January 3, 2019
Commercial properties are the asset class most resilient to economic fluctuations. This is a major advantage when the office market becomes highly speculative. Provided a management company pays close attention to the changes in the retail sector, it can capitalize on the best opportunities, leading to consistent long-term returns.
Retail: An Asset Class for Specialists
The growth of e-commerce, evolving purchasing habits, new consumer budgetary priorities... the profound transformation currently underway in the retail sector is unsettling many professional investors, who are currently adopting a wait-and-see approach regarding retail properties. Nevertheless, physical stores still account for the majority of distribution and represent the asset class offering the best prospects for attractive and sustainable long-term returns. This, of course, requires the essential expertise and sourcing to select the best-positioned assets in the commercial sector.
Loyal Long-Term Tenants
Indeed, the yield on retail properties is currently higher than that of offices, and also much more consistent over the long term. This is primarily due to the retail sector's near insensitivity to economic fluctuations. A well-located retailer, benefiting from a resilient business and paying rent consistent with their turnover, has no reason to change the address of their profit center. Conversely, offices, which are more akin to cost centers, act as adjustment variables; companies are quick to relocate to smaller spaces during a recession or move to larger premises to support their growth. The recurring income from retail properties is therefore due to lower tenant turnover, with many brands remaining in the same premises for many years. In a market context where investors in retail properties are scarce, certain brands such as Intersport, GIFI, or But are taking advantage of this to buy their premises at a good price and thus secure their location.
Limited Non-Recoverable Costs for Preserved Returns
This resilience also stems from lower vacancy rates, with prime locations being re-leased without delay. "Our occupancy rate in our retail properties approaches 99%, compared to an average rate of around 85% for most office-focused SCPIs on the market," comments Jean-Baptiste Pracca, President of Mata Capital. Another beneficial effect on returns: the traditional rent-free period of several months negotiated by tenants when signing an office lease does not occur in retail. Finally, a change of tenant does not incur any of the additional costs borne by office landlords, as refurbishment and/or compliance costs are always covered by the new retail tenant to set up their concept.
How to Select the Right Opportunities
However, recurring income is only guaranteed through a rigorous selection of retail investment opportunities whose economic model will endure over time. Location, a crucial criterion, must offer good visibility for the brand in a high-traffic consumer area. "Accessibility, particularly the ability to easily park one's vehicle in the immediate vicinity of the store, is essential in peripheral urban areas," emphasizes Laurent Delautre, Investment Director at Mata Capital. "This is the sine qua non condition for the brand to be in line with a structural evolution in purchasing behavior, as customers are abandoning the colossal hypermarkets where they used to concentrate their purchases and now prefer to diversify their sourcing locations with specialized brands. We no longer believe in the economic sustainability of hypermarkets associated with a shopping mall. Today, customers prefer more human-sized brands, prioritizing speed and proximity for their purchases."
Furthermore, positioning an investment strategy on mid-sized properties (<10,000 m2) allows for advantageous pricing, because this niche, too small for institutional funds, is much less competitive than large-scale transactions (>€20M). The successful fundraising of these real estate funds gives them a financial capacity that has become cumbersome given the scarcity of good investment opportunities in the market. This forces them to prioritize large-format infrastructures, even if it means driving up prices despite concerns about their economic future.
Check the sustainability of the retailer's business model
The rent level is another criterion carefully examined before acquiring commercial premises, as it must not threaten the retailer's economic viability. "The rent must be consistent with the retailer's turnover and the nature of their business," explains Laurent Delautre. "The acceptable occupancy cost ratio can indeed vary by a factor of two depending on the retail sectors, in line with the profit margin typically generated in each of these sectors."
The nature of the commercial activity obviously remains an equally decisive criterion. For example, local food businesses located on busy streets remain a safe bet. Conversely, textile brands, heavily challenged by e-commerce, do not offer the desired long-term stability prospects.
Finally, regardless of the retail sector, each case is examined taking into account the consistency of its distribution model.