Crosstree Capitalises After Sliding Doors Moment At O2 Outlet Centre

You have to wonder if people at Landsec ever think about how things could have been different.

In mid 2014, the U.K. REIT decided to pull out of an agreement with AEG to develop a new outlet centre at the O2 concert venue in South East London. Instead, it bought a 30% stake in the Bluewater Shopping Centre in Kent for £656M.

In May this year, Landsec announced that its stake in Bluewater had fallen in value by 11%, as the troubles in retail hit the value of even super regional malls.

It remains to be seen how the Icon outlet centre at the O2, which opened last weekend, performs over the coming years. But outlet centres remain the darling of European retail, with rents and values growing while other sectors see reductions. Early indications are that the Icon at the O2 will tap into this growth.

When Landsec stepped back from its joint venture with O2 owner AEG, Crosstree Real Estate stepped up to the plate. In 2015 it formed a new JV which saw it buy into an existing 370K SF of leisure space comprising food and beverage and a Cineworld cinema, and agree to develop the 210K SF outlet centre. The firm is backed by Swiss-Italian billionaire Ernesto Bertarelli.

The first phase of the two-story outlet centre is now open, comprising 53 stores, 80% of which are leased to retailers including the first Cheaney Shoes outlet store, Aspinal of London, GANT, James Lakeland, Hobbs, Kurt Geiger, G-STAR Raw and Ted Baker. A second phase comprising another 32 stores will open in 2019. Overall 165K SF of the 210K SF within the Icon will be retail, with the rest given over to food and beverage, mostly in Phase 2.

Seeing the newly opened centre, with its ribbed design reminiscent of the Westfield mall at the World Trade Centre, it is hard to believe that for a decade or more this was dead space around a 600K SF, 20,000-seater arena which hosts 9 million visitors a year. It was once earmarked for one of the “super casinos” planned by the government, but was not chosen as one of the winning sites. The process of finding a partner then took almost two years.

Whereas the current travails in retail mean that retail owners are trying to supplement their offers with leisure, at the O2 things are the other way around: Once the expansion plans are completed, 13% of the scheme will be retail, with the rest leisure and food and beverage.

“Historically the O2 has been seen as an arena with supporting F&B, and we wanted to change the perception of that,” Crosstree founding partner Nick Lyle told Bisnow at a launch event for the centre which saw a slightly incongruous mix of real estate professionals, social media influencers and reality TV stars come together at the NY:LON bat at the O2. “We wanted people to think of it as a major retail, leisure and entertainment draw.”

“If you look at what is happening in a challenging retail environment then a lot of retail owners are looking to increase footfall through adding leisure. Here we are starting with a scheme that has 9 million people a year coming through for a range of leisure visits and that is a good base from which to add retail and provides good support for retailers,” Lyle said.

Lyle said the 80% occupancy rate is a good one in this challenging retail environment. His team is not looking to fully lease up the scheme so it can constantly evolve the tenant mix.

Traditionally, outlet centres have been in suburban or rural locations, because retailers have not been keen to locate their discounted offer near full price stores. But the Icon joins the London Designer Outlet centre at Wembley as a new breed located much closer to the traditional profit centre of Central London.

Lyle said this was a challenge the scheme had needed to overcome, but the issue is becoming less pronounced.

“If you look at the lineup of retailers we have, it includes over 20 Regent Street-type retailers amongst many others, and those people wouldn’t be here if they were overly worried about cannibalising sales,” he said. “I think they see it as complementary and an opportunity to expand their customer base.”

On the challenges in retail generally, Lyle said there were still plenty of opportunities amid the gloom.

“There is understandably a lot of broad-brush negativity around retail and when we see that we always like to look deeper for opportunities to be contrarian,” he said. “Outlets are not easy to get up and running, but they are definitely one of the bright spots within retail. We see retail in London as a micro game. Even with this weak backdrop, we own a retail parade in Shoreditch where there has been a lot of office and residential development nearby and through a lot of gritty asset management we are moving rents on significantly.”

For Crosstree and AEG, there is still more to come at the O2. As well as the second phase of Icon, the JV is developing another 100K SF of leisure space, which will include an Oxygen free jumping trampoline park, an extension to the Cineworld cinema, additional street food-style restaurants, an as yet unnamed new leisure concept and Mamma Mia the party, an immersive experience where guests have a meal on a Mamma Mia-style set while being serenaded by ABBA songs. When tickets first went on sale they quickly surpassed the £1M mark.

Once the development programme is completed, Crosstree and AEG will have more than doubled the retail, leisure and F&B space around the arena from 370K SF to 750K SF.

It is quite hard to say whether on a pound-for-pound basis Landsec should have invested in the O2 rather than Bluewater. In 2016 the JV got a £185M loan secured against the existing leisure and F&B and the new outlet development, which means the whole is likely to have been valued at more than £300M, before the scheme was completed and before the addition of the extra leisure elements like Mamma Mia and the extended F&B and cinema. Whatever Landsec thinks, Crosstree is likely to be happy with the decision.