Neinver on the outlet opportunity

Although still a niche asset class, outlets are an exciting investment prospect, says Vanessa Gelado, fund, strategy and investment director at Neinver.

The European outlet center appears to be escaping some of the turbulence rocking other parts of the retail sector, and Madrid-based firm Neinver has made this space a key specialty, with 16 outlets in its portfolio, including 11 assets under Neptune, a joint venture with TIAA to invest in outlet centers. That JV now comprises a €1.3 billion gross asset value portfolio, and has registered over 9 percent internal rate of return. The firm, which invests, develops and manages property assets, is now focusing on strengthening its European footprint with new projects in the Netherlands, France and Germany. PERE talks with Vanessa Gelado, Neinver’s director of funds, strategy and investment about the fundamentals of outlets.

PERE: Given the perceived malaise of bricks-and-mortar retail, what makes the European outlet asset class different?

Vanessa Gelado: Outlets are utterly different to more traditional retail. In the centers we manage, for example, sales have increased on average by 10 percent over the last six years. This growth is produced by the concept’s appeal to consumers who have integrated outlet centers into their shopping habits. The continuous influx of top brand names has also helped increase outlets’ popularity. Further, outlets seem to be resilient to e-commerce growth as they are designed for people to enjoy the physical shopping experience.

The turnover rent models have proved effective and are another factor in the success of the format. These leasing structures have led to a win-win interaction between operators and retailers, with higher daily support to the brands in order to increase each center’s value and performance. Moreover, leases tied to turnover, usually shorter than in other retail formats, give outlet operators greater flexibility to respond quickly to changes in the market. This is good for investors.

In terms of density, outlets depend on brands’ stock, so there will always be far fewer (only 2 percent of total retail space in Europe) than traditional shopping centers, but this lower number, together with the higher lure of the offer, make their catchment areas larger, usually within a 90-minute drive.

PERE: Why are outlets a compelling investment opportunity?

Gelado: outlets seem to be resilient to e-commerce growth

VG: Outlets’ fundamentals have been strong in the last decade with numbers growing faster than those of traditional shopping centers. Consolidated outlet centers tend to provide better returns for investors and have performed well in periods of economic recession. The concept of ‘smart shopping,’ top brands at discounted prices, is attractive to consumers.

The spread in yields between prime and solid secondary shopping centers and outlets stands at 0.25 percent today but should disappear in the medium term. We target value-add net levered returns of 9 percent for yielding assets and 15 percent for new developments, adapting these to investment requirements. Our outlet-focused 2007-vintage Irus European Retail Property Fund produced around 9 percent IRR and 1.9x equity multiple. By contrast, value-added funds launched between 2006 and 2009 to invest in European retail have delivered an average IRR of -4.6 percent since inception, according to INREV.

PERE: How critical is location to achieving investment success in the outlet space?

VG: Location is essential. It determines paramount variables such as population, purchasing power, accessibility and tourism potential. In the European market, with close to 200 outlets, only a few new centers have non-overlapping catchment areas. This has encouraged Neinver, as well as other investors and operators, to look for more original, strategic locations closer to urban areas or tourist routes. To give you an example, we recently opened an outlet center in Prague less than five minutes from the airport and we have a project in the French Alps close to the Swiss border and destinations popular with tourists in the winter months.

Managers and investors need to be mindful of key differences between countries when looking for opportunities in this space. The UK and Italy are already well served by outlets, and value is driven by extensions, refurbishments and intensive asset management rather than by new developments. Germany and France have higher potential for further development due to their extremely restrictive licensing processes, with new licenses becoming quite precious. Having the right development skills and the necessary structure in place early in time is crucial in order to reap the benefits at the due time. Likewise, the outlet market in Central and Eastern Europe is just taking off with several schemes under construction.

PERE: What importance do you place on strong management as a driver of performance and value?

VG: This aspect is enormously relevant. Outlets require an intensive niche-type of retail management and know-how to drive performance and maximize returns, which is very different from traditional shopping centers, including specialized strategies for leasing, marketing, tourism and efficient property management. As these assets grow more complex in terms of their number of tenants, size and foot traffic, specialized management has become a priority. This is also key on the investment side, and this is why we analyze carefully all these variables before committing capital.

“Consolidated outlet centers tend to provide better returns for investors and have performed well in periods of economic recession”

Vanessa Gelado

The ability to understand shoppers’ needs and preferences is crucial for success. Customers’ expectations have evolved greatly since the outlet concept entered Europe in the 1980s. Tenant mix remains vital for sure, but nowadays customers are also looking for enjoyable experiences to share. This includes the shopping experience and also leisure and services, and has led to an increase in the importance of a quality food and beverage offering.

The implementation of new technologies is paramount to ensuring the efficiency of outlet centers and boosting overall performance results. With investment in technologies such as geolocation systems and contextual marketing tools we can measure how long visitors stay, identify the most visited areas and the frequency of visit to a particular store and send personalized offers to visitors when they enter their favorite store. Unifying this information in an omnichannel platform, retailers, managers and investors know customers better than ever, allowing them to optimize strategies and adapt quickly to market changes.

PERE: How do you see the next decade shaping up in outlet real estate?

VG: The number of new outlets will continue to grow, but in a more moderate way. The European market is close to having the right density, although it is still possible to find opportunities in some strategic locations closer to urban areas or tourist destinations and in countries with a lower density of outlets. Investor appetite for outlet assets is likely to grow as they see a balanced risk and reward potential in this business. Our objective is to double our pipeline space through development and acquisitions in the next few years. The European market is still fragmented with many local operators, so further sector consolidation is expected, with opportunities for acquiring individual assets to integrate into larger operating platforms managed by experienced operators.

There will be continued emphasis on the importance of strong management and the evolution of outlet centers into well-rounded destinations, bearing in mind not only quality retail but also design, atmosphere, services and leisure. The insights of new technologies will provide an excellent opportunity to increase overall returns and take customers’ experience to another level. We will also see intensified sustainability criteria in all phases of the property cycle to reduce operating costs and increase long-term assets’ value.

Beyond new developments, there are good opportunities to be picked up in the value-add segment through investment and intensive management to increase assets’ value and performance, including some refurbishments and extensions of current portfolios. Comprehensive omni-channelling with new technologies at outlets can further optimize results.

There are opportunities outside Europe, too. There’s an increase in the number of outlet projects in China and Russia, for instance, and the Asian market has great potential due to the rapid increase in disposable incomes, increased urbanization and low density of this type of retail asset.



This article was sponsored by Neinver. It appeared in the Investing in Retail supplement to the July 2018 edition of PERE magazine.