Resilient retail outlets have a secret weapon: turnover leases

Investor interest in outlets is growing at an unprecedented rate as both new sources of capital and existing players look to cash in on the ever-resilient market. This year to date, almost £1bn worth of outlet assets alone have been traded. With more transactions to follow, here are the underlying trends influencing the decisions of these investors.

More data provides a better picture of potential returns and areas for quick improvement

Outlets have effectively weathered the pandemic and economic turbulence of recent years, demonstrating resilience to emerge as one of the fastest sectors to rebound across Europe. More resilient than full-price retail against the growth in online shopping, sales in physical outlets have grown, not stagnated, following the pandemic. In fact, since 2019, spend per head across Realm’s portfolio has increased by 11%.

While this alone is enough to draw interest, it’s the turnover lease model used across the outlet market that is really adding to the feeling of confidence. The data provides a more transparent picture of potential returns and areas for quick improvement. There is an element of certainty from robust base rates, but also increased flexibility to adjust in line with changing consumer demands.

The model creates a partnership based on a shared interest – the better the tenant performs, the more the landlord benefits. This ensures that both owners and occupiers have an incentive to invest in their products which, in turn, contributes to the overall health of centres.

Thrift and savviness have persisted

What is driving this resilience? It is first worth considering changing shopper habits. In the aftermath of the 2007 financial crisis the “fight to value” phenomenon emerged. Personified by the rise of Aldi, Lidl and deal culture, consumers increasingly came to embrace thrift and savviness. Rather than fade over time, the phenomenon has persisted. Against an increasingly uncertain economic backdrop, it is no surprise that consumers are looking more and more for value.

“The model creates a partnership based on shared interest – the better the tenant performs, the more the landlord benefits”

The desire to be thrifty is also becoming linked to a desire to shop more sustainably. Consumers are moving away from fast fashion and are taking a more considered approach to shopping. They are increasingly looking for products that are more durable and lasting, are from high-quality brands and have the potential to be resold, often online. A recent report by First Insight found that 72% of consumers consider sustainability when making their purchasing decisions while 41% of consumers reported that they shop to resell. Outlets are able to combine affordability with high-quality brands.

There has been a shift in the type of shopper visiting outlets. Traditionally, the core value “hunting” demographic has been the over-40s. However, outlets are increasingly attracting a younger, broader demographic. The desire to be thrifty is now cross-generational and, looking to retailers like TK Maxx, The Outnet and Brand Ally, a pursuit of the more affluent shopper. At our centres, this shift is reflected in lettings of increasingly upmarket or aspirational brands such as Tommy Hilfiger, Calvin Klein and Guess.

This demographic has a greater propensity to shop at international retailers and the turnover lease model means that international brands looking to grow their outlet presence in the UK have access to trading data, which can help de-risk any decision to undertake expansion. This helps explain why Nike, Levi’s and Adidas have all consolidated their presence at Realm’s centres through upsizing.

More sociable and less stressful than shopping centres

A relatively new phenomenon which has started impacting the outlet sector in recent years is the creation of “shopping destinations”. Many centres built in the 1990s and early 2000s have recently undergone significant refurbishment and are now more in line with emerging expectations of what these experiential destinations should offer.

“72% of consumers consider sustainability when making purchases, while 41% shop to resell”

Landscaping, greenery and planting have all become key components and centres have started to offer onsite events and entertainment, pop-ups and increasingly varied F&B offerings, many of which are new entrants to the market. A sense of destination at outlet centres generally works well because of their design, many being open-air with a village feel compared with traditional shopping centres, offering a more sociable, less stressful experience that is likely to be repeated on a regular basis.

Finally, the outlet offer is more difficult to replicate online: both for retailers, where outlets provide a very efficient and cost-effective way to clear stock in a controlled manner, but also for shoppers, who have the desire for an aspirational experience and excitement of picking up a quality purchase at a value price point.

In all, the sector continues to demonstrate its robust offer in the face of changing consumer behaviours and uncertainty in the economy.

Article reproduced from React News 6/7/22

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