Luxury Brands Go Shopping for Upmarket Boutiques
Big luxury companies have spent more than $9 billion on real estate since the start of 2023
There’s no commercial real estate crash on New York’s Fifth Avenue or the Champs-Élysées in Paris.
Luxury brands are racing to buy properties on the world’s most famous shopping streets. One reason is the fear that, if they don’t buy their flagship store from the landlord, one of their rivals will do so and send them packing.
Kering, the owner of luxury brands including Gucci and Saint Laurent, handed Blackstone €1.3 billion, or $1.4 billion at current exchange rates, for a building this week on Milan’s Via Montenapoleone. It is one of Europe’s most expensive shopping streets, and Saint Laurent is already a tenant at one of the building’s retail units.
Blackstone’s investors got a great deal. The private-equity firm paid €1.1 billion in late 2021 for a portfolio of 14 properties that included the Via Montenapoleone building. Blackstone still owns a five-star hotel, two offices and some residential real estate in Milan that were part of the original purchase.
Based on the rent the Via Montenapoleone property is generating, the price Kering paid is equivalent to a roughly 2.5% cap rate—an astronomical price considering where interest rates are at the moment. Like a bond, the lower a cap rate the richer a price paid.
It is Kering’s second major real-estate purchase of the year. The company already spent close to $1 billion in January on a property on New York’s Fifth Avenue. Rivals are also snapping up real estate. Europe’s luxury brands have spent more than $9 billion buying boutiques on the world’s top shopping streets since the start of 2023 based on Bernstein’s analysis. Chanel and LVMH are both hunting for luxury properties in New York, according to real-estate sources.
Some of the deals look opportunistic. Rare properties are coming to the market because of the wider downturn in commercial real estate. Kering and Prada both bought stores on Fifth Avenue from real-estate investor Wharton Properties, which is experiencing distress in parts of its portfolio. The building that Kering bought at 717 Fifth Avenue had been threatened with foreclosure by one of Wharton Properties’ lenders.
It is also a great time to buy real estate because luxury brands have a financial edge over traditional property investors, says Will Silverman, a broker at Eastdil Secured who worked on the Fifth Avenue transactions. They can borrow more cheaply from the corporate bond market than what others would pay for a commercial mortgage.
The flurry of deals also shows how competitive the luxury industry has become. It is increasingly important for brands to own their flagship stores, and they are spending huge sums of money to make the shopping experience exceptional. Luxury brands’ store costs and investments were equivalent to 9% of their sales last year, according to Bernstein analyst Luca Solca. This is up from 6% before the pandemic.
Brands such as Christian Dior now have mini-museums in their main boutiques and entire floors dedicated to VIP clients where they can shop in privacy. Refurbishment costs run to tens of millions of dollars, so it makes sense to own certain key locations.
The purchases are precautionary, too: There is a threat that brands could lose their spot on major shopping streets if they remain renters. LVMH’s market capitalization has doubled and its annual sales have grown almost two-thirds since 2019, giving it enormous firepower to buy desirable real estate. Before founding LVMH, Bernard Arnault ran his family’s real-estate development company, so buying property is in the company’s DNA. The world’s most powerful luxury company owns at least six properties on Beverly Hills’ three-block Rodeo Drive and leases others, which makes it harder for other brands to secure a spot in the shopping mecca.
Keeping up with its rival will be expensive for Kering. Based on the deals it has done so far this year, Kering is on track to spend around 10% of its expected 2024 sales buying real estate. It did property deals equivalent to 9% of its annual sales in 2023. Investors might ask whether spending huge sums of money on property is really the best use of its capital.
But Kering will continue to rent rather than own most of its 1,800 stores worldwide. It might team up with co-investors to secure other key locations. Deep-pocketed Blackstone is bullish about luxury retail properties. That might be the best way to go toe-to-toe with LVMH.