| LONDON, April 21
LONDON, April 21 Insatiable demand among the
global super-rich for swanky retail property in Europe has
driven rental returns on the best shopping streets so low they
are not much higher than the safest government bonds.
As the wealthy shield cash from the hazards of the financial
crisis in the world's most upmarket real estate, it has widened
the gulf between the best and worst retail streets, a chasm
already yawning under the influence of sluggish spending by the
less well heeled and an exodus of shoppers online.
London's Bond Street is the most extreme example in Europe,
according to property consultant Cushman & Wakefield. Yields, or
the annual rent as a percentage of a property's value, were 2.75
percent at the end of the first quarter this year.
It is the first time yields have fallen below 3 percent
since the company's records began in 1991 on a street that
includes Prada, Louis Vuitton and Cartier.
"The wealthy choose to buy parts of Bond Street like the
rest of us buy a tie," said Stephen Hubbard, UK chairman of
property consultant CBRE. "The potential for rental
growth is very good, so they are not stupid things to buy."
Ten-year benchmark UK government bonds yields are about 1.7
percent, according to Thomson Reuters data, while they are 1.25
percent in Germany, 1.8 percent in France and 4.2 percent in
Italy. Thirty-year bonds are about 3 percent in the UK and
Investors typically seek higher returns from property than
bonds due to the fact real estate takes longer to buy and sell
and risks becoming vacant. Yields for the top office blocks in
the major European cities are about 5 percent.
With low interest rates keeping government bond yields down,
many asset managers have returned to property, which had become
something of a pariah asset class after the sub-prime real
estate collapse triggered the global financial crisis.
The second-lowest figure was 3.25 percent on
Kaerntnerstrasse and Kohlmarkt in Austrian capital Vienna,
followed by 3.75 percent on Avenue des Champs Elysées in Paris.
The list of major European cities includes Zurich, Hamburg and
Stockholm. Vienna matched its 10-year average, while all other
cities were below.
Shop properties on the best streets attract such strong
interest because the deal size is within the reach of wealthy
individuals whereas an office block worth several hundred
million euros is not, said David Hutchings, head of European
research at Cushman & Wakefield.
While many wealthy buyers remain anonymous, there is
currently strong interest in Bond Street from Hong Kong, said
Jonathan O'Regan, director of central London investment at
property consultant Savills.
It has driven prices up to 6,500 pounds ($9,900) per square
foot for the pricier jewellery section compared with about 1,000
pounds on King's Road in the select Chelsea district, meaning
shops can change hands for between 20 and 100 million pounds,
depending on size.
The proportion of Bond Street stores owned by British and
Irish funds dropped to 39 percent in 2011 from 96 percent in
2006, according to Savills. The different nationalities
in 2012 included Chinese, Qatari, Libyan and Danish, it said.
Meanwhile, yields for retail property outside the best
locations can exceed 10 percent, a premium that represents the
much higher risk of vacancy. Last week Britain's biggest
supermarket chain Tesco scrapped development plans for
more than 100 of its sites as shoppers were spending less or
making their purchases online.
In addition to investors, many retailers are buying
properties in the most sought-after locations to ensure they are
not turfed out or to avoid spiralling rents.
Companies that have done so on Bond Street, where rents are
about 25 percent higher than on neighbouring Oxford Street, the
country's second priciest strip, include luxury goods group LVMH
and Hermes and the Maramotti family behind
luxury clothing retailer Max Mara. Spain's Inditex has
done the same for its Zara fashion store on Oxford Street.
Retailers are investing in fewer, better pitches due to
weaker consumer spending in outlying areas and a growing trend
to buy online.
"These locations become a combination of a sales outlet and
advertising," said Dennis Lopez, chief investment officer at Axa
Real Estate, Europe's largest property owner, with 43
billion euros of real estate under management.
"I see a continuation of demand for the best spaces, but
these trends are like pendulums. A 2.75 percent yield looks
pretty low to me."