10 June 2013
Luxury sector is robust in face of national crisis
Britain’s high streets are in crisis, and store chains are grappling with the twin threats of cautious consumers and the rise of internet sales. Yet against this back drop London retail and demand from investors for prime retail assets, has remained robust.
The UK capital’ retail scene has been boosted by an economy that is holding up much better than in other parts of the country, as well as the influx of high-spending tourists.
In additions, says Adrian Peach, head of retail capital markets at professional services firm Jones Lang Lassalle, the capital is also the “seed bed for international retail expansion” by big and exciting overseas brands. When it comes to London retail, the most soutgh-after assets, and the punchiest values are around Bond Street, Oxford Street and Knightsbridge. Demand here tends to be from overseas investors, often the big retail dynasties. Bond Street has been particularly in vogue with high-profile tenants, and investors. Phil Cann, UK head of retail at global property firm CBRE, says it has enjoyed double-digit annual rental growth over a sustained period.
According to Mr Peachey: “It’s the definition of real estate gold. It is such a must-have location for all of the luxury brands, and funnily enough, luxury brand attract wealthy byers and investors”.
The high prices paid means returns are low with Bond Street yields at 2.5-3 per cent.
But Neil Varnham, managing Director of Pradera, a European retail fund manager, says the environment is low risk. “You are investing in a bond,” he says. “That bond is called London.”
As demand from retailers and investors for prime locations in Bond Street escalates, it is pushing up demand – and value – in neighbouring locations such as Dover Street and Albemarle Street.
Nearby Mount Street, where the majority of the freeholds are owned by the Grosvenor Estate, has already had a makeover, aided by the signing of fashion designer Marc Jacobs as a key tenant, who opened his first store there in 2007.
Mr Cann says Mount Street rents have doubled over the past three years. Regent Street, controlled by the Crown Estate has also become the go-to location for the big US brands. The Portman Estate, meanwhile, is hoping to reinvent Chiltern Street as destination for niche independent and upmarket retailers.
With these areas controlled by the estates, investors’ only option is to acquire leasehold sites. “To piggyback on someone’s estate management is a perfect investment rationale,” says Mr Cann. “These ‘shadow investors’ have done it in Regent Street, and will continue to do it if leaseholds or freeholds can be brought in key London locations. But you are competing with the stakeholders, who are among the most active investors at present. Indeed, the same trade-off is why would sell?”
New life is also being breathed into Covent Garden, after it was acquired by Capital and Countries in 2006.
Other pockets of retail interest are springing up further afield. One of the main accumulations is in east London, put on the map by Westfield’s Stratford City development. There is also interest in Shoreditch, helped by stores around Spitalfields and Boxpark, the pop-up mall.
Redchurch Street, a once derelict cut-through, aspires to be the Bond Street of the east, attracting tenants including APC, the French Retailer known for its utilitarian chic and Hostem, the upmarket menswear boutique. However, some experts say it needs to mature to attract the big-name luxury brands. “The retailers go there and they are underwhelmed at the moment,” says Mr Cann. “Redchurch Street needs a more compelling message.”
Further impetus has been given to the regeneration of Shoreditch after British Land, the UK’s second largest property company by market value, won a tightly contested bidding process to develop 22 buildings on the Shoreditch Estate, a 300,000 sq ft site that is owned by the City of London Corporation.
A key test of investor appetite for east London’s assets will be the sale of the retail and restaurant area in Old Spitalfields Market, put up by Ballymore Properties with a price tag of about £100m.
At the other end of the spectrum, investor interest is growing for smaller units that could be let to the big supermarket chains as convenience stores.
All of the big four supermarkets Tesco, Asda, J Sainsbury and Wm Morrison are expanding their convenience store holdings. Because of long leases typically 15 – 20 years spaces that can be let for use as convenience store units make attractive investments, says Mr Varnham. “If London retail is a bond, this is a super-bond, because of the even lower risk that comes with the longevity of the income stream, and the quality of the tenants”, he says.
Source: Financial Times, 2013