China, the fastest growing region for the outlet mall sector
- The outlet mall is well placed to outperform in both periods of strong and weak economic growth
Designer outlet operators, which previously focused on the US and Europe, are now casting their eyes further eastwards to Asia, most notably to China. The global expansion of outlet malls presents significant investment opportunities as they have proved to be relatively immune to cyclical economic and real estate market swings, as compared to other core real estate sectors which have more pronounced market cycles.
But what are outlet malls and what makes them so special? Typically, they are single-storey, village-style retail centres, selling goods at a 30 to 70 per cent discount. They do, however, come in all shapes and sizes, and naturally vary in quality. Ownership is largely accounted for by a few major players who tend to manage the better schemes, plus a larger group of single or small portfolio owners.
This specialist division of the retail market is relatively immature — as both a shopping concept and an investment opportunity. This is changing as retailing becomes more international and demand for luxury goods increases globally, in line with the burgeoning middle classes. The sector is already popular with shoppers and tourists, and the best schemes generate among the strongest sales densities of any retail destination. Retailers, enticed by the strong footfall and sales, are increasingly including outlets in their portfolio strategy.
The sector is well placed to outperform in both periods of strong and weak economic growth. During a buoyant economic period, the sector benefits from tourism growth, a greater propensity to enjoy a day out, and a boost in the demand for luxury goods.
In poor economic times, outlets benefit from a more cost-conscious consumer and surplus stock on the high street, meaning retailers are channelling more goods through this medium. In 2008 and 2009, the sector demonstrated excellent resilience to the poor market conditions - sales fell only by 0.5 per cent compared to the European average of a 5.4 per cent contraction, showing its resilience in a low-growth environment.
Another factor that supports outlet mall growth is the positive sales underpinned by long-term consumer trends, such as the growth of online shopping. The ability to compare prices online is a challenge to retailers selling full price products. This is where the outlet mall model comes in.
Urbanisation and the creation of wealth has seen Chinese consumers’ focus shift from basic needs to improving their quality of life. Wealthy Chinese consumers are brand conscious and are willing to purchase material goods. Chinese millionaires, who are on average 20 years younger than their peers in the US or Europe, tend to be more fashion conscious and interested in celebrity culture. Luxury goods are seen as a way to showcase their wealth and social status.
However, there remains a clear gap in the Chinese market for landlords to address the needs of luxury brands and the aspirations of these wealthy consumers. Luxury goods retailers entering the Chinese market face the challenge of supply: shopping centres in first-tier cities, often designed by local developers, have been developed for mass-market retailers. These do not meet the requirements of luxury brands. China’s outlet supply per capita is one of the lowest globally, there is room to address the growing need of wealthy consumers to shop for similar items in one location in this country.
While retailers expanding into Asia usually go for outlet malls as they provide a lower-cost entry point and the comfort of affordability with turnover leases, the potential volatility of income put investors off. But the reality is that, rents cannot fall below a minimum base rent, and leases are designed to promote growth.
The outlet sector offers good investment value given the attractive pricing. In Europe, the long-term average yields for outlet malls between 2008 and 2017 were around 100 basis points higher than shopping centres. This sector also has a far less volatile yield profile when compared with other retail assets and low correlation with other sectors, offering investors the benefits of diversification in reduced volatility.
Outlet malls are expected to continue to grow in popularity, with shoppers seeking aspirational brands, good value and an exciting shopping experience. This small, specialist part of the retail market, underpinned by sound supply and demand fundamentals, offers some of the most attractive risk-adjusted returns in the real estate market.
John Sharp-Paul is the head of portfolio management of Asia at TH Real Estate.