Retail must evolve if it is to survive and thrive

Landlords and investors need to adapt to meet the challenge posed by online shopping

The Royal Hibernian Way  has undergone a major   upgrade of its common area and retail units.

The Royal Hibernian Way has undergone a major upgrade of its common area and retail units.

 

The commercial property market is buoyed by economic fundamentals and the retail sector is no different. The Irish economic outlook for 2019 and 2020 remains strong with forecasted GDP growth of 4 per cent for 2019 and 3.2 per cent in 2020 (ESRI June 2019) although a no-deal Brexit could affect these figures. With disposable income increasing in Ireland, albeit slowly, and unemployment at a 14-year low, retail sales should prosper as a result.

However, the retail sector is receiving negative publicity at present, predominantly on foot of the expansion of e-commerce as well as the continuing turmoil amongst our neighbouring retailers in the UK. We have seen many high-profile UK high street retailers facing trading challenges, suppressed further by the weakness of sterling. In contrast with the UK, the pace of retail sales growth, excluding motor sales, in Ireland has increased over the past 12 months, by 4.2 per cent according to the CSO.

Retail is slowly evolving to meet changing consumer demands, moving towards an experiential offering. Big online retailers will typically take a “clicks-and-bricks” approach but will still require a foothold in prime locations. For example, shopping centres are now focusing on alternative offerings to increase time spent there such as wellness, childcare, cinema, and food and beverage providers, while high street stores such as Nike, LuLu Lemon and Molton Brown in New York, London and more recently Dublin, are holding fitness classes in store, as an additional draw for consumers and a new source of revenue. Zara has opened its first technology-driven, click and collect store in London, with mirrors that have embedded technology to help shoppers make informed choices.

Unsustainable levels

It is important to differentiate the sub-sectors of retail (and locations), as these sub-sectors each perform differently and rely on different aspects of economic growth.

Prime city centre retail is predominantly made up of the two streets, Grafton Street and Henry Street in Dublin, as well as centrally located St Stephen’s Green. Rental levels continue to increase as occupier and investor demand outweighs supply. As new international brands enter the market, the lack of available space is driving up the price.

Prime “Zone A” rent currently sits in the region of €6,500 per square metre but remains more than 30 per cent below the previous peak, which saw rents rise to unsustainable levels. While there are concerns around the demand for retail space given the continued expansion of online shopping, most large, international retailers still opt for a prime retail pitch to showcase their merchandise.

Retail outlets in Dublin’s ancillary streets, such as Clarendon Street, South William Street, Wicklow Street and Merrion Row are expected to benefit from the increased pricing on the nearby high streets. Smaller retailers, who cannot afford the high street prices, together with alternative retail uses such as food and beverage, beauty, healthcare etc who do not require the expensive prime locations, are now seeking space on these slightly “off pitch” streets.

Shopping centres including St Stephen’s Green, the Ilac Centre and Royal Hibernian Way had not adapted to the changing retail environment and were dated. The latter recently underwent redevelopment to upgrade the common areas and amalgamate some smaller retail units into high-end restaurants. Footfall and trade will benefit from the cross-city Luas line as well as the increase in new office space under construction on Molesworth Street.

Struggling

The Ilac Centre is also going through a modernisation project, with further redevelopment planned. The majority holding in St Stephen’s Green shopping centre is at the late stages of a sales process, and the expectation is that the new co-owners will seek to redevelop and upgrade the centre in the near term, including an experiential element.

Regional high street retail includes shops outside of the main cities. This is a sub-sector that is still struggling in some towns, which are typically “over shopped”. In addition, these properties are often owned by smaller, private landlords who may not have the ability or the resources to actively manage their assets and keep pace with the changing environment.

Retail parks are a different asset class, attracting a different tenant base that serve an alternative consumer purpose. The type of goods sold in retail parks, such as furniture, textiles, garden products etc are those that consumers want to “touch and feel” and therefore require a physical presence, with a large floor space. This sub-sector is thriving as the volume of new house builds continues to gather momentum and mortgage lending is more attainable. This is supported by the statistics noted by the CSO in July 2019, where it stated that the growth in household goods is the strongest performing component of retail year on year, at 11.2 per cent, compared to the 4.2 per cent growth across all retail products.

From an investor perspective it is critical to understand the different sub-sectors of the retail market, and the nuances of the different locations. In the right hands, retail investment is evolving as opposed to being endangered. Landlords must continue to be flexible and adaptable.

Suzie Nolan is the senior property fund manager of the Friends First Irish Commercial Property Fund, brought to you by Aviva