrial values benefitted mainly from yield compression, although rental growth also contributed significantly
  • All Property values rose by 0.6% in the UK on the quarter which followed the same trend as the preceding quarter Q1 2018 (0.9%) but was significantly slower than Q4 2017 (1.9%). Retail is one of the main drivers of this downturn, specifically the Shopping Centre sector
  • Over the year, the CEE countries grew at a faster rate 2.9% vs 0.3%, however, the Nordic countries increased at a slower pace 6.0% vs 7.7%
  • Grouping equivalent yields into quartiles, we see that there was yield compression across all quartiles. The European market is continuing to see yield compression across most asset types. This is likely to be a sign of the limited availability of top quality assets along with the historically low interest rates
Richard Holberton

Richard Holberton

Senior Director, EMEA Research

+44 20 7182 3348
richard.holberton@cbre.com

Clémentine Grégoire

Clémentine Grégoire

Analyst, Valuation & Advisory Services

+44 20 7182 3895 Clementine.Gregoire@cbre.com

Simon Threlfall

Simon Threlfall

Senior Director, Valuation and Advisory Services

+44 (0) 20 7182 2530
simon.threlfall@cbre.com

Chris Lyde

Chris Lyde

Senior Analyst, Valuation & Advisory Services

+44 20 7182 2927
chris.lyde@cbre.com

The Property Perspective | Alternatives |  H1 2018

The Property Perspective | Alternatives | H1 2018

 

We are pleased to launch The Property Perspective: Alternatives

KEY TAKEAWAYS

  • With the income stream offered by Retail, Offices and Industrial shortening and becoming more volatile over the last 20 years, investors seeking a “traditional, bond-like” property return can arguably now only find this in the Alternatives sector
  • But the Alternatives sectors offer so much more than this to investors eager to achieve higher returns by taking on direct or indirect operational exposure
  • Alternatives are poised to benefit from the myriad forces of disruption – political, social, technological – that are buffeting all markets, including real estate; to some extent all are protected by tight supply, strong covenants, and broad and deep pools of occupational demand
European Valuation Monitor  | Q1 2018

European Valuation Monitor | Q1 2018


Values rise; Industrial continues to be the best performer

The positive annual capital value performance in Europe continues at a slower pace than seen in Q4 2017. The All Property Index edged up (+1.1%) on the quarter vs (+2.5%) the previous quarter, driven by value growth in The Netherlands, France and Germany.

The Industrial sector was the leading performer, with value growth of 2.4% in Q1. Offices saw the next biggest increase, rising 1.3% followed by Retail which remained stable.

Grouping equivalent yields into quartiles, we see that there was yield compression across all quartiles. The European market is continuing to see yield compression across most asset types. This is likely to be a sign of the limited availability of top quality assets along with the historically low interest rates.

Over the quarter, Netherlands was the best performing at the All Property level, rising by 2.2% and mainly driven by the industrial sector. France and Germany also picked up (1.4% and 1.3%).

Over the year, the CEE countries grew at a faster rate 0.3%, however, the Nordic countries increased at a slower pace 7.7%. Overall, the rest of Europe stands at c. +6% on average.

All Property values rose by 0.9% in the UK on the quarter which followed a slowing trend compared to the preceding two quarters of 1.9% in Q4 and 1.4% in Q3. Retail is one of the main drivers of this downturn.

Richard Holberton

Richard Holberton

Senior Director, EMEA Research

+44 20 7182 3348
richard.holberton@cbre.com

Clémentine Grégoire

Clémentine Grégoire

Analyst, Valuation & Advisory Services

+44 20 7182 3895 Clementine.Gregoire@cbre.com

Simon Threlfall

Simon Threlfall

Senior Director, Valuation and Advisory Services

+44 (0) 20 7182 2530
simon.threlfall@cbre.com

Chris Lyde

Chris Lyde

Senior Analyst, Valuation & Advisory Services

+44 20 7182 2927
chris.lyde@cbre.com