January 3, 2019
Commercial premises are the most resilient assets against economic volatility. This is a major advantage when the office market becomes highly speculative. Provided they remain attentive to shifts in the retail sector, management companies can capitalize on the best opportunities, resulting in steady, long-term returns.
Retail: An asset class for specialists
The growth of e-commerce, changing shopping habits, and new consumer budget priorities—the profound transformation sweeping through the retail sector is unsettling many professional investors, who are currently taking a wait-and-see approach to retail real estate. Yet, physical stores still account for the majority of retail distribution and represent the asset class offering the best prospects for attractive, sustainable long-term yields. This, of course, requires the expertise and sourcing necessary to select the best-positioned assets in the retail sector.
Long-term tenant loyalty
The yield on retail premises is currently higher than that of offices, and also far more consistent over the long term. The primary reason is that retail is almost immune 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 location of their profit center. Conversely, offices—which are viewed more as cost centers—are often treated as variables to be adjusted; companies are quick to move to smaller spaces during a recession or relocate to larger premises to support their growth. The recurring income from retail premises is therefore due to lower tenant turnover, with many brands remaining in the same location for years. In a market where few investors are active in retail real estate, certain brands like Intersport, GIFI, or But are taking advantage of this to buy their own premises at a good price and secure their locations.
Limited non-recoverable costs for preserved yields
This resilience is also due to lower vacancy rates, as the best locations are re-let without delay. "Our occupancy rate for retail properties is close to 99%, compared to an average of around 85% for most real estate investment trusts (SCPIs) invested in offices," notes Jean-Baptiste Pracca, President of Mata Capital. Another beneficial effect on yield is that the traditional several-month rent-free period negotiated by tenants when signing office leases does not occur in retail. Finally, changing tenants does not involve any of the additional costs borne by office landlords, as refurbishment and/or compliance costs are always covered by the new retail tenant to fit out their concept.
Knowing how to select the right opportunities
However, recurring income is only guaranteed through rigorous selection of retail investment opportunities with business models that will stand the test of time. Location, a primary criterion, must offer the brand good visibility in a high-traffic area for consumers. "Accessibility, particularly the ability to park a vehicle easily in the immediate vicinity of the store, is essential in suburban areas," insists Laurent Delautre, Investment Director at Mata Capital. "It is the sine qua non for a brand to be in sync with the structural shift in shopping behavior, as customers move away from the massive hypermarkets where they used to concentrate their purchases and now prefer to shop at a variety of specialized retailers. We no longer believe in the long-term economic viability of hypermarkets associated with shopping malls. Today, customers prefer more human-scale brands that prioritize speed and convenience for their shopping."
Positioning an investment strategy on mid-sized premises (<10,000 m²) also allows for negotiating advantageous rates, as this niche—too small for institutional funds—is much less competitive than large-scale operations (>€20m). The success of these real estate funds in raising capital has given them a financial scale that has become cumbersome given the scarcity of good investment opportunities in the market. This forces them to prioritize large-format infrastructure, even if it means driving prices up despite concerns about their economic future.
Verify the long-term viability of the merchant's business model
The rent level is another criterion carefully studied before acquiring retail premises, as it must not threaten the merchant's economic sustainability. "The rent must be consistent with the merchant's turnover and the nature of their business," explains Laurent Delautre. "The acceptable effort rate can indeed vary significantly depending on the retail sector, in line with the profit margin levels typically generated in each of those sectors."
The nature of the business activity remains, of course, an equally decisive criterion. Local food shops located on busy streets, for example, remain a safe bet. Conversely, clothing retailers, which face strong competition from e-commerce, do not offer the long-term stability prospects we look for.
Finally, regardless of the retail sector, each case is reviewed by taking into account the consistency of its distribution model.