When Houston, Texas-based investment giant Hines recently put out a note on retail real estate prospects, it sounded like a downward cycle had finally turned. In many markets, it’s been tough to even give malls away over the past few years. But Hines concluded that good and bad retailing had been incorrectly lumped together in many investors’ minds and that as far as the good stuff was concerned, it was back in. So, why are retailers buying malls?
The common denominator between two very different groups – Ingka Centres, the property sister business to Swedish furniture and homewares giant IKEA, and apparel and sports multi-brand group Frasers Group – is that they are both sitting on plenty of cash. Their strong operational performance has also given them confidence in the future of brick-and-mortar retailing.
Retailers as Developers
The trouble for developers has been the retailers themselves. In the time it’s taken property investors to slowly come back around to the idea that there may be value in acquiring retail real estate, another type of buyer has stolen the race: retailers.
Two companies in Europe in particular, have set strategies to target shopping destinations from Munich and Paris to London and northern England. They have already bought up a number of malls and retail parks, with few signs of slowing down their acquisitive strategies.
The common denominator between two very different groups – Ingka Centres, the property sister business to Swedish furniture and homewares giant IKEA, and apparel and sports multi-brand group Frasers Group – is that they are both sitting on plenty of cash. Their strong operational performance has also given them confidence in the future of brick-and-mortar retailing.
Frasers Focuses on Property
Frasers Group is owned by colorful boss Mike Ashley, who has often divided public opinion in his domestic U.K. market since first founding sports equipment and apparel retailer Sports Direct. He has gone on a spending spree to launch and snap up brands, often those in distress.
Ashley is no stranger to dominating the headlines and Frasers Group has switched focus from brands to a rapidly expanding U.K. property portfolio that includes the recently acquired 770,000 square-foot Frenchgate shopping center in Doncaster; the Overgate Center in Dundee, for which it paid around $39 million in March 2023; Yorkshire outlet center Junction 32, which it paid $65.5 million for last November; and The Mall Luton, which it bought for nearly $76 million last March and is rebranding as Luton Point.
This October, it also completed the purchases of the 600,000 square-foot Princesshay Shopping Centre in Exeter for over $100 million from co-owners Nuveen and The Crown Estate, the 350,000-square foot, $33 million Fremlin Walk Shopping Centre in Maidstone — where it is opening a 70,000-square foot Frasers anchor store — and The Olympus Centre retail park in Gloucester.
Frasers Group has also just acquired the 160,000 square-foot St Nicholas Arcade in Lancaster’s city center, in the northwest of England, with Murray declaring: “At Frasers, we have always been strong believers in physical retail. By acquiring key retail sites, we are able to unlock new growth opportunities and this acquisition is also another step in developing our property segment.”
Frasers is in the process of buying the 350,000 square-foot outdoor shopping center Fremlin Walk in Maidstone, Kent, which has an asking price of around $33 million. Frasers is also reported to be in discussions over the Princesshay Shopping Center in Exeter with co-owners Nuveen and The Crown Estate at an estimated $105 million. This would make its total real estate portfolio valued in the vicinity of $350 million.
Frasers Group has declined to comment on its acquisition strategy, but CEO Michael Murray (Ashley’s son-in-law) said in a statement: “The acquisitions reinforce our commitment to investing in physical retail. Securing properties which serve as the primary retail destination for the community remains a top priority for us,” Murray added. “Such acquisitions unlock new growth opportunities for our retail concepts, while revitalising high streets and physical shopping locations up and down the country. At Frasers, we strive to re-invent and elevate retail for UK shoppers, bringing the very best brands, environments, and experiences to all our customers across the country.”
The strategy behind its mall grab? As a multi-brand operator, Frasers can fill much of the space with its own stores, including Sports Direct, Flannels and its department store concept Frasers, plus USC and Evans Cycles. Vertical retailing can have its just rewards.
IKEA Expands Across Europe
In the meantime, the Swedish furniture and homewares giant, through sister property business Ingka Centres, has been even more ambitious in the size and scale of the retail centers it has acquired. That includes four centers in Europe so far. The first was in Hammersmith, west London, which is now completed and open, with an urban-format IKEA as anchor. The second was Churchill Square in Brighton, on England’s south coast, which will welcome a new IKEA next summer as part of the repositioning of the city center mall. After its U.K. purchases, it went bigger in Paris with the established Italie Deux center which also includes retail offices and, as of September this year, a new 67,000 square-foot IKEA store.
No sooner had the Parisian center opened, than Ingka was announcing that it had agreed to buy one of Munich’s largest shopping destinations, Pasing Arcaden, from a subsidiary of Unibail-Rodamco-Westfield Germany. The retail-anchored, mixed-use development of more than 570,000 square feet is located in the busy and densely populated Pasing-Obermenzing district, to the west of Munich’s city center and attracts 10 million visitors a year. Expect an IKEA to open there soon.
Ingka Centres Managing Director Cindy Andersen has been pivotal in driving the global expansion plan for the company’s real estate strategy, with IKEA-anchored schemes of varying formats and sizes now planned for China, India, Europe and North America. Unfortunately, the prototype for the IKEA-anchored model was in Russia, where over 14 mega centers were operating before the invasion of Ukraine forced IKEA to exit the market.
Finding New Mall Life
“We are working with IKEA looking in Europe at the larger cities for urban locations, acquiring existing property and focused on quality,” Andersen said. “We have to be sure that it’s both the right location and then the right asset since we are very long-term.”
With the strategy based around acquisitions rather than build-out development, inevitably it will depend on what becomes available. Andersen said that there had been internal discussions about online, offline and the impact of the pandemic all of which led the company to believe more than ever in physical retail.
“In Europe, we are almost back to pre-Covid footfall levels, so for us having both physical locations as meeting places and IKEA, manifests that there is no divide between online and offline,” she said. “We are looking in Europe at the larger cities for urban locations, acquiring existing property and focused on quality. The challenge is to constantly develop spaces that are relevant because if you lean back and do what you always did, you will not attract people.”
U.S. Ambitions
Ingka has also been active in the U.S., having developed a downtown concept in San Francisco and ambitions to open in more North American cities. It has also launched other services in San Francisco including a food hall and co-working space. “When it comes to Saluhall (the food hall concept that debuted at the center), we are doing much better in terms of visitors than what we could have anticipated. Then, of course, whenever you do well, you have to fine-tune certain things, and it’s the same with the co-working space (also operational in San Francisco) that is also ahead of budget,” Andersen said.
The developer is taking that co-working concept back to Europe at Italie Deux. Each of its new centers will then inform the next with the likelihood of a mix of third-party retail, offices, flex/co-working office space, a food hall and, of course, an IKEA.
Although a second site U.S. site has yet to be identified, other than its project in Toronto, Andersen wants to find more downtown locations across North America.
Retail and the Property Play
So, will we see a rush of other retailers buying real estate? The answer is only if they are cash-rich and looking at how best to deploy capital. Second, they will have to be highly successful with a killer brand (IKEA) or with multiple, successful brands that they can use to anchor the centers (Frasers). Third, the malls have to be great value deals combining free rents, a low-risk acquisition and strong brands that can underpin the center. Frankly, I’m hard-pressed to identify a U.S. retailer that fits that description.