The luxury real estate market, especially for retail properties, appears to be unaffected by high interest rates. In fact, competition is particularly fierce, as highlighted by the number and value of transactions on the world’s most expensive streets, according to the Wall Street Journal. While the average commercial building has decreased in value by 20% since 2022, the most exclusive shops around the globe have scarcely been impacted by the higher borrowing costs in the US and Europe. For example, Cartier’s Swiss owner, Compagnie Financière Richemont, recently bought a property on Bond Street in London with a rental yield of just 2.2%, double the current rates set by the Bank of England.

Similar to bonds, lower rental yields correspond to higher prices. Most investors today would not purchase properties that generate an income lower than the debt cost required to buy them. Last month, Blackstone sold a luxury store on Via Montenapoleone in Milan to Gucci’s owner, Kering, for an impressive price. The building was part of a portfolio of 14 properties that Blackstone had acquired in 2021 for €1.1 billion (around $1.2 billion). Kering paid €1.3 billion (around $1.4 billion) for the Via Montenapoleone building alone, resulting in a rental yield of 2.5%. Meanwhile, the private equity firm acquired another luxury store in London.

Renting a luxury store still involves significant costs, yet this does not fully explain the high real estate prices. According to Cushman & Wakefield, rents on Rodeo Drive increased by 3% last year and remained unchanged on Upper Fifth Avenue. The reality is that luxury commercial properties are scarce. According to real estate consultancy CBRE, Bond Street in London has 150 properties. However, since luxury brands are selective about where to open a flagship store, only about two-thirds of the street is considered prestigious enough, limiting their choices.

The supply is even more limited on New York’s Fifth Avenue, where only four or five blocks of the six-mile avenue are prestigious enough to attract the world’s most expensive brands. Rodeo Drive’s luxury shopping district in Los Angeles has fewer than 50 individual buildings. This scarcity creates intense competition for both space and property ownership. LVMH, the world’s largest luxury goods company with over 70 brands, is transparent about its strategy to secure prime locations. Currently, it owns at least six properties on Rodeo Drive and six on Bond Street in London.

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