The Value in Retail

The retail sector has become a much less crowded space for investors due to uncertainties around changing retail patterns and the impact of online retailing.

This lack of competition is not necessarily a bad thing – in a lot of sectors, groups are struggling to find ways to deploy capital. I believe investors shouldn’t give up on retail, and landlords and investors who are willing to look at the sector and able to invest in repositioning assets, will be able to find and create value.

The retail landscape has been evolving over the years and online shopping is now second nature to most people I know. With the increasing speed and efficiency of delivery, and secure payment gateways such as PayPal, the online retail trend will only continue. The level of interest we’re seeing for logistics assets speaks to the growth in online retailing, and for the same reason, I expect Data Centres to feature even more going forward.

Despite the upward trend of online retail, I believe physical retail assets will continue to play a fundamental part of everyday life. This is especially true if you are living and working in major cities around Asia, which are home to some of the most interesting retail submarkets and properties.

Whilst online retailing has brought luxury brands to anyone with access to a smartphone, the customer journey and experience element of these brands are still huge factors when it comes to making a sale. The value of a physical store cannot be discounted and good retail will always continue to attract customers. I continue to see this in prime retail locations, testament to the consumers’ pursuit of experiences.

While prime locations are key, we’re also seeing more emphasis on placemaking, which is relevant in most sectors but critical in the current retail environment. Placemaking is broadly defined as the activation of an asset or destination through experiential offerings, forging a sense of community. In retail, this simply means giving people a reason to visit and return.

Placemaking can imprint value into an asset’s DNA, for example, by adding more F&B and entertainment-focused tenants. Investors who are able to dissect the market, identity their target audience, and enhance their assets to suit, will see increased traffic and sales revenue as a result. The same is true for both prime and typical non-discretionary centres, but for centres outside of prime areas, more work typically needs to be done to understand the drivers of the catchment.

A recent example of how placemaking can upgrade an asset and deliver value, is the repositioning of Parkside Plaza, located in Shanghai’s Putuo District by Joy City. Upon acquisition, Joy City reengineered the composition of the mall to better target female shoppers. To position the mall as a ‘family friendly’ destination, a rooftop sports park featuring a jogging track was also added. As the first rooftop sports park in Shanghai, this was a key differentiating point from the other malls. After re-opening, the mall’s foot traffic increased by 80% and sales revenue rose by 34%.

While our clients all want to understand and be ahead of the newest trends and underlying structural drivers, one of the biggest challenges we see right now across the region is a limited availability of good quality assets and difficulties in creating scalable investments. I’ve seen acquisitions teams on the ground liking specific deals but passing them up because they believe any retail assets will get knocked back at IC level, particularly if IC members are sitting outside APAC. I think every deal needs to be considered on their own individual merit, and dismissing this sector entirely means you potentially miss out on some interesting opportunities. Some of our clients are now taking advantage of the lower competition to build exposure in this space. Well-positioned retail properties that are either prime high street or non-discretionary will continue to be attractive assets to own.

Going forward, I expect we’ll see the retail sector continue to evolve; I also expect more investors will come back to the sector in a continued search for value. Selecting the right assets and positioning them based on the catchments will be critical, but I think retail is a long way from done as a sector.

By Tom Moffat, Executive Managing Director, Head of Capital Markets Asia, CBRE.