London’s West End Rents Surge as Retailers Seek European Growth
International retailers such as Kate Spade and Forever 21 Inc. are competing for prime space in London’s West End, pushing rents to new highs as landlords elsewhere in the U.K. struggle with mounting vacancies.
Rents on Oxford Street, Bond Street and Regent Street, central London’s premier retail locations, rose as much as 20 percent last year, Colliers International estimates. That compares with gains of up to 17 percent on Avenue des Champs- Elysees in Paris, Hong Kong’s Russell Street and Fifth Avenue in New York, the other three members of the world’s “retail super league,” the broker said.
London has the highest proportion of international retailers of any city in the world because it serves as a base for expanding in Europe, CB Richard Ellis Group Inc. (CBG) said. Companies are jostling for outlets to prepare for an eventual recovery of the continent’s economies and the influx next year of hundreds of thousands of visitors for the Summer Olympic Games, brokers said.
“I have a number of clients saying they have to have a shop open in time for the Olympics, so it’s focusing people’s minds,” said Peter Mace, a partner in charge of London retail leasing at broker Cushman & Wakefield Inc. “Any deal done now on a new lease is at a record, for prime and secondary locations. I have never known such limited supply.”
Retailers establishing or strengthening their London presence in the past 12 months include Apple Inc. (AAPL), Prada SpA’s Miu Miu, Barcelona-based Desigual, Limited Brands Inc.’s Victoria’s Secret, Forever 21, Liz Claiborne Inc. (LIZ)’s Kate Spade, VF Corp. (VFC)’s 7 For All Mankind, Polo Ralph Lauren Corp. (RL)’s Rugby, Missoni SpA and German outdoor-clothing maker Jack Wolfskin.
Zone A Rents
Retail sales in London topped all global cities last year at 64.2 billion pounds ($104 billion) as the weak pound supported tourism, Newark, England-based Centre for Retail Research estimates. Sales on the West End’s three main shopping strips rose 7.3 percent in 2010 compared with the U.K. average of 0.8 percent, data compiled by destination visitor monitor Springboard show.
Zone A rents on Bond Street, the U.K.’s most expensive shopping street, will eventually exceed 1,000 pounds a square foot, said Cushman & Wakefield’s Mace. Zoning retail space is an industry measure derived from actual rents and used to compare leasing costs for different stores. Zone A rent is the cost calculated for the most valuable storefront space.
The highest zone A rent on the street is the 965 pounds that jeweler Piaget, a unit of Compagnie Financiere Richemont SA, agreed to pay in December 2009 for 169 Old Bond Street.
Shoe retailer Aldo Group Inc. agreed in February to pay 725 pounds a square foot to open its third Oxford Street store, a new zone A peak for London’s second-most expensive shopping strip.
It was a “tough but necessary pill to swallow,” said Marie-Andree Boutin, vice president of real estate and store planning for the Montreal-based chain, which has 1,500 outlets in 56 countries. Competition for 309 Oxford Street meant Aldo faced losing “the momentum we’ve established in that very location over the past eight years,” Boutin said by e-mail.
Rather than immediately opening in cities across the country, luxury and international retailers usually expand in Britain with one or more stores in London and outlets in a few dominant regional malls, backed up by their websites, according to Mark Burlton, the London-based head of Cushman’s cross-border retail advisory arm for Europe and Asia.
Highest Vacancy Rates
Cities like “Leeds, Nottingham and Manchester will have to wait a long time before they get implantations of these new brands because there’s such a gap with London,” he said.
Towns in the Midlands and northern England account for all 10 highest shop-vacancy rates among the U.K.’s largest urban centers, according to Local Data Company Ltd. in London. Rotherham, near Sheffield, has a vacancy rate of more than 28 percent, a result of its proximity to Meadowhall, Britain’s third-largest mall.
“The strong centers will get stronger and the rest will feel real pain,” said Neil Saunders, head of consulting at Verdict Research Ltd., a London-based data firm specializing in retail. “This is the hangover of the decade-long credit boom that kept consumers spending and resulted in some ill-advised store openings by retailers.”
Prime rents in more than 400 town centers across the U.K. are mostly little changed since June 2010 after a decline of about 13 percent in the preceding 24 months, said Paul Moody, a director of retail at Colliers International in London.
That underscores the pressures retailers face across the country as energy and commodity costs climb and shoppers spend less because of rising prices, taxes and unemployment. Among retailers reporting lower sales in the past months are Marks & Spencer Group Plc, Dixons Retail Plc and John Lewis Partnership Plc’s department stores.
As some retailers shut or retrench, newcomers seek to fill the void.
Paris fashion chain Sandro paid more than 700,000 pounds for the lease to 6 Marylebone High Street, off Oxford Street, to the administrator of Descamps SAS, a high-end household- furnishings chain that filed for insolvency. HMV Group Plc (HMV), the book and music retailer that’s closing 60 stores across the U.K. this year, sold its leasehold interest in 360 Oxford Street to Los Angeles-based fashion company Forever 21 in November for about 14 million pounds.
Regent Street Revamp
The rising sums paid for lease surrenders and record rents on new leases reflect efforts by landowners and property companies to attract new and higher-paying tenants, said Anthony Selwyn, director for retail at broker Savills Plc (SVS) in London.
The largest program is the 750 million-pound revamp of Regent Street by Crown Estate, which runs the commercial property originating from the British monarchy’s estates.
Apple opened its first European store there in November 2004, helping Crown Estate attract tenants including Michael Kors, Gap Inc.’s Banana Republic and 7 for All Mankind.
To keep Burberry Group Plc (BRBY) on Regent Street, Crown Estate bought furniture chain Habitat U.K. Ltd.’s lease in January. Burberry also bought LK Bennett’s lease to an adjacent unit last month for an undisclosed amount to create a larger outlet.
“It’s a very exciting time for London,” said Beverley Churchill, a director at Capital & Counties Properties Plc (CAPC) in London who last year helped 36 new and higher-paying tenants to open in Covent Garden, including Apple.
The firm’s appraisers estimated that if new leases were signed for all its real estate at Covent Garden, the deals would generate an additional 12 percent in rental income, Capital & Counties said March 2. The value of the properties appreciated 14 percent to 640 million pounds last year.
The demand has allowed large landowners to improve a district.
Grosvenor Group Ltd., which is owned by the Duke of Westminster’s family trusts, has transformed Mount Street in Mayfair into a center for designer boutiques like Christian Louboutin, Marc Jacobs and Vivienne Westwood.
Zone A rents are around 350 pounds a square foot compared with 95 pounds in 2006, while the cost to buy the lease of a prime unit there exceeds 1 million pounds.
“We are absolutely shocked at the key money changing hands,” said Helen Franks, Grosvenor’s head of commercial and retail leasing in London. Key money is the sum paid to acquire a lease and persuade the existing tenant to move out.
Next Big Thing
Property developers and investors including Almacantar SA, Derwent London Plc (DLN) and Great Portland Estate Plc have targeted the eastern section of Oxford Street as the next big redevelopment area.
The scruffy stretch from Oxford Circus to Tottenham Court Road has a station under construction for Crossrail, the planned train link between Heathrow airport and east London.
Discount fashion retailer Primark Stores Ltd. agreed to open an outlet near the new station being built at Tottenham Court Road in a property being redeveloped by Land Securities Group Plc and Frogmore Real Estate Partners LP.
“Since Primark went in, that part of Oxford Street is on fire,” said David Kenningham, executive director of London retail at CB Richard Ellis.
Not everyone is convinced that West End rents can continue to scale new heights, given the new projects in the pipeline and September’s opening of Europe’s largest urban mall, Westfield Stratford City in east London.
“The benefits of London’s outperformance will be spread more thinly and shoppers’ spend will become more diluted as a result,” said Saunders at research firm Verdict.
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