Scott Malkin set up Value Retail over 20 years ago after working on Rodeo Drive in Beverly Hills, bringing the fashion-led outlet centre concept to Europe. The company has nine European outlets and two projects in China. He spoke to Lloyds Bank’s Martin Green at the Real Estate Capital Europe Forum
Martin Green: What makes Value Retail different and how do you achieve your high sales per sq ft?
Scott Malkin: Everything was informed by Rodeo Drive. It had four retail levels with parking beneath; I learned that retail in North America wasn’t what we were raised to think of, acres of production-line regional malls anchored by department stores.
We discovered that the very exciting part of retail was fashion, which was inextricably linked to tourism. That’s why a Japanese investor [Sogo] wanted the Rodeo Drive project; so many Japanese were going to Los Angeles at that point, so they wanted to own it and steer Japanese visitors to it.
The idea was to apply some of those principles to the factory outlet centre concept that hadn’t arrived in the UK. It’s also clear that the world has polarised between digital and experience, but we’re often pretty sheltered in real estate and don’t think retail’s being re-invented as aggressively as it is.
We decided early on we were not just real estate guys, we were going to operate these projects and we put them on licences rather than leases. Half of the shop-fits are renewed every year. The consumer – we call her a guest – can’t tell why, but knows it’s different to any shopping environment she’d go to in her normal routine.
We started in real estate and added what I’d call fashion retail. Now we’re adding in hospitality, which confused the retail brands I spoke to last week in Milan. They said: that’s a brilliant idea, where will you put the hotel? I said no hotel, hospitality is an idea… the notion of experience and memories of the experience… it’s not a building.
We’re about to stir up positive tension, dynamic energy with our investors by introducing a lot of cost and new concepts, spending more to improve guest experience and the time people spend. That’s what other attractions are doing, it’s what hotels, Disney and Terminal 5 are trying to figure out.
There are very few places where people have to go, and a batch of places where they choose to go; if we can’t make it good enough they’ll go elsewhere. The lesson of the market is: whatever is good enough this year is better than last year and definitely won’t be good enough next year. The cost and complexity of delivery grows.
MG: Are we seeing the death of the high street of old? What’s your gut feeling on UK retail and what is going to work?
SM: Major markets will work. To the extent that London extends to Birmingham, that’s good news for Birmingham. The logic is that pure online retailers don’t make money. Amazon doesn’t make money; it might make it through the cloud, through services, Yoox – they’ve just bought Net a Porter. They don’t make money; Yoox makes money from services to the brands.
You will see multi-brand retailers needing to link themselves with the physical presence to define who they are, create a relationship with the consumer and figure out how to get to be profitable. And you’re going to see more pure-play retail concepts move towards flagship stores.
The old high street is already dead, but it will take a long time to go. Woolworths was the walking dead for years before it went under. You’ll see an enduring presence gradually shrink from what we consider peripheral locations and concentrate on places where people choose to spend time.
On my last US trip, two people told me about a new service where you get a box delivered containing terrific quality ingredients and make your own meal. There’s no excess and you’re not spending an hour in the supermarket– it’s waiting when you come home. One person’s son opened the box, made his dinner in 15 minutes and discovered he liked cooking.
That’s like Mark Zuckerberg putting wifi in refugee camps… There are no schools, no teachers; but a thing called Com Academy is revolutionising how people think about education and it’s aimed at young people.
This notion of empowerment is on us already. There’s resistance everywhere but it’s unstoppable and we need to embrace it. The people who embrace it will be strong.
MG: You’ve got close links through your assets to understand consumer trends and tourism from China. How do you see that today? Is the UK doing enough?
SM: Bicester Village’s guests this year will be about two-thirds non-EU, from Asia, the Middle East, Latin America. From the experience (of arriving) in the UK, at Heathrow or Gatwick for example, one can always do more. Government officials have no idea what goes on unless someone calls them and says: “I just queued for an hour at T3 to get in.” They are told statistics that average everything out and make it hard to understand what’s happening.
The internet is a democratisation tool. It allows transparency. For example, when the London Olympics was gearing up, a coach from New Zealand tweeted: “I’m stuck in a queue for an hour; it’s ridiculous, London’s pathetic.” That hit Downing Street.
The reality is Heathrow’s dysfunctional because airlines, operators and customs services have no incentive to work together. They have different bosses and priorities. The government has since articulated a vision of embracing tourism as an economic driver. That’s good, but if you can’t figure out who’s responsible for a decision, you can’t make it. No one has responsibility, no one’s judged on how happy your cousin is arriving from Tokyo. Until that happens, the experience will be a lot less than it could be.
MG: You’re investing in Europe, Asia and China. What do you think about the way equity is working at the moment; is it just out of control?
SM: Equities are stumbling and we’re on the way to global struggle and deflation in many markets. On the one hand, everyone’s terrified by the risk of inflation; but another line says, at a global level, we’re just repeating the Japanese 20 lost years.
But equities are out of favour, as are emerging markets. Interest rates are falling; on the Continent, you have to pay a bank to take your money. Real estate, particularly with bond-like characteristics where defined income streams come in at dividend levels, is at a high level compared to bonds or anticipated equities market earnings. And if inflation rises, real estate should go with it.
I think real estate is in a sweet spot. It will result in a continued focus on real estate assets, as money needs to go somewhere.
MG: How do lenders behave with a product like a luxury outlet centre? It’s a shopping centre, but with a high volume of variable rents; although you’ve got a very good tenant roster, they are generally found to be more difficult.
SM: They’ve been through several cycles; Bicester’s been open 20 years, so familiarity is now greater with lenders but also valuers. Also, institutional investors have been pouring into this sector looking for yield and security. So in the US, Asia and Europe, these are now seen as primary retail assets with growth in performance and enduring qualities. The flexibility and less conventional approach is part of what’s driving growth, when shopping centres generally are flat.
Our experience is that lenders are rigorous; we get much more scrutiny than a traditional deal that ticks a lot of boxes and feels familiar. I think the overlay of regulation on banks has made everything cumbersome and increased the need for the transparency between borrower and lender. To get things done you have to have a partnership. It works for us, as we’re relationship borrowers.
The other extreme is securitisation, when you just worry about the package and don’t touch your lender. But in the middle it’s a pain for lenders to put money out; they feel they have to spend time with you and you have to make an effort to be a useful client