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Tipping the balance

The influx of overseas retailers is pricing domestic operators out of prime locations.

With its bold, terracotta exterior and 4,500 sq ft of retail space in one of London’s most sought-after areas, Chinese retailer Bosideng’s arrival on the corner of Oxford Street and South Molton Street is the latest in a raft of overseas retailers clamouring to secure prime property in the UK.

It’s a coup for a relative unknown in the UK market, but comes with a high price. The project cost the menswear retailer in the region of £35m, including buying the freehold. However, Jason Denmark, director of retail operations for Bosideng UK, calls the prime position “a unique opportunity”.

Bosideng joins a surge of fellow superstars of international retail in setting up UK flagships in the past year. From the US, women’s young fashion chain Forever 21 made its UK debut and the launch of lingerie retailer Victoria’s Secret caused a frenzy, while excitement is brewing over casualwear chain J Crew crossing the pond.

Data from property agent Cushman & Wakefield shows that since the start of the year, 92% of available retail space in Bond Street and Sloane Street has been scooped up by retailers from overseas, with Italian businesses accounting for 38% of the retail transactions, followed by Swiss brands with 23%.

The demand has cemented London as one of the prime cities for international fashion retailers, according to Justin Taylor, chief executive officer of UK retail at Cushman & Wakefield.

“London is right up there on the global map. There’s a ‘follow my leader’ approach about it. The UK is an attractive, easy and transparent property market to transact in and it has a stable political environment.”

For US womenswear retailer Eileen Fisher, which opened its first UK stores in Marylebone and Covent Garden in October, it was crucial to find the right locations. Karen Gray, director of retail and global development at Eileen Fisher, says the two locations have given it “exposure to a local London, suburban shopper and international tourists”.

The influx of international retailers comes as prices for key retail spaces reach record levels. Figures from property agent Harper Dennis Hobbs show rental prices for Oxford Street rose from £570 per sq ft in 2010 to £700 in 2011.

That’s great news for landlords, but some domestic retailers, including London designer indie Wolf & Badger, blame soaring rental prices on the arrival of international players.

Co-founder George Graham says: “Rent increases do appear to be driven by the unprecedented influx of international retailers, particularly some of the French brands, which are entering the market and paying record rents on multiple properties all over London.”

Ian Dudley, group property director at Aurora Fashions, the company behind Warehouse and Oasis, recalls when Spanish young fashion chain Desigual paid a record level of rent in 2010 to take over the Disney store on Oxford Street. “They pulled rental price up significantly,” he says. “Everyone is vying for the same space and there’ll always be someone who will pay top dollar.”

Graham says finding Wolf & Badger’s second store last year was difficult. “We had a tough time finding a good property that wasn’t immediately snapped up by a large multi-brand retailer from overseas at a ludicrous rent. Luckily we ended up with our perfect property [on Dover Street], but it took almost a year.”

Nigel Keen, group property director at JD Sports Fashion, explains that if an international retailer wants a flagship in a prime rental area like Oxford Street or Westfield London, they will make sure they get it, which he says can lead to a “bidding war for some of the bigger premises”.

He says this stampede of international retailers does not help domestic businesses when it comes to opening stores in sought-after sites: “When a deal is done it creates evidence for a landlord of what tenants might pay to gain access to that location, and that can push rents up.” However, it’s unlikely that JD Sports Fashion would ever battle it out over a store. “If we came across a situation where it was very aggressive we wouldn’t join in, we would just bide our time and wait,” says Keen. “We will only pay what we can afford. We would stop looking at that location and go for somewhere more affordable.”

London designer indie Browns felt the impact of international competition earlier this year, when it was driven out of its Sloane Street property after luxury Brazilian jeweller H Stern reportedly paid a £1m premium to secure the space.

Browns’ chief executive Simon Burstein says: “Retail establishments and landlords are able to enjoy hefty rental increases from brands coming from overseas who are not familiar with the market, and they end up paying well above the market price, which affects others.”

Domestic retailers complain that some international retailers have paid a record amount for a unit in a prime location, setting a lasting benchmark for the area, and then left within a couple of years.

However, property agencies are keen to stress that this isn’t the case. “I don’t think overseas brands have particularly got more capital than those in the UK,” says Taylor. “Although some are locating on the best part of Bond Street, for some of the international brands that are not already in the UK they want one flagship and they might be willing to pay more than a domestic brand.”

While there has been an influx from overseas, some UK businesses have also fought for prime spots. Superdry cut the ribbon on its four-floor Regent Street flagship earlier this year, while Belstaff reportedly agreed a record deal for its New Bond Street premises at the start of the year.

The fact that major UK retailers such as Aurora Fashions and French Connection are scaling back their store portfolios to focus on ecommerce is further skewing the picture.

“On the one hand we’ve seen some retrenchment of UK brands in the UK while on the other there’s lots of new international ones coming. As soon as there’s a rise in demand, market demand increases,” explains Taylor.

Many acknowledge the advantages of having a new international arrival as a neighbour. The addition of a big name, such as US young fashion chain Hollister, which regularly attracts queues of teenagers, can be a footfall driver.

Overall the rise in rental prices is limited to “the odd pocket”, namely London, the Trafford Centre and Aberdeen, the latter because of the impact of the oil industry, according to Dudley. Beyond such destinations, Dudley hasn’t seen an increase in rental deals.

In fact, drill down to many of the high streets across the UK and many retailers aren’t competing with international operators.

Select buying director Chanda Pandya says that although she’s seen rents in primary locations rise by about 5% to 10%, as a value retailer with more stores in secondary locations she argues that it hasn’t been directly affected by the influx of retailers from overseas.

“In secondary locations rents are static, and due to the demise of many small or independent firms there are good deals to be had,” she says.

“International players take large prime sites so it’s not an issue for us at the moment”, but she adds it could become one as Select expands.

As international retailers continue to fight for the best sites for their UK flagships, the battle to secure properties in valuable primary destinations will keep raging.

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