Luxury retail real estate: poised for growth or close to the limit?

The retail real estate sector is increasingly polarised between secondary locations and shopping destinations with a luxury profile. This divergence reflects two factors: the increasing significance of e-commerce and the growth of luxury shopping tourism. Can we expect this trend to continue?

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Exclusivity is the defining feature of luxury retail and explains why luxury retail locations in developed countries have outperformed the rest of the market. High prices are one way of achieving exclusivity. However, outstanding attention to detail, scarcity and – most importantly - a personalised experience are also crucial features of strong luxury brands.

All generations of luxury shoppers, from baby boomers to millennials, share the preference for a personalised experience. It explains why real estate locations with a luxury profile have proven particularly resilient to competition from e-commerce. While luxury brands have embraced the internet to improve interaction with the customer, they have also continued to invest heavily in the physical experience. An attractive physical store and excellent face-to-face customer service have remained at the heart of these brands’ marketing strategies.

However, luxury retailers have begun to face competition for prime, centrally-located real estate from mass market retailers. The disrupting forces of e-commerce mean the latter must also invest in a physical presence in the most attractive locations.

A shopfront for the brand

Indeed, e-commerce has enhanced the role of the store as an extension of the brand for retailers in general. It is recognised that a physical presence in an attractive location has to complement online expansion in order to maintain brand awareness. With knock-on effects on sales performance across traditional and online channels, retailers are determined to secure the right assets in the right locations. Favoured sites include those with a high natural flow of people – driven by tourism, cultural attractiveness, proximity of business hubs and/or a culinary offer – in cities with a wide international reach. Such locations have experienced sharply increasing demand from a wide array of retailers, resulting in unprecedented upward pressure on rents.

As the charts below illustrate, rents for high streets with a luxury profile such as New Bond Street, the Champs-Élysées, Madison Avenue and Ginza have risen particularly sharply but significant increases have also been recorded in established central, mass-market high streets. Secondary high streets and shopping centres, especially those in out-of-town locations and provincial cities, have underperformed.

Figure 1: Movements in global retail rents, 2006-2016
graphs showing retail rents in Paris, London, New York and Tokyo
Source: Cushman & Wakefield, January 2017. SC = Shopping Centre

We expect this trend to continue. Retail assets that are best positioned to benefit from the rise in online retail, as a result of their ability to enhance the brand, will continue to increase in value in the long term. These include prime shops on key high streets in strong cities with a national or international profile, as well as retail schemes that are destinations in themselves.

These retail formats are likely to continue to outperform the rest of the sector. We also see some growth potential in assets that provide a high level of convenience to customers, such as well-located flagship stores and shopping centres that also boast excellent merchandise, services and entertainment as well as airport shops and outlets in immediate proximity to the largest transport hubs.

While the willingness of retailers to accept rises in occupancy costs in the best locations has increased and is likely to remain high, total occupancy of retail space is expected to continue to shrink as online channels expand. A structural decline should continue in less well-located schemes and high street shops in less economically-robust locations, especially those with a weak food and beverage, and entertainment offer, as well as declining catchment areas.

What’s the ceiling for prime rents? Can recent sharp increases on the world’s most expensive high streets continue indefinitely? Do recent rental declines in New York and Hong Kong point to a reversal in this trend? We do not believe this is the case. Rental levels in individual locations, such as New York’s Times Square, are likely to experience corrections as competition from other neighbouring thoroughfares emerges and new supply enters the market. The long-term trend for prime high street locations will nevertheless remain positive due to the aforementioned structural changes but also the highly-constrained supply that is typical of city centres. Some locations, such as Hong Kong, have become highly reliant on shopping tourism, and may experience prolonged rental weakness in the prime retail sector. International shopping tourism, alongside e-commerce, has driven the luxury retail real estate market in a number of cities in recent years. Yet by nature, it is highly volatile and to a large extent dictated by currency movements, thus difficult to predict.

Figure 2: Personal luxury goods sales by channel and format, (2016, €bn)
Pie Chart showing Personal luxury good sales by channel and format (2016,
Source: Bain & Company, October 2016, Worldwide Luxury Market Monitor 15th Edition

The China factor

Rapid increases in wealth, the relaxation of visa restrictions for Chinese nationals, which were introduced in a number of countries around 2012, and more competitive prices abroad, prompted millions of Chinese shoppers to cross borders to shop for luxury goods in recent years. This release of pent-up demand led to a ballooning in total spending on luxury goods by Chinese consumers. This spending currently accounts for around 30 per cent of the global total1. As much as 77 per cent of total Chinese luxury purchases are estimated to have been made abroad in 2016.2

Europe has been the leading destination for Chinese shoppers. Approximately 30 per cent of all personal luxury purchases by Chinese residents were made in Europe in 2015-16, followed by Asia, excluding mainland China (approximately 20 per cent), the Americas (approximately 15 per cent) and Japan (approximately five per cent)3.

Further increases in personal wealth should continue to drive overall demand for luxury goods from Chinese consumers. However, we expect this growth to moderate as a result of new Chinese government regulations, brought in as part of Beijing’s anti-corruption crackdown. China’s anti-graft campaign started in 2012 and initially targeted domestic sales of luxury goods, including watches, which have been heavily taxed, as well as ‘extravagant’ catering at public functions. More recently, the government has focused on luxury purchases made abroad.

High penalties for false declarations and tightened customs controls have hit China’s daigou industry – a system whereby overseas-based, personal shoppers buy luxury and other products and ship them back to customers in China, thus avoiding high import tariffs. Increased taxes imposed on a range of goods ordered from abroad, effective from April 2016, further reduced Chinese demand for overseas goods. In addition, limits to withdrawals from the government-supported payment card network, UnionPay, have undermined the appetite for shopping abroad. The EU’s introduction of a biometric visa for Chinese citizens in October 2015, as well as concerns about terrorism, have acted as further deterrents to Chinese travellers considering visiting Europe. The biometric visa requires 10 fingerprints, a facial image, and a personal visit to an EU consulate or visa centre in one of China’s main cities.

The impact on Chinese consumers is already evident. According to Global Blue, an international tax refund company, Chinese tax-free shopping declined by 24 per cent year-on-year in March 2016, following a 58 per cent increase in 20154. In October 2016 – a popular time for foreign shopping trips by the Chinese due to the Golden Week, an annual seven-day holiday to celebrate the founding of the People’s Republic of China – tax free sales in Europe fell by three per cent year-on-year5. Visitor numbers are holding up and there is scope for further growth given that only 4 per cent of the country’s residents currently hold a passport6. But spending has shifted away from shopping to accommodation, entertainment and restaurants. According to FT Confidential Research, for the first time since 2013, Chinese tourists now spend more on those three areas combined than on shopping7.

We expect the luxury spending spree in Europe by Chinese visitors to moderate on the back of new regulations as well as changing tastes. We think a partial diversion of spending to mainland China is likely. Given that over 50 per cent of personal luxury purchases in Europe are made by extra-regional consumers, with the Chinese accounting for a large share of this spend8, rental growth in high-end retail locations is expected to normalise.

Figure 3: Sales of personal luxury goods globally (£billion), 1994-2016 
chart - Sales of personal luxury goods market
Source: Bain & Company, October 2016, Worldwide Luxury Market Monitor 15th Edition

Currency movements have been an important factor influencing where shoppers go to buy luxury goods in recent years. The appreciation of the Hong Kong dollar against the Chinese renminbi in 2015 was a major reason for the sharp dip in visitor numbers to Hong Kong that year, with luxury spending diverted to Japan and Europe. It subsequently declined in the former due to the stronger yen and remained relatively high in the latter as the euro remained historically weak against the renminbi. More recently, some of the luxury spending diverted from continental Europe to the UK as non-European shoppers took advantage of the decline in the value of the sterling following the Brexit vote.

The strategic implications for real estate investors

Factors which are unlikely to be repeated, such as the rapid increase in Chinese tourist spending, have partly influenced the outperformance of luxury retail real estate. However, we expect rental values to remain polarised as retailers’ multi-channel strategies continue to result in the selection of locations with high natural footfall and the potential to enhance brands. Real estate investors should be wary of developing strategies that focus specifically on luxury tourism expenditure due to its unpredictable nature. Large, affluent catchments with an attractive cultural offer would be appropriate targets and are likely to occasionally benefit from tourism, depending on currency movements and regulations.


1 Bain & Company, Global Luxury Study 15th Edition, October 2016

2 Bain & Company, Global Luxury Study 15th Edition, October 2016, based on values denominated in EUR

Bain & Company, Luxury Goods Worldwide Market Study, Fall-Winter 2015 and Bain & Company, Global Luxury Study 15th Edition, October 2016

4 Global Blue, Globe Shopper Report: China Edition, April 2016

5 Global Blue, Golden Week: Tax Free Shopping driven by Chinese spending in Europe, November 2016

The Economist, Coming to a beach near you, April 2014

7 Financial Times, Hong Kong’s luxury brands confronted by changing Chinese tastes, May 2016

Bain & Company, Global Luxury Study 15th Edition, October 2016


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