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Property Special: Looking overseas

With international expansion high on the agenda for fashion retailers, we examine how the property market is shaping up in four of the key overseas markets.

With 40% of international multiple retailers plotting expansion into Germany, according to property firm CBRE, it is clear the country is still top of many agendas, with other territories following closely behind.

Germany, India, China and the US are hotbeds of international development, although with varying success for UK retailers.

However, there are a host of variables with regards to property, as there are vast differences between these countries and it is not a case of one size fits all.

The challenges include identifying which city to launch into first, access to local knowledge about consumer preferences, knowing how much rent to pay and understanding how to deal with landlords. To be competitive, retailers need to go into their chosen markets with a full armoury of knowledge, so they are in a stronger negotiating position.

Many will opt to team up with local partners when branching into a new territory, but others prefer to retain total control and will instead work solely with a property firm to help them secure overseas stores.

Online operations have also allowed companies to try out foreign markets before committing to a bricks-and-mortar launch.

Although they are willing to take some risks, many companies want to minimise them. “Retailers are being selective about where they place their stores, both in terms of the countries they choose to operate in and the retail spaces they take,” says Peter Gold, managing director of cross border retail EMEA at property firm CBRE.

However, he says this has not stopped leading retailers seeking new opportunities and expansion plans continue to be extensive. We take a look at some major target markets around the world.

Germany

Germany is often top of the list for UK retailers plotting international expansion, with plenty of suitable cities in which to try to secure stores. Berlin’s Kurfürstendamm is one of Germany’s main shopping streets, along with Spitalerstrasse in Hamburg and Munich’s Kaufinger Strasse.

“Germany is one of the most sought-after markets in Europe and one of the most sought-after globally today,” says CBRE’s Peter Gold. “It’s a professional marketplace and the shopping centres are well looked after. There are big landlords like ECE and MFI who look after a lot of shopping centres so you can have a collective discussion over a lot of assets.”

However, one property insider says the German property market is arguably one of the hardest brokerage markets and says there is a “fairly unregulated system leading to frequent disputes”. He adds: “Brokerage fees in Germany are often the highest in Europe and demand continues to outstrip supply in the major cities, which has led Germany to be not only one of the most desirable countries to expand in, but also one of the most expensive.”

Diego Baronchelli, property director of outdoor and action sports EMEA at brand house VF Corporation, whose portfolio includes Timberland and Vans, agrees that Germany is expensive, adding that because of such a strong focus on key shopping streets, the demand for property on these streets is high and has pushed rents up considerably. He says that because of pricier rents, VF Corporation looks for smaller units in Germany than it does elsewhere.

“The landlords are also more difficult to deal with,” he adds. “They deal in very long terms. We never like to sign a lease for more than five to 10 years and they want at least 15 years and aren’t willing to negotiate very much.”

Furthermore, unlike the UK, the German market has virtually no transparency, making it difficult to obtain turnover and rental comparisons, which can delay decisions. Yet because of the high demands transactions can happen very quickly, and retailers must act fast or lose out on shops.

China

China

China

All eyes have been on the Chinese market over the past decade, with retailers eager to tap into the potential 1.35 billion consumer base.

“The challenge with China is that the retail landscape is so vast and changes so quickly that knowing where to be and knowing how relevant that location will be in two or three years’ time is not straightforward,” says CBRE’s Gold. “You’ve got the fast pace of progress making it difficult to know where to be in shopping centres.”

Property developers in China have recently turned their attention to commercial sites and shopping centres have been popping up across the country. However, in some cities such as Chengdu and Shenyang, there has been such an oversupply that it has led to soaring vacancy rates of up to 20% in some instances.

As a result, landlords have become more amenable to negotiating deals, with some offering to pay for retailers’ fixtures and fittings and others reportedly agreeing rent-free deals.

Despite this, it has still been tricky for mainstream and fast-fashion brands to secure prime sites. Historically, shopping centre owners have preferred luxury brands, with the likes of Prada and Gucci taking precedence when it comes to key ground floor units, and mid-market retailers such as Zara and H&M competing to get onto the first or second levels.

Gold adds: “Some of the brands that have entered those markets have found the consumer appetite and the retail environment are not necessarily aligned, so you’ve got to pick and choose very carefully between top-tier and second-tier markets.”

However, there are some retailers such as Ted Baker, GAP and Nike that have risen to the challenge and excelled in China.

Ted Baker is plotting further expansion in the country after opening four stores in Shanghai last year, one of the prime cities for retail investment.

India

Following the easing of rules on foreign direct investment in the Indian retail market last year, the country has become even more attractive to retailers from overseas. Its government also relaxed rules on sourcing within India and changed the criteria on the cities in which multi-brand retail chains can open stores, paving the way for businesses to expand more freely.

Since then, a raft of retailers have given the green light to Indian expansion, including H&M, Zara and Forever 21.

In November, Marks & Spencer revealed plans to double its Indian store count to 80 by 2016 with its joint venture retail partner Reliance Retail, which will see India become the chain’s largest international market outside of the UK.

Venu Nair, managing director of Marks & Spencer Reliance India, says the country offers exciting prospects. M&S is focused on building its position in key cities such as Mumbai and Delhi, as well as branching into secondary cities such as Kochi and Vadodara. Despite the opportunities, Nair says the prospects in India mean there is a high demand for quality shopping locations. “Getting access to the right shopping malls and high street locations is very important for us, which is why we work closely with our partner Reliance Retail, which has extensive local experience and expertise of the property market in India,” he adds.

Although the market is less penetrated than other countries, some retailers may discover that finding the right retail environment is challenging. Rents can be high because of the increasing demand and the lack of modern developments means many retailers, such as Hermès and Louis Vuitton, have opened stores in luxury hotels.

Using franchisees or local partnerships to gain insight into culture and customs are the most popular ways of expanding into India.

USA

USA

New York is often viewed as a starting point for retailers expanding into the US, and chains including Topshop, Reiss and All Saints have put down roots there.

“One challenge of Manhattan is it is very expensive compared with European cities,” says CBRE’s Gold. “So it is prohibitive in terms of cost. I think the unit cost per square foot in Manhattan is one of the most expensive globally [at $3,300 (£1,999) per annum].” Nationally, however, rents are increasing, but at a rate of less than 1%.

Although New York has some of the most famous shopping streets in the world, such as Fifth Avenue and Madison Avenue, once you leave the east coast the landscape is dominated by shopping malls until you hit the west coast.

Mall of America in Minnesota state, Florida’s Aventura Mall and Pennsylvania’s King of Prussia Mall in are among the largest - all house more than 300 stores.

Another advantage is that it is not uncommon for the landlord to pay property broker fees, rather than the retailer as is the practice in many other countries.

With such a large country to conquer, Gold says some areas are very local rather than international and consumer tastes are diverse. Yet, he adds: “Real estate is not the headache it could be elsewhere.”

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