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Why are luxury watch brands spending hundreds of millions on prime real estate?

More rare and precious than a luxury good is a top-tier lease.

Three years ago, Swiss watch retailer Bucherer opened the largest luxury watch store in Paris, located in the city centre just two blocks from department store Galeries Lafayette and a short walk from the Place Vendome, the octagonal square that’s home to the luxurious Hotel Ritz.

But Bucherer is only a tenant. The owner of the building that houses its gargantuan, two-storey store is the Richemont group, the luxury conglomerate that owns brands like Cartier and IWC.

Richemont paid an estimated 70 million euros (S$107 million) to acquire the building, the former home of the much-loved but sadly now-defunct menswear store named Old England that sold tweeds and tartans.

The purpose of the sizable investment was to secure prime real estate in the favoured destination of high-spending tourists, particularly those from China. Unsurprisingly, even though Bucherer operates the store, its landlord’s brands are prominently featured inside.

Luxury brands instinctively demand the priciest locations in top-tier cities, using them as tools to build brand equity. In fact, a shopaholic tourist need not look up a city guide to figure out where to spend money. Just heading straight for the location of the local Cartier, Hermes, Louis Vuitton or Rolex boutique will inevitably bring one to a street lined with high-end stores.

That’s the reason Richemont’s Parisian investment was neither its only foray into real estate, nor its most expensive. In 2012, the company paid US$380 million (S$512 million) for the St Regis in New York’s Fifth Avenue, a luxury hotel with a shopping arcade chock-full of luxury names that will presumably make way for Richemont brands, as leases expire.

Two years later in 2014, Chopard did the same in Paris, buying the Hotel de Vendome, a small but posh hotel located at the entrance to the famous square. Sure enough, it was not just a bet on valuable real estate – the jeweller had been the tenant of the ground level store for over a decade.

As with the Richemont investments, Chopard’s purchase was to secure prime real estate, an asset that is infinitely more rare and precious than any luxury good.

Investments like these are aimed at avoiding the fate of brands like Buccellati, the Italian jeweller that was turfed out of the Place Vendome when LVMH acquired the building that housed its boutique.

Fellow tenant Damiani also suffered the same fate when its lease expired, a turn of events that will likely repeat itself with other independent brands without the resources to buy buildings.

This strategy of buying the best real estate is not limited to watch and jewellery houses, with Hermes, Chanel and Prada doing the same. In fact, back in 2014 when business was still thriving, Prada was offering advances of 20 million euros or more to secure leases in key cities like Geneva and Milan, according to a recent Reuters report.

The irony of the strategy is its circularity, which has a compelling logic nevertheless. With the vast amounts of cash made from shoppers, namely those from mainland China, luxury names snapped up the best real estate to sell yet more luxury goods to the same demographic.

Since last year, pricey real estate buys have been put on hold, with brands now closing stores in Hong Kong, the city hardest hit by the slowdown. But, despite the severe fall in the demand for luxury goods, especially watches, brought on by the anti-corruption campaign in China, luxury brands are still fl ush with cash.

Richemont’s latest annual report reveals a net cash position of 4.76 billion euros – not quite an Apple-level cash hoard, but enough to finance lots of high-end real estate deals.

The property hunt has merely been paused. When the business environment turns around, luxury names will no doubt again be on the prowl for prime land – to the delight of city centre property owners everywhere.

Read more of Su Jia Xian’s incisive commentary at his website, WatchesbySJX.com.