Outlets are the star of the retail sector
Outlet malls will continue to grow in popularity with investors, as the sector is underpinned by constrained supply and growing demand, offering some of the most attractive risk-adjusted returns in the real estate market, according to THINK Global: Outlets by TH Real Estate.
The research highlights that 2017 saw the highest level of outlet mall transactions in Europe ever recorded at €1.7 billion ($1.98 billion), with volumes three times the long-term average of €548 million ($639 million). According to TH Real Estate, it has been the strongest performing sector in the region over the past decade and will remain one of the best value property sectors with many prime outlets achieving valuation yields 75 basis points higher than their shopping center counterparts.
“Outlets have proven to be a more defensive investment, with relatively low levels of volatility as seen during the last economic cycle,” said Angela Goodings, director of research at TH Real Estate. “They provide consumers with a shopping experience, with operators invested more in catering facilities to increase dwell time, alongside marketing events which improve footfall. Therefore, we believe the sector is also defensive to the ongoing diversion of retail sales to the Internet. Where we have been able to analyze data, high-quality assets have outperformed in terms of sales and rental growth as well as investment returns.”
TH Real Estate believe the sector is well placed to outperform in periods of strong and weak economic growth, demonstrating excellent resilience in the poor market conditions of the global financial crisis, when sales only fell by 0.5 percent compared to the European average of –5.4 percent.
While it is important to understand the attractiveness to investors, the report examines the increase in retailer demand and consumer trends. Following the global financial crisis and improved pricing transparency via the Internet and heavy discounting on the high street, there has been an increase in value-conscious shoppers globally. Therefore, the outlet mall model is well-positioned to grow its share of the rising value-conscious market.
According to the report, there are large differences in the supply of outlet malls globally, with the United States being the most mature market while Asia Pacific is still in the early growth phase with the provision of outlets remaining very low. In particular, supply per capita in China is one of the lowest globally. Although the development pipeline in the country is not significant, the delivery of high-quality/high-end schemes will struggle to meet the insatiable demand for luxury goods from Chinese consumers, with retail sales consistently outstripping GDP growth over the last decade, at an average of 11.9 percent per annum. TH Real Estate highlights China as a particularly attractive growth market for luxury retailers due to its large population, densely populated cities, and growing consumer appetite for luxury and globally recognized brands.
TH Real Estate believes constrained supply, coupled with growing demand should fuel rental growth and long-term structural improvements in investment pricing of outlets globally.
View the full report here.
