Jan. 9 (Bloomberg) -- There isn’t enough Bond Street to go around, so retailers are going up.
Luxury-brand owners such as Chanel SA and Christian Dior SA are expanding their shops by taking over upper floors previously used as offices along the U.K.’s priciest retail strip. Others including Victoria’s Secret U.K. Ltd. are going farther out -- jostling for space along the less swanky parts of the central London street, where demand far exceeds supply.
Bond Street shrugged off the U.K.’s double-dip recession as high-end jewelers, boutiques and department stores in central London’s West End shopping district attracted wealthy shoppers from abroad. Converting upper offices to shops is the cheapest way to expand on the road, where rents are a 10th of what the street level commands, according to Jones Lang LaSalle Inc.
“Almost without exception, the first floors in the best space in Bond Street are now getting converted into retail,” said Martin Thomas, head of central London retail at the brokerage firm. “Those that haven’t been converted, you can bet your bottom dollar that they will be fairly soon.”
Property owners on the street are benefiting as retailers spend their own cash converting offices into shop space, which sells at a higher price in the area. The change can increase the value of a first-floor property by as much as 40 percent, according to Neil Thompson, portfolio director at Great Portland Estates Plc. The company has won approval to develop five stores on the street, according to a planning document.
Retailers on the best part of the street also tend to pay higher rents than office tenants for upper floors, meaning property owners get increased revenue and a better yield when the building is sold, said Dominic Rowe, a broker at Michael Elliott LLP. He estimates the company has bought and sold about 500 million pounds ($803 million) of property for investors in the area over the past two years.
Bond Street rents reached a U.K. record this year when Salvatore Ferragamo Italia SpA, the Italian clothing maker, agreed to pay 1,000 pounds a square foot for a zone A store, Savills, the property’s broker, said in February. That was beaten by the 1,050 pounds a square foot paid by Swiss luxury jeweler Boghossian SA, Knight Frank LLP said in November.
Zone A rent refers to the price a tenant pays for the most valuable part of the store, rather than the property as a whole, and is used to compare buildings.
The world’s most expensive retail location is currently Causeway Bay in Hong Kong, where rents rose 34.9 percent in the year through June 2012 to $2,630 a square foot, Cushman & Wakefield said in a November report. That put the area ahead of New York’s Fifth Avenue at $2,500 a square foot. The broker ranked New Bond Street, the northern half of the strip extending to Oxford Street, sixth at $936 a square foot. It didn’t rank Bond Street as a whole.
Demand for space is extending the Bond Street’s prime area as brands like Belstaff, the British motorcycle jacket maker owned by Labelux Group GmbH, choose to open on less popular parts of the road, according to broker Savills Plc. That’s pushing up rents and boosting building values in those areas and attracting buyers like Amancio Ortega, Europe’s richest man and founder of Inditex SA, the Zara clothing-chain owner.
Rent increases and limited availability along luxury shopping streets in the U.S. is also forcing retailers there to consider secondary streets, Cushman & Wakefield said. “Given the strong growth in high street rents recorded over the past 12 months in cities such as New York, Chicago and San Francisco, this upward trend is likely to ease somewhat,” the New York-based broker said.
Bond Street’s stores have annual sales of more than 1 billion pounds, according to New West End Co., which represents 600 retailers in that area of London. The street, located in the Mayfair neighborhood, has the “highest proportion of ‘haute couture’ stores per square mile in the world and helps to underpin London as one of the major centers of the fashion industry,” Chanel said in documents filed in 2011 supporting a plan to expand its store there.
Sales of luxury goods in the U.K. will grow 8 percent this year, New West End estimates showed. That’s more than double the 3.2 percent sales growth forecast for the broader clothing and footwear sales category in 2013, accountant BDO LLP estimated. The difference stems partially from spending by tourists, BDO analyst Callum Butterfield said in an e-mail.
Yields on Bond Street are the lowest in the U.K., meaning investors are paying high prices with the expectation of a significant increase in income or the willingness to settle for smaller returns than they would get from any other type of property in any location.
Prime U.K. high street retail properties sell at yields of about 4.75 percent, Savills said in December. That compares with 3 percent or slightly less on Bond Street, Thompson said. The yield is the annual rent expressed as a percentage of the purchase price.
Rent increases are spurring retailers to look at other options to gain a foothold on the street or expand. Six applications were made to turn offices on Bond Street into retail use last year, compared with seven in 2011 and none in 2007, according to plans filed with Westminster borough. The figures exclude buildings used as art galleries.
Ermenegildo Zegna won permission in December to demolish its store and add about 60 percent more shopping space. Milan-based Zegna plans a “VIP fitting suite” on the third floor, according to planning documents filed with Westminster Council. LVMH Moet Hennessy Louis Vuitton SA’s Louis Vuitton offers its most valued customers access to an upstairs apartment where they can lounge and order drinks while personal stylists present the brand’s wares.
Paris-based Christian Dior and Longchamp SAS are also expanding their shops. Dior and Zegna declined to comment by e-mail and Longchamp, Belstaff and Chanel didn’t respond to e-mails. The owner of the Chanel building at 158-159 New Bond Street is Swedish insurer Gamla Livforsakringsaktiebolaget S.E.B. Trygg Liv, according to a filing to the Land Registry.
Others are looking toward the northern end of the street where rents are lower. Belstaff agreed to pay zone A rent of 840 pounds a square foot in January 2012 for a 25,000-square-foot store on the street.
The deal “demonstrates the continued expansion northwards of the prime pitch on Bond Street,” Anthony Selwyn, a director at London-based Savills, said in a statement. He cited leases to Miu Miu, Hublot SA, Coach Inc. and Fendi SpA in the same area. Thomas of Jones Lang said rents on that part of the street have doubled in about five years,
Victoria’s Secret’s store on the street opened in August and has “been packed ever since,” Martin Waters, president of international business at the retailer’s owner Limited Brands Inc., told shareholders in October.
It’s a different story for the rest of the U.K. retail market. Sales at stores open at least a year gained an “underwhelming” 0.3 percent in December from a year earlier, according to the British Retail Consortium. This year will see “more of the same” the group predicted.
The cheapest rents on Bond Street are for stores between Oxford Street, the U.K.’s busiest shopping strip, and Brook Street. Zone A rents there are about 300 pounds a square foot compared with 800 pounds around the corner on Oxford Street, Rowe said in an interview. It’s on the cheaper stretch where Great Portland plans to develop the five stores that are part of its Hanover Square project.
“That part of the street has suffered because the quality of the units hasn’t been there for the retailers to take,” Thompson said by telephone. “Our plan is very much to deliver the quality of space that they need.”
Many shoppers travel to the most luxurious part of Bond Street via South Molton Street, reducing the foot traffic on the northern part, Thompson said.
Crossrail, a subway linking Heathrow to central London, may help that part of the street when it opens an entrance there in 2018. The new rail line will increase the number of passengers visiting that part of the street by as much as 65,000 a day, according to Crossrail. As a result, zone A rents there may rise to as much as 550 pounds a square foot, Thompson said.
“There’s a list of 25-plus retailers trying to get representation on Bond Street at the moment and our plans are to make sure that we provide that space that they demand and hopefully reap the benefits of increased rents over the next few years,” he said.
Tribeca Holdings Ltd., led by Irish investor Aidan Brooks, has been betting that the street’s prime area will expand. It owns the stores rented by Cartier and Rolex on the most expensive part of the strip and in 2011 added a store leased by LVMH affiliate Hublot to the north.
Tribeca last year bought 107 New Bond Street across from the Crossrail entrance for 13.8 million pounds, a yield of 2.65 percent, according to Knight Frank.
Brooks “just saw better value for money” on that part of the street, said Thomas, who advises Tribeca. The company declined to comment on its acquisitions.
Ortega, Europe’s richest man according to the Bloomberg Billionaires Index, paid 155 million pounds for a building leased to Zara at the junction of Bond Street and Oxford Street, bringing his total assets in the area to about 500 million pounds, Savills said in June.
Demand for space on Bond Street and Sloane Street, in the Knightsbridge district, outstrips supply by almost 10 to one, broker Cushman & Wakefield said in November. Values on Bond Street have been boosted by retailers buying stores they were leasing or purchasing spaces owned by competitors, Rowe said. That can ensure they stay on the street and lets them expand when rivals’ leases expire, he said.
LVMH Moet Hennessy Louis Vuitton SA last year bought the Louis Vuitton flagship store as well as the shops leased to Coach and stationer Frank Smythson Ltd. The properties were bought by its Luxembourg-based affiliates Naxara SA, Glacea SA and Pronos SA for about 292 million pounds, according to filings to the U.K.’s Land Registry.
“These major groups -- be it Hermes, Chanel, LVMH or whoever -- they have so much money on their balance sheets. Rather than having 200 million pounds burning a hole in their pocket, they’re preferring to invest it into real estate in the right location,” Thomas said. “Bond Street didn’t really ever have a recession.”
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