Shop Ahoy

Beyond the superficial prestige inherent in owning retail real estate, there are compelling reasons for investing in the asset class. Chief among them is the simple fact this now-$22 trillion market place continues to grow. With global consumers now spending $40 billion each week, according to market researcher Euromonitor International, it is expected to grow by 2.3 percent 2017.

And yet large swathes of the private real estate investment market are currently negative on shopping accommodation. There are two major reasons, the first of which is becoming increasingly obvious; the second, though connected to the first, perhaps less so.

E-commerce is dramatically shifting the retail landscape, for the retailers that occupy buildings and, subsequently, for the landlords which let them. Another researcher eMarketer estimates global sales will hit $27 trillion by 2020 with e-commerce accounting for 14.6 percent, up from 8.7 percent today.

Growth in the online segment is a major factor behind retailers not having a firm grasp on their spatial needs and that message is seeping into lease negotiations with landlords. To paraphrase one turned-off investment manager at last month’s MIPIM conference in Cannes: Why should I be bullied by some blue-chip retailer into offering a 25-year lease, with tenant-only break clauses every five years and where the rent payable is subject to on-premises turnover?

He painted a picture in five years’ time where the only items kept in the unit are a bunch of tablets through which consumers order items for delivery. No in-store turnover could mean no rent and that means defunct economics for the landlord.

But ignoring such a money-swilling industry is not an option. So, what is an investment manager to do?

Speak to the senior folk at AEW Europe and they’ll tell you destination retail remains viable for core capital for now. The firm put its and its investors’ money where its mouth is with its Europe City Retail Fund, for which it brought fundraising to €290 million and snapped up high-profile retail on the Champs-Élysées in Paris, last month.

Speak to the folk at UK private equity real estate firm Moorfield Group (as we do for this month’s Blueprint interview), on the other hand, and they’ll say buying last-mile logistics as a proxy for retail is a safer point of access.

To investors keen to engage this ultimately significant but currently challenging part of global GDP: whatever you do, look beyond the tip of this iceberg asset class.