OUTLET SHOPPING

IMAGE: K O M A R O F F / SHUTTERSTOCK
OUTLET SHOPPING
Why outlet center operators are increasingly seeking to emancipate themselves
from the "factory" image and why large investors now also like to "shop" there.
In early February, a press release made the rounds
In the industry. "Ares Management Real Estate
Fund Acquires Two Designer Outlet Centers In
France In Partnership with McArthurGlen," was the
title. Specifically, Resolution Property divested Itself
of objects in Troyes and Roubaix worth about €200
million. These outlet centers will continue to be
managed by McArthurGlen, which made a
minority investment In them as part of this transaction. The schemes together comprise a total of
about 47,000 sq m and feature strong retail
tenants, Including Polo Ralph Lauren, Nike, and
Hugo Boss, among many others. The Troyes
location is the largest outlet center In France.
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So far, so good. But who Is the buyer? Ares Management, LP, is a leading, publicly traded, global
alternative asset manager with approximately $92
billion of assets under management and more than
15 offices in the United States, Europe, and Asia.
Since its inception in 1997, the company has
adhered to a disciplined investment philosophy that
focuses on delivering strong risk-adjusted investment returns throughout market cycles. John
Ruane, Partner In the Ares Real Estate Group,
described the deal thus: "Both of these retail outlet centers have dominant locations and have
served as popular shopping destinations in the
northeastern regions of France. We have identified
significant potential to create value through active
management, including Improving the tenant mix
and upgrading the buildings to enhance the shopping experience."
LASTING POPULARITY
Any way you look at it, outlet centers are enjoying
lasting popularity in Europe as a niche product in
the retail property asset class. "Factory outlet centers are attractive investment objects for investors
because of their expected returns, which are significantly higher than those of other types of retail
operations like shopping centers and retail parks,"
explained Georg Fichtinger, Head of Capital Markets at CBRE Austria, who has long been involved
intensively with the European outlet market. The
range of yields on factory outlet centers in Europe
has been between 6.5% and about 1096 in the
recent past. In addition, in places like Germany, restrictive approval requirements have had a positive
effect on maintaining the value of the properties
because getting approval for further outlet centers
near an already established site is difficult, CBRE
points out. The European market for outlet centers,
which now includes different generations of centers, still offers opportunities to invest both in new
project developments and In objects already established In the market. In many cases, entire centers
do not change hands. Instead, only parts of them
are bought and sold In the context of share deals.
Due to their high management Intensity and limited capacity for usage changes compared to other
types of property, outlet centers are a target, In particular, for specialty Investors and indirect investments. Above all, it is fund managers that get
involved In the outlet center segment. Some examples here are the European Outlet Mall Fund
(Henderson Global Investors), with a volume now
of nearly €1.5 billion and an Internal Rate of Return
(IRR) of approximately 13%; the mixed IRUS European Property Fund (Neinver), with a volume of
over €1 billion (with a focus on FOCs and retail
parks); and the Polonla Property Fund I & II, with a
volume of over €600 million invested, Inter alia, in
three outlet centers in Poland. It Is now also clear
that more than just "purely" institutional investors
are active in the market for factory outlet centers.
Joint ventures of operators/developers and Investors are increasingly being established, as the
alliances of Neinver with TIAA Henderson Real
Estate and McArthurGlen with Simon Property
Group show. VIA Outlets can also be seen as a new
player in the market. As a consortium investor
belonging to Hammerson, Meyer Bergman, and
Value Retail, the vehicle focuses on established
centers with a certain appreciation potential. The
real estate consultancy CBRE-and developers,
judging by their activities-believe that the European market for factory outlet centers continues to •
offer attractive investment objects, since a significant proportion of the centers is still in the hands
of national project developers.
Copenhagen Designer Outlet, which
opened in October 2014, was
developed and is owned by Danica
Pension, which is part of the Danske
Bank Group and is the largest
pension fund in Denmark.
Despite the currency crisis and economic turmoil,
development pipelines have been churning out
finished objects in recent years. One Scandinavian
example is Copenhagen Designer Outlet, which
opened in October 2014. The shopping destination
houses around 80 stores on 17,500 sq m. It was
developed and is owned by Danica Pension, which
is part of the Danske Bank Group and is the largest
pension fund in Denmark.
DOWNTOWN OUTLET CENTERS AS A
TREND?
Just recently, one new outlet concept in particular
caused a stir in Germany. August 2014 marked the
opening of a downtown outlet center in Bad
Münstereifel. It was the first time a professionally
organized and designed factory outlet concept was
Implemented In Europe that used existing retai
space in store locations in a historic downtown
area. Although outlet centers had already been built
in locations near city centers, none had ever been
built directly in a downtown area. These center concepts always consisted of a uniformly planned and
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COVER STORY
ONLINE TIP
For more information on the
European outlet center
market and for a list of all
existing and planned outlet
centers in Europe created by
the consulting firm ecostra,
go to
www.across-magazine.com.
spatially contiguous building complex and showed
little variation in terms of their ownership structures. Examples of such outlet malls include those
in Wolfsburg, Roermond (Netherlands), and Roubaix
and Romans sur Isere (both France). An outlet
concept like that in Bad Münstereifel, with retail
units more or less scattered throughout a citycenter business district had never before been
built-at least not by experienced international FOC
developers. That will probably remain so in the
future as well. "That is a fact, despite the attraction
of relatively unproblematic approval situations in
city centers compared with green field FOC projects, which have to go through an often lengthy and
expensive process-a process that also ends with
an uncertain result," says Joachim Will, CEO of the
Wiesbaden research Institute ecostra, which analyzes developments in the European retail markets.
outlet centers. A race to build downtown outlet
centers has thus become visible between different
communities within the same region. One example
Is the competition in Middle Franconia in Bavaria
between the towns of Dinkelsbühl, Feuchtwangen,
and Óttingen. The Hessian municipalities Usingen
and Oberursel are also thinking about such a downtown project, as is the Bavarian town of Zwiesel. An
Austrian delegation from the Tyrolean town of
Reutte has even traveled to the Eifel to inspect Bad
Münstereifel. The ecostra CEO counters the euphoria, however: "Even such a downtown outlet concept requires certain location factors, a promising
catchment area, and needs a certain 'critical mass'
of outlet stores. It is unlikely that more than one
such concept can be economically viable within the
same region."
PROFESSIONALIZATION OF
MANAGEMENT INCREASING
Ares Management Real
Estate recently bought two
outlet centers in Roubaix
(photo) and Troyes, both in
France, for approximately
€200 million.
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Large, internationally experienced FOC operators
so far show almost no interest In downtown outlet
concepts. According to ecostra's CEO, this is mainly due to such concepts' low capital market viability. Mortgage banks, which have been increasingly active in outlet financing In recent years, have so
far been extremely cautious over financing downtown outlet centers. In addition, there is considerable doubt as to whether city outlet centers are
even a tradable property market product at all. "For
real estate funds, In any case, investments in such
retail concepts are out of the question," explained
Will. Thus only local and regional Investors come
into question, which finance such projects primarily with equity and hold the objects over the long
term. German and Austrian municipalities nevertheless seem fascinated by the prospect of urban
On to operators. Although many outlet centers in
Europe are still "under-managed," management
professionalization is rapidly Increasing among outlet centers. As recently as 15 years ago, only three
or four operators In Europe managed more than
three locations simultaneously. The situation today
is very different. The large management companies
have expanded their service portfolios massively
and need not fear comparison with international
shopping center operators in terms of professionalism and efficiency. Jhe potential to take smaller,
owner-operated outlet centers under management
Is undoubtedly still present. Smaller projects, In
particular, are In significant need of upgrades to
their operations and marketing.
Especially in the field of marketing, a new trend also
seems to be emerging. The custom branding of
projects is becoming increasingly important.
Especially among more recent projects, the word
"factory" has disappeared altogether from centers'
names, which is meant to emancipate them from
the "factory" image. Even names with no reference
whatsoever to their character as outlets are now
feasible, as we see with "One Nation" near Paris.
Getting away from the "shoddy industrial image" is
also In the interest of international brands.
The German consulting company ecostra surveyed
international brand manufacturers In the Industry
again last year. The findings were published in the
"Factory Outlet Center Performance Report Europe
2015." The most profitable outlet center from the
tenants' viewpoint is Designer Outlet Center
Roermond in Holland, followed by Bicester Village
near Oxford and Outlet Metzingen In Germany.
Top 10 outlet center operators in Europe in 2015
R a n k i n g based o n t h e p r o p o r t i o n , in p e r c e n t , o f t h e t o t a l o u t l e t center sales space in Europe.
A s of: June 2 0 1 5
Neinver
Realm
Value Retail
Concepts & D i s t r i b u t i o n
SIZE AS A SUCCESS FACTOR
This was the eighth time ecostra had conducted the
survey. From past experience, the consulting
company concludes that size represents a success
factor. Large objects with lots of stores grant
individual tenants significantly better returns than
smaller ones with fewer units. The survey results
also make clear that the sales form does not automatically guarantee great economic success.
A look at the end of the ranking table shows this.
The worst-performing factory outlet center from the
tenants' perspective was Soratte Outlet Shopping
in Sant 'Oreste, Italy, north of Rome.
The competence of the center operator thus takes
on particular importance. According to ecostra,
McArthurGlen is the best operator from tenants'
Freeport
Fashion House Group
Unibail-Rodamco
Advantail
ROS
A t o t a l o f 54 o t h e r
operators
43.3
SOURCE: ECOSTRA
point of view as far as center management, marketing, and leasing are concerned. Surprisingly, Land ^ , 8 * ,
Securities, a niche player in the sector, ended up i n SS SS
•• *
second place. Value Retail placed third.