Retail in 2015: Two-tier market emerges

Top streets and malls get big rents, while secondary and provincial locations suffer

 

Rising sales have helped the retail sector turn a corner in 2015 but, battered by the bust, it still faces significant challenges in terms of an oversupply of space and a flight away from bricks-and-mortar to the online space.

The retail highlight of 2015 was undoubtedly the October sale of Project Jewel for €1.85 billion to a combined bid from UK property group Hammerson and German insurer Allianz. The portfolio, whose loans with Nama had a face value of €2.6 billion, included Dundrum Town Centre, the Pavilions in Swords and the Ilac shopping centre. Also included was a large development site between Henry Street and O’Connell Street in Dublin city centre.

Hammerson and Allianz are two of the largest and most sophisticated retail landlords in the world. Hammerson’s shopping centre portfolio, for example, includes Brent Cross in London, The Bullring in Birmingham and Highcross in Leicester. Some see its entry into the Irish market as a sign that phase two at Dundrum and development plans for the Ilac and O’Connell Street sites could be on the cards.

Either way, the Project Jewel sale is probably the most significant change in the Dublin retail market for over 25 years. But it is closely followed by the recent decision by Selfridges to take control of Arnotts on Henry Street and the sudden closure of Clerys on O’Connell Street in June.

For Larry Brennan of Savills, however, the highlight of 2015 was the start of construction work on the West End extension at Liffey Valley which will house a new Penneys anchor store, a reconfigured cinema and six restaurants already leased to a range of Irish and international brands. “The Liffey Valley extension marks the first retail development start in Ireland since 2007,” says Brennan. “Its success will lead to shopping centre owners reviewing development possibilities as the rental market recovers and retailer demand starts to justify spec retail development.”

Turnover

Excluding Project Jewel, total retail investment turnover in the first nine months of the year came in at around €460 million and most agents suggest this figure could rise to between €720 million and €750 million by year’s end.

This would represent a fall on the €1.1 billion transacted in 2014 but last year was a very strong year after virtually no shops changed hands in the first half of 2012 and there was only a gradual rise in transactions through 2013.

However, there is still momentum in the investment market as evidenced by the fourth quarter sale of the so-called National Portfolio for more than €170million to US investment group Davidson Kempner. Savills and JLL had been guiding €162 million for the five retail parks comprising more than 100,000sq m of shopping space.

International funds dominate the investment market but are now forming alliances with Irish developers and investors. The rationale here for the overseas funds is that they can grow value over a three to five-year period before selling out to their Irish partner. But Irish Life and Iput have also been on the acquisition trail in 2015.

Rents

Grafton Street has seen the most significant changes in retail rents over the past 12 -18 months. Demand for pitches on Dublin’s prime street remains strong with Hugo Boss, & Other Stories and Lifestyle Sports among the new wave of retailers to secure space.

Stephen Murray of JLL says zone A rents on the street now stand at €5,500 per sq m. “That’s up 12 per cent on 2014 and I expect a 10-15 per cent rise in prime Grafton Street rents for 2016 as occupiers compete for the limited number of pitches available. It will be very interesting to see what rent the reconfigured 72 Grafton Street [formerly Karen Millen with HMV occupying on a temporary basis] makes when it comes to the market in 2016.”

Henry Street rents appear to have stabilised at a headline zone A level of €3,800 per sq m but there have been few new lettings on the street. Zone A rents in Dundrum Town Centre stand at around €4,000 per sq m with the Pavilions Swords at €2,650 per sq m, Liffey Valley at €2,850 per sq m and Blanchardstown at €2,900 per sq m.

However, most agents point to the two-tier nature of the retail market where the primary streets and top shopping centres are doing well in terms of rental growth and occupancy levels while secondary locations witness high levels of vacancy with tenants calling the shots in lease negotiations.

Meanwhile, recovery outside the main metropolitan areas has been patchy at best. “There is undoubtedly a clear oversupply of retail space in certain geographic locations across the country and some of this oversupply can come down to the type of retail space provided not being fit for purpose,” says Karl Stewart of DTZ Sherry FitzGerald.

Online impact

Another key factor in the retail market is the move of shoppers online. “This trend has undoubtedly been one of the major factors affecting the demand for retail space in recent years,” says Enda Moore of Hooke & MacDonald. “The sectors most affected include electronics, media, music stores and bookshops.”

Stephen Murray says the accelerating clicks-and-mortar approach of some retailers to focus on prime physical pitches while having an online and home delivery service is affecting the “overall quantum of space demanded” by retailers. “Retail is experiencing a revolution rather than evolution,” he says. “The customer focus, response time and control of major vertically integrated retailers such as Inditex and H&M make the trading landscape for multi-brand indigenous retailers a challenging one. While the improved economic outlook will lift most boats somewhat over the coming years, this is going to be against a backdrop of a sector experiencing major and irreversible structural change.”

An interesting response by retail centre owners to lessen the impact of online shopping has been to grow leisure facilities, like cafés and cinemas, within their centres to increase the dwell time and create a destination centre. But, for now, clicks and bricks appears to be the way forward.

Future

Strong economic growth, rising employment and consumer sentiment at Celtic Tiger era levels should support the retail sector going forward.

Many agents expect big international brands to continue seeking prime pitches while the food and beverage sector, one of the best performers, should be a key ingredient in determining the success of larger retail schemes.

An improving residential property market and a rise in the supply of new homes – key factors in the demand for bulky goods – could also improve the lot of the long-suffering retail park market. However, as leases expire, some zombie parks with substantial vacancy may gradually close.

“Improving retailer performance across all sectors will see retailers starting to grow again,” says Darren Peavoy of Bannon. “This will see vacancy rates in provincial shopping centres and good retail parks reduce while rental levels in these centres and parks should start to increase.”