This past decade has been good for outlet shopping in Europe. Even as some full-price malls were buffeted by market saturation and the fall of Europe’s economy, brand outlet centers have seen one fruitful year after another. But will this continue? “Every year since the financial crisis has been good for outlets, and I suspect that 2016 will not be any different,” said Ken Gunn, director of FSP Retail Business Consultants, based in High Wycombe, Buckinghamshire, England. “Yes, there are challenges. Yes, economies go up and down. But historically, outlet has been performing at twice the rate of growth of full-price retailing for a long, long time, and I suspect that that will continue.”
All of which will provide grist for much discussion at ICSC’s European Outlet Conference in London on March 22.
It may be good in a different way, however. These days outlet developers are having a harder time finding good locations — far enough away from full-price shopping so brands do not cannibalize their own sales, and yet not so close to another center as to weaken its appeal, Gunn says.
These geographical constraints appear to be making the segment more attractive to institutional investors. “We’re seeing a lot more funds interested in the market,” said Giles Membrey, managing director of Rioja Developments, based in Royal Tunbridge Wells, just outside London, and which specializes in retail development and leasing. Two or three years ago, most sales of existing assets would attract some half dozen bidders. Now, he notes, they typically attract two or three times that number.
Gunn concurs. “We’ve got a lot of institutional investors and corporate investors coming into the industry,” said Gunn. “It’s very, very vibrant at the moment.”
Part of the reason for the focus on new properties is that few institutional investors have the patience or courage to finance new schemes. “Most funds won’t put money up at this stage due to the planning risk, particularly in countries like the U.K., France and Germany,” Membrey said. The approvals process can take a minimum of two or three years and cost upwards of €1 million (roughly $1 million), he says. There are exceptions: Membrey’s group recently secured approval for a designer outlet village north of Birmingham. A British property company funded the application process, he says.
Last year saw the smallest amount of additional floor space since 1994, with less than 50,000 square meters (about 538,000 square feet) added to the total across Europe. But Europe’s outlet industry — numbering 222 centers — enjoyed strength in other respects. The outlets, totaling some 3.4 million square meters, achieved €11.8 billion in revenue (turnover). Overall sales are up by 86 percent since 2008, according to FSP Retail.
In 2016, several shopping centers will expand and new ones will open, adding some 100,000 square meters of floor space to the total, most of this in southern and central Europe, according to FSP. Last November McArthurGlen, the market leader in terms of gross leasable space, announced plans to expand its total global retail footprint to nearly 900,000 square meters by 2019, up nearly 50 percent from today, through eight new shopping centers and eight expansions, all but one of these in Europe. Executives at the London-based company estimate that the expansion will extend the centers’ catchment area by about a third, bringing 144 million Europeans within a 90-minute drive of a McArthurGlen outlet center.
FSP estimates that the market could support perhaps another 60 outlets. Moreover, as Gunn notes, finding the right site is becoming more difficult in some areas. The opportunity varies considerably by region. Although the typical penetration rate for outlet shopping in Europe is 141 people per square meter of outlet retail, this covers a considerable range — from 87 people per square meter in Switzerland and 88 in Portugal, to 273 in Germany and 2,014 in Russia.
Daniel Losantos, CEO of Madrid-based outlet giant Neinver, sees opportunity ahead in Germany and France but says the markets will require patience to develop. “Although they offer a great opportunity for us to develop new outlet centers, the licensing processes can take very long, in many cases a few years,” he said.
In the past, lobbying by retailers against new schemes has kept many proposed outlets out of Germany, says Gunn, who also suggests that attitudes toward outlets are beginning to change. Membrey, for one, says it sees great potential in the market.
Investors are likely to be quite active this year, either expanding their current portfolios or forming new ones. One important investor, TH Real Estate, a unit of U.S. pension fund TIAA-CREF, is already the largest owner by revenue share (18 percent) and by floor area (11 percent). A longtime believer in outlets, TH Real Estate has enjoyed steady success with outlets for more than a decade. Launched in 2014, TH Real Estate’s €2.3 billion European Outlet Mall Fund includes investments in malls operated by McArthurGlen and Neinver. It is a successor to an earlier TIAA-CREF outlet fund that delivered a roughly 12 percent internal rate of return between 2004 and 2013.
Despite rising asset prices, however, Gunn foresees no consolidation ahead for operators. The top three players, McArthurGlen (466,000 square meters across 20 outlets), Neinver (311,000 square meters across 15) and Value Retail (173,000 square meters across nine) take home about half the sales now, and they will remain dominant, Gunn says.
As the map fills up, however, operators are likely to be increasingly careful about their next moves. Losantos expects that Neinver will be able to sustain sales growth of 6 to 10 percent over the next few years. “However, it is clear that we will have to be very selective about acquisitions and the locations we choose for new developments,” Losantos said.
“You’ve got to think much more about how you customize your outlet center development to fit the opportunity that’s in front of you,” Gunn advised. “If there’s already a McArthurGlen on your doorstep, there’s no point in trying to necessarily go down that same retail mix. But you might bring a different retail mix in. It may well be that you look to incorporate more leisure as well, to create a point of difference.”
One possibility could be to expand the food-and-beverage offering, a step that some full-service centers have already taken. Though that might appear a sign of weakness for the format, Gunn argues that outlet shopping was always much more of a leisure activity than a trip to the local mall. The presence of high-end brands and higher-value architecture and the fact that many outlets are located near tourist destinations both help to put the shopper in a different frame of mind.
“In some ways they’re suspending their shopping skepticism when they go to an outlet center,” Gunn said. “It’s a different type of experience, because they’re a bit more in enjoyment mode, in pleasure mode, because it’s the brands you want in a nice place that you quite like to go.”
