Location
Long-term successful investment in shop property is
not about the yield, or the lease, or the tenant,
but location.
Location is not the same as where the shop property is located. Where the shop property is located is where the property has been or is being built. The location includes the vicinity, the surroundings and the neighbourhood.
For all types of retailers and shopkeepers), where a shop is located makes a big difference.
Retailing is about market-positioning. Although there can be similarities in the ways different retailers operate, all retailers have their own particular target-customer.
The market for products, goods and services is divided into sectors and segments. Sectors are the type of goods and services: for example, clothing sector, grocery, travel agents, and so on. Segments are the type of goods within a sector: for example, the clothing sector comprises ladieswear, menswear, workwear, and so on. Each sector and segment has its own customer-base and every retailer will cater for and aim to serve its preferred sector and segment of the market. A consequence of competition, often there is an overlap where retailers whose apparent target-market might be one thing also sell other things as well.
The reason people buy goods and services is to satisfy a need of some sort. Everyone has the same basic needs (for example, hunger, shelter, warmth, security, spirituality, and so on). We satisfy needs through the form of wants, of which there is a myriad. Whatever we want or might want is how we go about satisfying a need of some sort. Essentially, retailing is all about juggling figures and creative accounting, about extracting a profit from the difference between what it costs the retailer to buy the product from the supplier or manufacturers and what it costs to sell it to the customer. That profit, known as the gross profit, can be massive, for example with ladieswear it can be around 75% , with greeting cards over 100%, or tiny, for example supermarkets operate on around 5% or so. It is not just gross profit that measures success, but also the rate of stock-turn: the time it takes a retailer to sell the products before it needs to pay its suppliers. Since the retail price of the item does not indicate the amount of gross profit, it is wrong to assume that a retailer generating a massive turnover must be doing really well.
Although people have unlimited wants, they have limited spending-power, so what people do is exercise discretion by adjusting priorities as to what they are prepared or happy to pay for a particular item. Products, goods and services are classified as non-discretionary and discretionary. Generally, money spent on discretionary items is what's left over after paying for all the basics, such as food, heating bills, rent, mortgages, etc.
In essence, people like to pay as little as possible for goods and services, but because everyone is different so too are circumstances, and the definition of 'little' varies with the person's opinions, beliefs, tastes and attitude, so the retailer's success depend on understanding the psychology of the target-customer. For example, the market for luxury goods may not come over as price-sensitive, but just because a customer is willing to pay a lot more for a product even though a similar product could be bought for a lower price elsewhere does not mean that customer would over-pay.
It is natural to aspire, and not everyone wants to live within their means, so to cater for those that want to buy things they cannot afford at the time, a system of credit exists whereby lenders charge interest to enable people to borrow on their income and pay off the debt by instalments. Because the banking and financial system is geared to the supply of credit, establishing the proper value of anything is effectively impossible. In theory, the proper value is what a cash buyer would reasonably expect to pay, but because the availability of credit has distorted the market and rubbed off on attitudes, in practice, it is hard to say with any certainty whether non-availability or shortage of credit would necessarily make much difference to the value, rather than just perception. In other words, when credit is not readily available, it is thought cash-buyers must be getting a bargain.
Although the price of some products, goods and services can be reduced so as to stimulate demand, discounting is risky because it requires a minimum level of turnover to cover the overheads of the retailer. Also, consumer-demand varies according to the nature of the need. Moreover, retailers do not only experience competition from other retailers, they also suffer competition from customers themselves satisfying their needs in other ways. Not spending so much and being content with what one has already may spring to mind as an example, but another, as the finance director of a multiple retailer once remarked, is "blokes going to football matches on Saturday afternoons, instead of going out shopping."
It's not only retailers that can suffer from fluctuations in customer-money supply, investors also can misjudge how much credit distorts perception of value. The intrinsic value of anything is how much it costs to make. The cost of a building includes the cost of the land materials, the builder, professional fees and so on. That value is objective and capable of being independently quantified. Because shop property investments can be mortgaged, a gulf emerges between how much the investor could afford and the intrinsic value of the property. What the finished building would be worth is subjective and not capable of being quantified independently, because whether someone else would pay the same price would depend upon what the building were worth to them.
to be continued/edited....
When you buy a shop property for investment, you are not buying into the tenant's business. How the tenant chooses to run its business and how it manages to pay the rent is nothing to do with you. You are buying the property and whether the investment is the entire building or part of a building, that is all you are buying. However, you are not buying the location. Although the property is 'located' in the location, the location is often more important than where the property is located.
Location is not the same as where the shop property is located. Where the shop property is located is where the property has been or is being built. The location includes the vicinity, the surroundings and the neighbourhood.
For all types of retailers and shopkeepers), where a shop is located makes a big difference.
Retailing is about market-positioning. Although there can be similarities in the ways different retailers operate, all retailers have their own particular target-customer.
The market for products, goods and services is divided into sectors and segments. Sectors are the type of goods and services: for example, clothing sector, grocery, travel agents, and so on. Segments are the type of goods within a sector: for example, the clothing sector comprises ladieswear, menswear, workwear, and so on. Each sector and segment has its own customer-base and every retailer will cater for and aim to serve its preferred sector and segment of the market. A consequence of competition, often there is an overlap where retailers whose apparent target-market might be one thing also sell other things as well.
The reason people buy goods and services is to satisfy a need of some sort. Everyone has the same basic needs (for example, hunger, shelter, warmth, security, spirituality, and so on). We satisfy needs through the form of wants, of which there is a myriad. Whatever we want or might want is how we go about satisfying a need of some sort. Essentially, retailing is all about juggling figures and creative accounting, about extracting a profit from the difference between what it costs the retailer to buy the product from the supplier or manufacturers and what it costs to sell it to the customer. That profit, known as the gross profit, can be massive, for example with ladieswear it can be around 75% , with greeting cards over 100%, or tiny, for example supermarkets operate on around 5% or so. It is not just gross profit that measures success, but also the rate of stock-turn: the time it takes a retailer to sell the products before it needs to pay its suppliers. Since the retail price of the item does not indicate the amount of gross profit, it is wrong to assume that a retailer generating a massive turnover must be doing really well.
Although people have unlimited wants, they have limited spending-power, so what people do is exercise discretion by adjusting priorities as to what they are prepared or happy to pay for a particular item. Products, goods and services are classified as non-discretionary and discretionary. Generally, money spent on discretionary items is what's left over after paying for all the basics, such as food, heating bills, rent, mortgages, etc.
In essence, people like to pay as little as possible for goods and services, but because everyone is different so too are circumstances, and the definition of 'little' varies with the person's opinions, beliefs, tastes and attitude, so the retailer's success depend on understanding the psychology of the target-customer. For example, the market for luxury goods may not come over as price-sensitive, but just because a customer is willing to pay a lot more for a product even though a similar product could be bought for a lower price elsewhere does not mean that customer would over-pay.
It is natural to aspire, and not everyone wants to live within their means, so to cater for those that want to buy things they cannot afford at the time, a system of credit exists whereby lenders charge interest to enable people to borrow on their income and pay off the debt by instalments. Because the banking and financial system is geared to the supply of credit, establishing the proper value of anything is effectively impossible. In theory, the proper value is what a cash buyer would reasonably expect to pay, but because the availability of credit has distorted the market and rubbed off on attitudes, in practice, it is hard to say with any certainty whether non-availability or shortage of credit would necessarily make much difference to the value, rather than just perception. In other words, when credit is not readily available, it is thought cash-buyers must be getting a bargain.
Although the price of some products, goods and services can be reduced so as to stimulate demand, discounting is risky because it requires a minimum level of turnover to cover the overheads of the retailer. Also, consumer-demand varies according to the nature of the need. Moreover, retailers do not only experience competition from other retailers, they also suffer competition from customers themselves satisfying their needs in other ways. Not spending so much and being content with what one has already may spring to mind as an example, but another, as the finance director of a multiple retailer once remarked, is "blokes going to football matches on Saturday afternoons, instead of going out shopping."
It's not only retailers that can suffer from fluctuations in customer-money supply, investors also can misjudge how much credit distorts perception of value. The intrinsic value of anything is how much it costs to make. The cost of a building includes the cost of the land materials, the builder, professional fees and so on. That value is objective and capable of being independently quantified. Because shop property investments can be mortgaged, a gulf emerges between how much the investor could afford and the intrinsic value of the property. What the finished building would be worth is subjective and not capable of being quantified independently, because whether someone else would pay the same price would depend upon what the building were worth to them.
to be continued/edited....
When you buy a shop property for investment, you are not buying into the tenant's business. How the tenant chooses to run its business and how it manages to pay the rent is nothing to do with you. You are buying the property and whether the investment is the entire building or part of a building, that is all you are buying. However, you are not buying the location. Although the property is 'located' in the location, the location is often more important than where the property is located.