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Cash-strapped but still want a Gucci handbag?

From Beijing to Britain’s Bicester Village, fashion-conscious consumers are increasingly turning to outlet villages for their luxury purchases. Typically single-storey, “village” style retail centres selling goods at a 30-70 per cent discount, designer outlets were considered a risky investment as recently as the turn of the century, says Andrew Rich, manager for TIAA Henderson’s European Outlet Mall Fund.

But in fact, the sector has defied expectations and its numbers have grown faster than those of traditional shopping centres in the past decade, as luxury retailers have increasingly embraced the concept to dispose of surplus stock and last-season lines. Brand-hungry consumers also rushed to seize discounted clothes in the recession. “Outlet villages have fared much better during the downturn than many shopping malls did,” says Rich. “They have proved a very strong performer during the recession.”

Vacancy rates – at around 2 per cent – tend to be lower than at traditional shopping malls, while leases also tend to be shorter – at around 10 years – and tied to turnover, providing retailers and investors with greater flexibility. Darren Yates, partner in commercial research at Knight Frank, says the schemes tend to be managed aggressively. “If they don’t meet turnover, they can be moved within the scheme or ditched altogether,” he says. “The operators are constantly reviewing the tenant mix.

“Outlet centres have been relatively recession-proof during the downturn because of the discount angle. This reflects the fact that it’s still a relatively new retail format, having first emerged during the mid-1990s – so growth is starting from a low base.”

Although short leases traditionally deterred investors, as they are potentially more volatile, in reality rents keep increasing, says Rich. The widespread use of performance break clauses also means that underperforming tenants could be removed quickly.

And with turnover at out-of-town discount shopping villages increasing on average by between 110 per cent and 180 per cent during the recession, investment funds have performed well, he adds. “The flexible leasing structure means that outlet operators can respond very quickly to structural changes in the global retail market as well as local requirements,” says Rich. “This is the key to optimising performance, tenant mix and the shopper experience.”

John Lutzius, managing director at Green Street Advisors, a property consultancy, agrees that out-of-town shopping villages have delivered good returns compared with much of the rest of the retail sector over the past few years. Furthermore, the gap between good quality outlet villages and shopping centres has narrowed, he says. “Ten years ago, yields for investors were very high because everyone was nervous about the format,” he says. “But premium outlets have been such strong performers that yields have come down.”

The popularity of outlet centres has been driven by retailers, which are increasingly promoting them as shopping destinations. Although some luxury French brands such as Louis Vuitton and Hermès have tended to shun outlet villages, they are increasingly on their own. High-end retailers including Gucci, Armani, Prada, Dolce & Gabbana and Burberry have all embraced the market, while there has also been an influx of north American players opening outlet stores across Europe and Asia, including Michael Kors, Abercrombie & Fitch, True Religion, Coach and Fossil.

More established outlet traders such as Tommy Hilfiger, Nike and Hugo Boss have also been keen to upscale and create larger, destination stores in the villages. Other retailers actively seeking to expand their outlet portfolio include Furla, Desigual and North Face.

The US – where the first modern multi-store outlet centre in the world opened in 1974 – is the most saturated market, with outlet space per capita the highest in the world. But Britain and Italy are also well supplied compared with Germany and France, where restrictive planning laws have curtailed further openings. In central and eastern Europe the market is just taking off, with several schemes in the process of construction.

In some cases, out-of-town retail centres are numbered among the world’s best-performing shopping destinations according to the value of sales. And they are also cited among the world’s most popular tourist haunts.

Value Retail, for example, which owns the Bicester Village outlet in Oxfordshire, says three out of four Chinese tourists to the UK visit its retail park, making it one of the top tourism destinations for Chinese visitors to the UK.

Bag a bargain: big brands such as Gucci are typically offered at half the regular price

The market with the most potential may well be Asia, boosted by the rapid increase in disposable incomes, increased urbanisation, and a rise in the number of millionaires – whose average age is 20 years younger than those in the US and Europe. The Chinese, in particular, are also more likely to be more exuberant and celebrate success with material goods, says Rich.

And although for the most part successful outlet schemes tend to look the same anywhere in the world, China has spawned a series of more interesting designs. In China, designer outlet stores include the Florentia Village Designer Outlet Centre, which opened in 2011 in Wuqing, between Beijing and Tianjin. It is modelled on Venice, complete with canals and gondolas and traditional Italian buildings in pastel shades; it has attracted brands that include Gucci, Prada Valentino, Bulgari, Bottega Veneta, Fendi, Loewe, Mulberry and Jimmy Choo. Silk Road Holdings, which owns the village, is currently working on two new designer outlet shopping centres in Guangzhou and Shanghai which, respectively, will offer 45,000 sq m and 56,000 sq m of shopping. And in May this year, Value Retail opened its own outlet centre in China, a vast development in Suzhou also modelled on an Italian village. It will eventually represent around 100 luxury brands.

Rich cites the strong culture of gift giving in China, often in the form of clothing and accessories, as one reason behind the healthy market in Asia. Chinese consumers also like the heritage behind British brands: Burberry, for example, reported like-for-like sales growth in China of 30 per cent in 2013. Nevertheless, there are obstacles, including much outlet centre space that is not of high enough quality for luxury retailers keen to protect their image and status.

While traditional shopping centres are suffering from the rise of online shopping, analysts believe that out-of-town discount villages may be insulated from the change. “They are designed for people who enjoy the shopping experience,” adds Rich. “The ambience is very important.”

In addition, fashion and footwear, which comprise most of the offering at an outlet, represent a smaller proportion of online sales “simply because people want to touch and feel these items”, Rich says. “We believe that outlet malls are the most likely part of the retail market to withstand the shift to online shopping.”

The growing popularity of outlet centres has attracted new entrants including ING, Blackstone and UBS, even though their impact remains niche, accounting for just 2.7 per cent of the total shopping centre market. But while the sector remains small compared with others within retail, Rich firmly believes that this is an expanding market.

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Why investors need to shop around

Every shopper craves a bargain, but strong financial returns coupled with limited opportunities mean that investors looking for exposure to the outlet retail market may have to pay mark-up prices, writes Adam Palin.

The sector has demonstrated not just exciting income growth, but resilience through the crisis. The €1.5bn TIAA Henderson European Outlet Mall fund – which invests in McArthur Glen designer malls – has achieved average annual returns of 12.5 per cent, after all fund costs, since 2004. By contrast, European retail funds overall have delivered negative annual growth of 0.1 per cent over the past decade, according to data from Inrev, a body for investors in non-listed real estate vehicles. However, opportunities are limited as most assets belong to private companies or portfolios, says Mat Oakley, director of commercial research at Savills. “Bizarrely, the easiest option [for institutions] is probably to participate in building one,” he says. Indeed, the likes of Aviva and Hermes are among outlet developers in the UK.

John Lutzius, managing director at Green Street Advisors, says US investors could consider a real estate investment trust, Tanger Factory Outlets. The owner of more than 40 outlet malls has recorded annual total returns averaging 15.7 per cent over the past decade, compared with a US Reit index average of 8.8 per cent.

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