Standing tall: outlet centres’ continued resilience a rare chink of light for retail sector

31 / 07 / 23 - 6 minute read

In recent years, headlines regarding the retail sector tended to be on the more sensationalist, negative side of the spectrum. The COVID-19 lockdowns dealt a fatal blow for many retail stores, which shuttered their storefronts and closed their doors for good. Then, the economic downturn forced traditional brick-and-mortar retailers and department stores to burn through more of their cash reserves. Less newsworthy, however, was the continued strong performance of outlet centres amidst the doom and gloom.


Lois Hoyal

Dan Valenzano, PATRIZIA Managing Director and Head of European Value-Add Transactions

In fact, as during similar downturns in the market in previous years, outlet centres have shown remarkable resilience throughout the recent economic turmoil. For customers, their appeal lies in the convenience of shopping at a large selection of stores housed in one location. Shoppers also enjoy the discounted prices offered on a variety of products – outlets are where retailers traditionally sell their sale items.

Retail tenants, on the other hand, benefit from the close alignment on performance provided by turnover rents, paying their landlord a percentage of the revenue generated, says Dan Valenzano, PATRIZIA Managing Director and Head of European Value-Add Transactions. “Retail tenants view this alignment as a natural hedge against the bad times when they don’t sell as much merchandise, while they’re also happy to pay more when they sell more than expected,” Dan explains.

Tenants also appreciate the significant reduction in non-rental costs. “Service charges for retail outlet centres are lower because they don’t require as much maintenance and upkeep as traditional shopping centres, meaning that, overall, outlet centres represent a good value proposition,” summarises Dan.

Lack of competition in the Nordics

With this in mind, PATRIZIA invested in two outlet centres in the Nordics. In 2005, it acquired the Stockholm Quality Outlet in Barkarby, just north of Stockholm, which it extended in 2017 to include 70 premium stores within a 4,500 sq m shopping area, flanked by apartments, a supermarket, offices, and a soon-to-be-added Metro transport link.  

“Over the years, we’ve continually expanded the outlet centre and have always been able to increase the rent,” says Jörg Laue, Head of Transactions Nordics at PATRIZIA. “For tenants, rent is cheaper – easily half the price of high street retail units. For consumers, outlet prices are at least 30% cheaper than downtown. In periods of economic uncertainty, such as the current cost of living crisis, people look for good value and that is implicitly offered in an outlet centre.”

Throughout the pandemic, the centre’s resilient operating set-up led to encouraging data. And after the lockdowns, there was a rapid recovery in footfall. “Now, turnover is up and it’s running extremely well,” says Jörg.

Then, at the end of 2022, PATRIZIA acquired the Ringsted Outlet in the heart of the Zealand region, just 50 km outside of Copenhagen, attracted by its good pricing and potential economic return on capital.

Covering over 13,400 sq m of retail space, the outlet has an occupancy rate of 97% and is home to big fashion names, such as Nike, Hugo Boss and Adidas.

In 2021, Ringsted Outlet delivered a strong performance, with sales and footfall even outperforming pre-pandemic levels, says Jörg. “Ringsted Outlet additionally offers significant value-add potential. There may be the opportunity to increase its gross leasable area, add more premium tenants and make it an even better shopping experience for customers,” he reveals.

Jörg Laue, Head of Transactions Nordics at PATRIZIA

Ringsted Outlet

"Service charges for retail outlet centres are lower because they don’t require as much maintenance and upkeep as traditional shopping centres, meaning that, overall, outlet centres represent a good value proposition."

Dan Valenzano, PATRIZIA Managing Director and Head of European Value-Add Transactions

Where next to invest?

PATRIZIA was particularly attracted to the Nordic region due to its limited supply of fashion outlets and lack of competition: Ringsted is Denmark’s only existing retail outlet centre while Stockholm Quality Centre is one of only two outlets in Sweden. Just compare this with the UK, with over 50 outlets, or Italy, with some 40-50 outlets.

Looking ahead, Dan predicts growing interest in this underdeveloped market, saying: “As the Nordic population continues to better understand the value proposition offered by these retail outlet centres, we’ve seen an additional tailwind. More retailers want to find a way into the Nordics because it’s a stable economy with disposable income per capita at the top of the European landscape.”

Meanwhile, PATRIZIA has been investigating further possible outlet investment opportunities across Europe. Germany is a priority, while France, Benelux, Italy, and the UK are also interesting, says Dan. “We have a very favourable broad view of the sector,” Dan shares. “A lot of it comes down to the particular situation – whether those outlet centres are currently available and if the pricing is attractive.”

Cautious optimism

So, how is the rest of the European retail sector faring? Over the last several years, many formerly busy shopping centres have been forced to shut as the requirement for retail floor space dwindles, says Radu Mircea – PATRIZIA Director – Investment Strategy & Research.

The impact of COVID is that it has accelerated the transformation of the sector, including in removing supply from the market through conversions and rents being rebased to sustainable levels. However, following a temporary surge during 2020-21, we are seeing the share of online sales to the overall figure drop in line with the trend observed before the pandemic..

The out-of-town retail park sub-sector has been the most resilient during the pandemic and the outlook remains strongest for necessity-based retail. Food-anchored retail in particular benefits from long affordable leases with major grocery chains and less online sales diversion.

Moreover, we’re starting to see recovery signals for those areas of the market that were more negatively affected by COVID lockdowns, such as prime high street locations previously exposed to global tourism. Here, there is scope for cyclical recovery, says Radu. “In certain locations such as London and Paris, for instance, the post-COVID bounce-back in tourism is supporting retail spend and there may be a bit of a recovery from a rental point of view,” Radu shares.

Overall, those shopping centres and high street stores that proved resilient enough to survive the various challenges presented by the past few years are now finding their footing again.  

Vacancy rates are starting to stabilise while rents have broadly stagnated over the last year – a big improvement on the double-digit declines seen during the pandemic.

All in all, it’s important to recognise that there is still a lot of polarization in the market, says Radu. “There is a widening gap between the best of retail and the rest of retail,” Radu states. “We’re relatively optimistic about necessity-based retail and the best quality high street and shopping centres but there is a fairly large segment in-between. Prime retail locations that are well connected by public transport will continue to outperform secondary locations, where there is still a lot of oversupply. There is quite a lot of variation by country as well. In the UK, for example, the sector is arguably ripe for a lot more conversion to other uses than is seen elsewhere.”

 Radu Mircea – PATRIZIA Director – Investment Strategy & Research

Selective approach

For PATRIZIA, this means adopting a selective approach in terms of assets and locations, carefully differentiating between areas of the market with a potential for improved occupancy and rental growth and more stagnant segments which need a lot of capital expenditure just to maintain occupancy and nominal rents, says Radu.

Essentially, PATRIZIA will continue to pursue retail opportunities in centres which it believes to have an outstanding, vibrant future. “Inevitably, there will be winners and losers,” Dan admits. “We’ll see a lot of shopping centres purchased by value-add funds and repurposed for industrial or maybe residential use but we’ll primarily look for those retail centres that have a critical mass that can benefit from good investment and hands-on asset management.”

So, contrary to the general narrative, opportunities are still to be had in retail and, in particular, resilient outlet centres.