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Real Estate Monthly Bulletin

Elkstone Real Estate – Monthly Update February 2018

Padraig’s Snapshot

Since our last report, Elkstone and our clients have acquired two properties, the first is a student property in Copley St, Cork, which was acquired with our partners Hatch Student Ventures and adds to our growing portfolio in the sector.  Copley St is a 137 bed development with planning permission for a further 112 beds in an adjoining building.  The property will be operated by Hatch and we see this as a good opportunity to acquire a good investment asset, with upside potential in a market which is significantly under-supplied with student beds.

The second is an existing property on Parnell St, Dublin 1.  The property is located along the recently opened Luas line, close to the Parnell stop and we believe this location has good future potential, with significant regeneration proposed in the general area.

This month, in our article, we focus on developments in the retail sector.

Retail Apocalypse?

A lot of ink has been spilt writing the obituary of retail property and it’s fashionable to look at retail as a property sector under threat.  Disruption by non-traditional providers disproportionately impacted retail property above other sectors in the last five years.  Images of major US names such as Sears, JC Penney and Macys closing their doors, along with the relentless success of Amazon and other online providers, resulted in sensational headlines, predicting the ultimate demise of bricks and mortar in this sector.

As this landscape changes, Elkstone invested in a number of ecommerce and online disruptors like Dollar Shave Club, Tausendkind and Rebuy.

Online retail has been evolving for over twenty years, you would think, giving retailers a long lead time to get their house in order.  The last five years have however been a time of great change, driven mainly by the online channel itself or as part of an omni-channel offering.

Some of the main developments leading to this change include:

Trust:  A lack of trust in online payments was one of the early inhibitors to the growth of online shopping.  This has dissipated over the years with improved payment security, consumers now feel more and more secure shopping online.

Over-retailing:  Certain geographies were severely over-retailed, none more so than the United States. The growth of suburban retail, led to a multitude of tired, enclosed malls in B and C locations, many in working class districts, which themselves were suffering from broader issues in their micro-economy.

Customer Experience:  Cost-cutting, often the result of heavily leveraged acquisitions of retail chains, causing a lack of investment, disenfranchised staff and a poorer customer experience.

Consumer habits: Consumers have become used to convenience and want access to purchasing on their terms.  Traditional retailers have responded with later more flexible opening hours etc, but it is very difficult to counter the convenience of home delivery.

Europe lags behind the United States, but many high street and retail parks here are on borrowed time unless they invest and evolve.  While this has been a difficult phase, there are reasons for optimism for those who make the adjustment.

Reasons for Optimism

Retail is growing: Retail as a whole continues to grow.  While online retail has swallowed a large piece of this growth, opportunities clearly exist for those who can execute a successful omni-channel approach.

 

New faces: As some traditional retailers shut their doors, others are ironically replaced by non-traditional retailers such as Amazon, whose acquisition of Whole Foods, a chain of 431 well located units in major affluent markets signals their intent.

Not the first time: Retail has had to continuously evolve.  In the past the rise of automobiles led to the growth of suburban shopping centres. The predicted demise of the high street was over-stated.  Those, who were able to adapt survived and grew stronger.

Experiential retail: People are different and not everyone is moved by the efficiency of online shopping.  Many see shopping as part of a wider experience and landlords have adapted to this, appealing to the personal traits of those who see retail as an experience.  Shopping centres are rebranded as town centres and food, leisure, health and entertainment offerings are now as important as traditional stores.  The pressure from online providers has pushed traditional retailers to up their game, making their customer experience slicker and requiring less effort.  A face to face interaction with a motivated salesperson, who can demonstrate and explain a product is still very hard to replicate online.

Enabler: The online channel has been an enabler for start-ups, allowing them to gain presence with a low cost base, growing into their physical premises as they expand, creating a demand for both industrial and retail space.

New norms: The accepted norms for retail landlords is changing. Once twenty five year upward only leases to “blue-chip” retailers was the holy grail.  Landlords will need to embrace the change with a more flexible approach to leases and layout, including showrooms rather than traditional stores.  You can expect to see the success of serviced-offices and co-working starting to rub off on the retail sector.  This will create opportunities for those who adapt.

Old norms:  In some ways, location has become a little less relevant, with more transactions occurring in industrial warehouses.  Well located properties, properly presented will continue to thrive however.  As footfall increases in airports, train stations and transport hubs, we can expect to see the continuing growth of retail in these locations.  Traditional retail districts more and more offer both retail and entertainment.  People will leave their couch to go shopping, socialise and be entertained.  As has always been the case, landlords and retailers need to consider how best to lure them to their location above others.

Retail will face challenges and opportunities over the coming years.  Elkstone’s view on the sector considers both the Venture and Real Estate perspective and our investment strategies continue to evolve with both views in mind.

Our feature article this week from Forbes magazine takes the views of a many of America’s leading Retail CEO’s on the prospects for bricks and mortar in the retail sector in 2018. Click here to read more.