Insatiable demand among the global super-rich for swanky retail property in Europe has driven rental returns on the best shopping streets so low they are not much higher than the safest government bonds.
As the wealthy shield cash from the hazards of the financial crisis in the world's most upmarket real estate, it has widened the gulf between the best and worst retail streets, a chasm already yawning under the influence of sluggish spending by the less well heeled and an exodus of shoppers online.
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London's Bond Street is the most extreme example in Europe, according to property consultant Cushman & Wakefield. Yields, or the annual rent as a percentage of a property's value, were 2.75 percent at the end of the first quarter this year.
It is the first time yields have fallen below 3 percent since the company's records began in 1991 on a street that includes Prada, Louis Vuitton and Cartier.
"The wealthy choose to buy parts of Bond Street like the rest of us buy a tie," said Stephen Hubbard, UK chairman of property consultant CBRE. "The potential for rental growth is very good, so they are not stupid things to buy."
Ten-year benchmark UK government bonds yields are about 1.7 percent, according to Thomson Reuters data, while they are 1.25 percent in Germany, 1.8 percent in France and 4.2 percent in Italy. Thirty-year bonds are about 3 percent in the UK and France.
Investors typically seek higher returns from property than bonds due to the fact real estate takes longer to buy and sell and risks becoming vacant. Yields for the top office blocks in the major European cities are about 5 percent.
With low interest rates keeping government bond yields down, many asset managers have returned to property, which had become something of a pariah asset class after the sub-prime real estate collapse triggered the global financial crisis.
The second-lowest figure was 3.25 percent on Kaerntnerstrasse and Kohlmarkt in Austrian capital Vienna, followed by 3.75 percent on Avenue des Champs Elys��es in Paris. The list of major European cities includes Zurich, Hamburg and Stockholm. Vienna matched its 10-year average, while all other cities were below.
Shop properties on the best streets attract such strong interest because the deal size is within the reach of wealthy individuals whereas an office block worth several hundred million euros is not, said David Hutchings, head of European research at Cushman & Wakefield.
While many wealthy buyers remain anonymous, there is currently strong interest in Bond Street from Hong Kong, said Jonathan O'Regan, director of central London investment at property consultant Savills.
It has driven prices up to 6,500 pounds ($9,900) per square foot for the pricier jewelry section compared with about 1,000 pounds on King's Road in the select Chelsea district, meaning shops can change hands for between 20 and 100 million pounds, depending on size.
The proportion of Bond Street stores owned by British and Irish funds dropped to 39 percent in 2011 from 96 percent in 2006, according to Savills. The different nationalities in 2012 included Chinese, Qatari, Libyan and Danish, it said.
Meanwhile, yields for retail property outside the best locations can exceed 10 percent, a premium that represents the much higher risk of vacancy. Last week Britain's biggest supermarket chain Tesco scrapped development plans for more than 100 of its sites as shoppers were spending less or making their purchases online.
In addition to investors, many retailers are buying properties in the most sought-after locations to ensure they are not turfed out or to avoid spiraling rents.
Companies that have done so on Bond Street, where rents are about 25 percent higher than on neighboring Oxford Street, the country's second priciest strip, include luxury goods group LVMH and Hermes and the Maramotti family behind luxury clothing retailer Max Mara. Spain's Inditex has done the same for its Zara fashion store on Oxford Street.
Retailers are investing in fewer, better pitches due to weaker consumer spending in outlying areas and a growing trend to buy online.
"These locations become a combination of a sales outlet and advertising," said Dennis Lopez, chief investment officer at Axa Real Estate, Europe's largest property owner, with 43 billion euros of real estate under management.
"I see a continuation of demand for the best spaces, but these trends are like pendulums. A 2.75 percent yield looks pretty low to me."
($1 = 0.6539 British pounds)
(Editing by Will Waterman)