Why luxury retail still needs real estate

Luxferity, 23.11.2019

Luxury RetailRecommend

Article by Sergi Villar, Kering’s Real Estate Director

New players, new locations, and new shopping habits have changed the luxury market dramatically in the past five years. But stores remain a “destination” for shoppers and tourists alike. Real estate is alive and well… and adapting. Here’s how, and why. 

Urbanization is Global

In the last 10 years, urbanization has accelerated: 55% of the world now lives in cities and it is expected that 60% will do so by 2025. This has changed the real estate demand in cities from only mixed-use developments to omni-use complexes in which people live, work and play within the same seamlessly connected environment. That mirrors an increasingly hyper-connected and mobile urbanite lifestyle that blurs the line between personal and professional lives. Urbanization is also changing historic city centers, creating a concentrated demand for retail luxury resulting in a proliferation of high-end brand boutiques in unexpected neighborhoods. And there’s a knock-on effect: these in-town points of sale are becoming destinations for the luxury-hungry tourist and travel retail market is growing fast (+13 % since 2017) and was worth $79bn in 2018 (source: Generation Research). “Urbanization has historically been among the most significant influencers of real estate strategies for retailers,” says Sergi Villar, Kering’s Real Estate Director. “And today the pace of urbanization is accelerating.”

Shopping mall transformations

Real estate developers in the US are transforming empty shopping malls from simple retail properties into mixed-used projects with shopping, dining, and entertainment centers for the surrounding communities. Globally, similar mall projects with a large focus on entertainment are popping up in places such as K11 Musea in Hong Kong and Meydan One mall in Dubai, and in the Japanese cities of Tokyo, Yokohama, and Osaka where urban shopping centers next to train stations have become “Fashion Buildings” targeting younger shoppers. “Real estate is playing an important role in the rationalization of retail activities as consumer shopping habits evolve,” explains Sergi Villar.

Bottega Veneta store in Tokyo, Japan © Nacása & Partners Inc.

China is still an opportunity

The main real estate effort in China today is optimizing the existing luxury store network in Tier 1 cities such as Shanghai, Beijing, Shenzhen and Guangzhou and opening new flagships in Tier 2 cities such as Chengdu, Hangzhou and Nanjing. Kering has recently signed a multi-city, multi-mall, multi-brand agreement with one of the main Chinese property developers, Hang Lung. This strategy follows a change occurring in Chinese spending on luxury goods due to a series of moves introduced within the last year by the Chinese government – including lowering import duties and taxes on luxury goods – designed to shift luxury spending more and more to the domestic market. Projections estimate the Chinese will soon spend 50% of Luxury goods domestically, vs 24% in 2017 (source: Bain-Altagamma).

At the same time, real estate investments in places favored by Chinese inbound tourists – such as Southeast Asia, Australia and Canada – can’t be ignored. “China is still a key growth engine for the global Luxury market,” Villar points out, “and real estate has to provide a showcase for luxury brands, wherever the shopper is.”