The obituary of high street retail, according to the press, has been written. Physical stores are closing at a rapid rate. We don’t think this tells the whole story.
The daily announcements of retailer bankruptcies points to an ever-decreasing pool of occupiers. However, we argue that the pendulum of pessimism in investment markets often swings too far. We argue that for differentiated retailers in excellent city locations, physical stores do have a future.
There is clear evidence of retailers struggling, sales and profit margins are declining, as the below chart from Green Street Advisors shows:
We think the first defence of physical retail starts with location. The internet provides convenience and price advantages – as Amazon CEO Jeff Bezos puts it: ”faster-cheaper-further”. The evidence shows that some high streets provide destinations that cannot be replicated online.
A truism in the internet age is that the location of real estate, particularly retail real estate, is even more important. Demand for physical stores lies in the strongest global cities, and the advantage lies with landlords who have scale in these destinations, allowing them to curate the tenant mix in micro locations.
The result is a division of retail asset ownership: those with scale and location advantages can do well; owners with assets scattered in regional locations are at the mercy of a dwindling pool of retailers. Historically, owners of shop buildings relied on a bygone age of real estate investing – long leases providing dependable income with minimal owner input. The advent of the internet has changed that: owners of real assets need to roll up their sleeves and become fully involved, managing their sites and provide themselves with a growing customer base.
The advantage of global cities
For us, investing in retail real estate mean investing in global cities. The leisure component of major cities, underpinned by excellent transport infrastructure, creates locations that include shops, restaurants, theatres and museums. This is in contrast to regional and local high streets.
Retail landlords in major cities benefit from the mass transit systems that bring so many people into the centre of global cities, with the broader cultural attractions underpinning the appeal. Regional centres do not have these advantages. If a visit to the shops in a regional town is no longer a necessity, as those goods are available online, then the future could be bleak.
Where can the high street still work?
Locations can thrive when a landlord owns a large swathe of an area and can effect change.
Examples in the UK can be found in London (ranked no.2 in our Schroders Global Cities top 30) where traditional landed estates and a few select listed companies have made a difference. Shaftesbury, listed in the UK, has transformed its West End “villages”: Carnaby Street, Chinatown and the Seven Dials area to the north of Covent Garden.
The twin ingredients of centrally located assets with access to mass transit, as well as contiguous ownership, puts these organisations in an envious position. However, even with these advantages, there is a need to engage with both retailers and local councils in order to provide the right mix of tenants. If done in a considered way, high streets with independent retailers don’t compete with Amazon. One of the best examples of this is the transformation of Marylebone High Street by the Howard De Walden estate.
Why careful estate management pays off
The success of these large landlords has not come easily. Many have made large sacrifices in short-term rental income, in order to achieve a better long-term tenant mix. Legacy leases, either elapsed or bought out, provide opportunities to introduce new types of tenants to that location.
Some of these new tenants can be loss-leaders, introduced to the estate because they bring something fresh, but not yet sufficiently profitable to pay market rents. This process is painstakingly slow but when the inflection point of original retailers and shoppers meets, landlords can reap the benefit.
Shaftesbury Plc is the best example of estate management by a publicly quoted company. The acquisition of assets in its three ”villages”, working with Westminster Council to enhance the public realm and long negotiations to change the mix of retailers to entice shoppers, has taken many years. The result is one of the most vibrant shopping areas in London.
The chart below demonstrates the results. The blue bars show the actual rental income while the green bars estimate the potential rental income. Shaftsbury’s focus on investing in its location has given it pricing power and as leases expire, it should be able to push up rents.
The travails of the high street are a stark reminder of the benefit of investing in Global Cities. Mass points of consumption, underpinned by infrastructure, support the value of land, regardless of use.
Large scale owners of street retail in London don’t need to compete with ”quicker, cheaper, faster”. They offer a different experience, with independent retailers, smarts streetscapes and top class dining.
The high street might be dying in certain locations but we believe opportunity knocks in Global Cities.
Risks associated with real estate investing:
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Past performance is not a guide to future performance.
Losses can occur if Real Estate investments cannot be bought or sold quickly enough to prevent or minimise a loss. Losses can occur due to factors that affect the overall performance of the real estate market.
Published by Hugo Machin, Co-Head of Global Real Estate Securities, Schroders
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