Yield spread between outlets and shopping centres narrows - CBRE

Intensifying investor interest in the retail property sector is leading to a rapid narrowing of the yield gap between top-end designer outlets and ‘full price’ shopping centres, according to CBRE.

Over the last 24 months, yield spreads between outlets and ‘full price’ shopping centres have narrowed significantly, from around 2% to less than 1% today, as investors interest moves strongly into what has in the past been a niche sub-sector.

'Historically in Europe, outlets have been viewed as riskier than shopping centres, due to the turnover rent structure of the leases. Despite the attractive yield premium that this has offered, investor interest has been mostly limited to sector specialists,' commented Daniel Hayden, director, International Valuation, CBRE.

European outlets differ from much of the continent’s regular shopping centre stock in that they operate almost exclusively on the turnover rent model. However much of the outlets' success can in fact be put down to this attribute, which helps them mitigate the risk of trading downturns while also sharing in the success, added Hayden.

'We have seen a strong shift in recent quarters though, as general retail property investors realise the ability of outlets to perform almost counter cyclically; they tend to do well alongside the rest of the market during good times but offer defensive qualities when economies are not so buoyant. Outlets are also more resilient to e-commerce than a conventional shopping centre due to their more focussed shopper appeal.

There is also a demand-supply imbalance, where for much of Europe planning restrictions limit the construction of new centres. CBRE noted that there are only roughly 170 operating outlets in Europe at present. 'Between the narrow development pipeline and the very limited trading of stabilised centres, when they do come to the market competition has become fierce,' noted Hayden.

'So much so that, if one of the Europe’s super-prime outlets were offered for sale today, we could conceivably see the outlet to shopping centre yield spread narrow to almost zero.'