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Luxury retail real estate: poised for growth or close to the limit?

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6 Mar 2017

Luxury retail real estate: poised for growth or close to the limit?

The retail real estate sector is increasingly polarised between secondary locations and shopping destinations with a luxury profile. This divergence reflects two factors: the increasing significance of e-commerce and the growth of luxury shopping tourism. Can we expect this trend to continue?

Exclusivity is the defining feature of luxury retail and explains why luxury retail locations in developed countries have outperformed the rest of the market. High prices are one way of achieving exclusivity. However, outstanding attention to detail, scarcity and – most importantly - a personalised experience are also crucial features of strong luxury brands.

All generations of luxury shoppers, from baby boomers to millennials, share the preference for a personalised experience. It explains why real estate locations with a luxury profile have proven particularly resilient to competition from e-commerce. While luxury brands have embraced the internet to improve interaction with the customer, they have also continued to invest heavily in the physical experience. An attractive physical store and excellent face-to-face customer service have remained at the heart of these brands’ marketing strategies.

However, luxury retailers have begun to face competition for prime, centrally-located real estate from mass market retailers. The disrupting forces of e-commerce mean the latter must also invest in a physical presence in the most attractive locations.

A shopfront for the brand

Indeed, e-commerce has enhanced the role of the store as an extension of the brand for retailers in general. It is recognised that a physical presence in an attractive location has to complement online expansion in order to maintain brand awareness. With knock-on effects on sales performance across traditional and online channels, retailers are determined to secure the right assets in the right locations. Favoured sites include those with a high natural flow of people – driven by tourism, cultural attractiveness, proximity of business hubs and/or a culinary offer – in cities with a wide international reach. Such locations have experienced sharply increasing demand from a wide array of retailers, resulting in unprecedented upward pressure on rents.

As the charts below illustrate, rents for high streets with a luxury profile such as New Bond Street, the Champs-Élysées, Madison Avenue and Ginza have risen particularly sharply but significant increases have also been recorded in established central, mass-market high streets. Secondary high streets and shopping centres, especially those in out-of-town locations and provincial cities, have underperformed.

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