What lies behind Kering's new real estate strategy?

The fact that the luxury industry has plunged headlong into the real estate market is certainly no secret: in the past year, not only have brands begun to build and furnish luxurious residences in major vacation destinations worldwide, but they have also started acquiring real estate properties with significant investments. One such example is Kering, which recently purchased a historic 5,000-square-meter building at number 8 Via Montenapoleone from Blackstone, at a cost of 1.3 billion euros. This acquisition is part of a major real estate reorganization aimed at addressing the increasing economic challenges in the sector, as detailed in a report by Il Sole 24 Ore. According to the newspaper, the group is considering splitting off a highly valuable real estate portfolio, estimated at up to 4 billion euros. The idea is to transfer these assets to a newly created company and then explore various value-enhancing strategies: among these are selling shares to third-party investors or listing the real estate entity on the stock market. This strategy would allow Kering to lighten its balance sheet by separating part of its debt and transferring it to a new entity, reducing the financial impact on the company and improving metrics like net debt or the debt-to-equity ratio. By separating the real estate from the main balance sheet, Kering could reduce pressure on cash flow and free up resources to focus on its core business, namely its brands.

Another key aspect of the operation is the ability to maximize the value of real estate assets by managing them flexibly or attracting new partners or investors. Additionally, having a separate real estate company would allow Kering to optimize the management of its buildings through long-term rental contracts or renovation projects that further increase their value. By separating luxury from real estate, risks are reduced for both sectors, as losses on one side would not affect the other. After all, while real estate is a solid investment, it is not entirely risk-proof given market fluctuations and maintenance costs.

Kering’s real estate plans also include a strategic focus on stability, as real estate represents a more stable and predictable long-term investment compared to fashion—which, for instance, has seen a significant drop in sales this year, particularly for Kering. According to sources cited by Il Sole 24 Ore, the operation is still in its early stages and is expected to be completed, barring unforeseen issues, by mid-2025. Among the properties involved are about ten buildings located in Milan, New York, and Paris. In New York, the group acquired a building on Fifth Avenue last year with over 10,000 square meters of space, costing $963 million. In Paris, Kering also purchased number 35 Avenue Montaigne in 2023 for 860 million euros and 235 Rue Saint-Honoré for 640 million euros, which is expected to become Gucci’s new mega-store.

However, the group’s strategy has not always taken this direction: as Il Sole 24 Ore reports, just six months after the purchase, Kering attempted to resell 80% of the properties but failed to find suitable buyers. Now, instead of selling them, the group plans to enhance their value through a new real estate company. Interestingly, the Montenapoleone building is not included in this grand plan and is set to become a new operational center for a group that already manages several brands in Italy. The decision to adopt this real estate strategy seems partly (if not entirely) driven by the group’s financial difficulties, with its operating profit for 2024 revised downward to approximately 2.5 billion euros—the lowest level in the past eight years. During a recent presentation, Kering CFO Armelle Poulou stated that Kering is working to reduce debt, and there are reportedly negotiations with financiers interested in the real estate side of the business, which is expected to act as a stabilizing anchor for a luxury business recognized for its volatility. It’s less clear whether the acquisition of the talent agency CAA in 2023 through the Artemis company (which also owns Kering) has weighed on the group’s collective finances, along with the acquisition of 30% of Valentino. The first deal was valued at 7 billion, while the second was 1.7 billion. This suggests that the debt burden on the group may also stem from these investments, as Kering itself is part of the 40-billion-euro portfolio of Artemis, which owns brands like Puma, Coperni, and Giambattista Valli, as well as Christie’s auction house, Stade Rennais football club, and an investment fund dedicated to technology, among other assets.