Retail property often makes a compelling part of an investment portfolio but how and why is it set apart from other types of real estate assets and what are the key trends that are impacting the sector globally?
These were some of the points addressed by retail property expert Chris Igwe, of international advisory services business Chris Igwe international, in An Introduction to Retail Property, the latest webinar in the series from Bayfield Training.
What is retail real estate?
Igwe explained that retail real estate was all about zoning: “As in residential, offices etc the commercial or retail element is defined by a zoning restriction to be found pretty much across the globe,” he said.
“Retail real estate is simply an area/building/environment within which goods or services are being sold to the public,” he said. He explained that retail real estate can involve various touch points which traditionally have ranged from department stores to shopping centres to high streets and retail parks. “Those were fundamentally the makeup of retail real estate.” In the US outlets have also traditionally been a strong sector with similar growth following later in Europe.
More recently however that traditional retail real estate definition has broadened to now include newer formats such as pop-up stores, hybrid projects such as leisure, as well as mixed-use, travel hubs and theme or leisure parks.
Why would an investor look at retail real estate?
Igwe explained that there are three main reasons that the retail real estate market is attractive to investors:
- High yields: The yield (or annual rental income divided by the price paid for it) is one of the most attractive reasons that an investor might be attracted to the retail real estate market, Igwe explained. “A good yield for prime retail real estate would sit somewhere between 3.5 to 5.5%.”
- Long leases: Across Europe leases within retail are generally at least five years and above, longer than many other assets where lease lengths are often less, although rental lease levels vary dramatically between European markets. “Five years is really the low end, in fact, many leases across Europe are anywhere between ten and twelve years or at least five to twelve years. That means that there is a supported rental income over that period of time that the landlord or investor can count on.” To illustrate the variety across Europe, Igwe explained that lease terms can range from nine, ten to 12 years in France, five or ten years in the Netherlands to anywhere between 10-15 years in the UK. “In addition to this, the leases and renewal terms and conditions are all different.”
- Low maintenance costs for investors: This is because it’s the tenant that absorbs the majority, if not all, of the costs of rental through the service charges that they pay. This includes everything from utility bills to maintenance and repairs, insurance, marketing, and real estate taxes.
Key drivers of change
Igwe explained that a structural change has taken place in the market that has seen sales densities — sales per square metre – decline and that things won’t go back to how they were primarily thanks to the continuing, growing impact of e-commerce on retail real estate.
“Essentially, we’ve got too much space, too many stores and sales are going down. That’s a major issue that we need to deal with,” he said.
He explained the model that helps to define the effort rate – an equation of sales divided by the total of rent, service charges and taxes – that is essentially how hard a retailer needs to work to be profitable. With falling or flattening sales this can prove a huge challenge since retailers need to work harder to be profitable (on the basis that the rent does not come down), a big issue that needs to be addressed and is causing a problem in the industry generally, he said.
He also explained the impact of the changing lifecycle of retailers – which previously had been from around 15 to 25 years. Such lifecycles are now shortening drastically if retailers fail to stay relevant, he said. “It doesn’t mean that they die – although some do – but if the concept or the brand isn’t renewed, they are definitely going to go out of business or struggle.”
This is especially important today Igwe explained, highlighting that whilst many retailers and brands can grow very fast the decline can be as sharp because things are moving so fast in the industry.
Other factors that are reshaping the retail real estate industry
Other factors are coming into play too. Amongst these, one of the biggest is the shift of space within retail real estate towards leisure and food and beverage. “Leisure and food and beverage are the big, big sectors today. They are growing very fast. They are what you and I most want to engage with.”
And that is seeing a reallocation of space as a result of such operators being able to pay very different rents when compared to a humble retailer since their turnover can be higher. “Shopping centres up until recently allocated around 5-8% of the floor space to food and beverage and leisure. Today that has doubled to around 10-20% of gross leasable area,” said Igwe. In China, such bias is even higher – and can be up to 40 to 50%, with a greater weighting on food and beverage.
The travel retail sector is also fuelling tremendous change as places like airports and train station do more to exploit their captive customers with better retail offerings within their projects. “Travel retail is a very, very big area and it’s growing in importance and significance.”
Pop-up stores are also proving increasingly important. “About ten years ago they were just seen as a nice thing to have but now there’s a real strategy around pop-ups – not just from the brands but also the owners and the landlords.”
Finally, Igwe talked about the impact of disruptors such as Amazon, Deliveroo and Uber Eats on the retail market – providing new services and new expectations for customers. “They are creating a whole new dynamic,” he said.
The headlines affecting the real estate sector
Amongst the biggest headlines impacting the retail real estate sector are tired formats and the impact of mobile and technology, coupled with a changing consumer, Igwe explained.
Traditional retailers are struggling – particularly if they have tired, failing or challenged formats. Igwe cited examples such as Toys R US, as well as mass market fashion retailer New Look which is closing stores.
He explained that where mid-market fashion has previously dominated shopping centres in terms of generating interest, rents, and space the impact of online is forcing a change in structure as landlords often look to convert their spaces for other uses and retailers look to rebalance their portfolios. “You still start to see retailers reducing their portfolio and some sadly going out of business,” he said. Some could reduce store numbers by between 25 to 50%, he predicted, because of the growing impact of internet sales, compared to physical stores. “Many retailers have too many stores and that has an impact on retail real estate.”
Mobile and technology is also changing the retail landscape, particularly combined with consumer demands and will continue to grow more – whether it’s customers paying or surfing via mobile. “The technology piece is important. You have two very important generations in which the consumer has a greater impact on how we buy and sell – the millennials and generation Z,” he said.
Finally, new methods of working are also helping to create a different environment and new demands for retail, he said.
What the future holds
The future will see retailers’ growth changing, he concluded. “Retailers have repositioned themselves. The consumer wants to shop online and you have to embrace that. The reality of today’s world is that e-commerce will continue to rise. There are strategies for that to grow even within those retailers who are opening stores.”
However, he warned that retailers have to balance their strategy towards capturing internet customers rather than simply focusing just opening stores for the consumer. “If she/he’s not getting the experience that she/he wants in a store then it won’t matter how many stores are opened they won’t be successful. So opening stores is absolutely the right thing still to do because studies have shown that if you open stores you increase your e-commerce sales and if you close a store you will lose your e-commerce customer that was in that area and he or she may never shop with you again. We are walking a knife-edge,” he said.
The next in the Bayfield Webinar series will be An Introduction to Development, which will take place on 24th July at 11am GMT.