Investors are starting to get wobbly about owning retail property assets, at least those outside of prime high-street locations and the big-destination suburban malls, as growth in online shopping is disrupting the sector and affecting values.
This change of attitude was bluntly summed up recently by Stephen Vernon, chairman of property investment company Green Reit. We're out of retail, he told The Irish Times in September. "Retail is challenged across the world, particularly malls, as they need a lot of ongoing investment. It's not an Irish thing: across the world retail is challenged."
Green Reit, which once held about 20 per cent of its €1.42 billion portfolio in retail, has now moved its money into logistics instead, hoping to benefit from a bounce in this asset class as it services the growing online retail market. Logistics make up about 8 per cent of Green’s portfolio and this could grow to 20 per cent.
Property investment companies are not the only ones eschewing bricks-and-mortar retail. Swedish home furnishings giant Ikea, which a year ago was looking at locations for a second flagship Irish store in south Dublin, has now changed tack on the back of strong online sales barely a year after launching an Irish web sales platform.
Claudia Marshall, Ikea's market manager for Ireland, has suggested that more than €1 in every €10 spent by Irish shoppers at Ikea is spent online. "We want to be where the customer wants us to be," she told The Irish Times recently. "Our growth strategy is online. Our investment in multi-channel retailing this year was in direct response to the changing needs of our customers, and 'Shop Online' was a big part of this journey." The company is even introducing Skype sessions with its design staff to help customers plan their kitchens – now that's a long way from traditional retailing.
However, there hasn’t been a stampede to offload retail assets in the Irish market by any means, according to Marie Hunt, head of research at CBRE. Hunt points to a “steady flow of retail opportunities” coming to the market in 2018. “One thing that has been noticeable is that, in line with trends witnessed in other European locations, the pool of buyers for retail investment properties has thinned over the last 12 months as some investors are nervous about underlying structural issues in this sector, such as the growth in ecommerce. Demand for core retail assets remains very healthy and these assets continue to be well bid considering the underlying retail occupier story in Ireland. However, unless assets are competitively priced and/or there are obvious opportunities to add value, the liquidity for secondary assets is somewhat weaker by comparison and this might ultimately lead to some price softening.”
Declan Stone, managing director and head of retail at Colliers, also claims that there “has not been any stampede” out of retail investments, although the sector is “more than a little unloved at the moment”. He suggests many retailers are struggling and the list that have recently folded, contracted or gone through some form of insolvency process is “long and includes many high-profile names, such as Debenhams, Homebase, B&Q, New Look, Toys R Us, House of Fraser, Carpetright and many more”.
As a result, according to Stone, investors are “more than a little cagey” about the sector. “There have been some notable retail transactions recently, principally Kilkenny, Carlow and Globe retail parks – all of which were acquired by Friends First,” he says. “However, it remains to be seen how a number of others on the market such as Swords Central, Wilton Shopping Centre, Fairgreen Shopping Centre, Northside Shopping Centre and Navan Town Centre will fare, and the industry consensus is that buyers for such assets are relatively thin on the ground.”
Karl Stewart, director of retail at Cushman & Wakefield, believes retail assets in Ireland are still selling as long as they are priced correctly. “There is still very strong demand for Dublin retail assets, as demonstrated by the recent acquisition of Westend Retail Park, Tallaght Town Centre and Liffey Valley by overseas investors,” he says. “Regionally, the majority of retail assets were acquired by overseas funds and these assets are being asset-managed and improved. At some stage, these investors will seek to dispose of these assets in an orderly fashion.”
The only way to look at retail in Ireland is “too many shops in the wrong areas and in the wrong use”, according to Darragh Cronin, director, retail at Savills Ireland. “Retailers with an omni-channel sales strategy [online and bricks-and-mortar] will always trade best,” he says. “While certain larger brands may look to reduce the number of secondary locations they may currently trade from, the need for positioning in prime locations will remain. A change to more convenience and independent offers in the secondary pitches will proliferate, with a large focus on the restaurant and fresh food industry.”
Some commentators suggest the oft-mentioned “retail in crisis” experience in the UK – where long-standing brands have disappeared, and high-street shops are being shuttered – is spilling over into the Irish market and making retail a less desirable property class.
“Undoubtedly,” says Stone. “Retail as a sub-sector of the overall Irish property investment market had its heyday in 2016 when retail transactions accounted for some 50 per cent of a €4.4 billion market. In 2017, it fell to 28 per cent of a €2.28 billion market, and up to the third quarter of 2018 retail has only accounted for about 11 per cent of the total, €2.53 billion spend. Over the 2016-2018 period, the attrition among retailers has been dramatic and it is notable that with so much of our retail tenants being headquartered overseas, the actual occupational, and by extension capital, market is unfortunately exposed to problems many retailers face abroad, on top of trading difficulties here in Ireland.
‘Little tenant demand’
“For me, the charge into retail in 2016 was somewhat surprising – and seemed far more driven by the weight of capital than by underlying occupier demand. Put simply, retail yields tumbled – driving up capital values – but in the background there was little tenant demand to underpin this, and in fact in the intervening 24 months the occupational market has worsened. It is noteworthy that the anticipated [retail)]Sigma/Oaktree Reit flotation this year has been put on ice for now.”
Marie Hunt, however, points to Ireland’s strong economic backdrop as being “supportive” of the retail sector, as evident from measures such as “retail sales activity, footfall and consumer sentiment”, while the latest Visa Irish Consumer Spending Index for September saw the 19th consecutive month of expansion in retail sales, with expenditure up 1.5 per cent year-on-year.
“From a property perspective,” says Hunt, “we continue to see strong appetite for any well-located schemes or retail units with particularly strong demand from the food and beverage sector. Encouragingly, demand for good secondary and suburban locations has also been improving and our latest high-street vacancy counts around the country have seen occupancy improving in several locations. From an investment perspective, the pool of buyers for secondary retail is thinner as investors focus on core and this may in turn impact on yields or pricing for these assets in due course.”
Stewart suggests retail is not in crisis but in a period of change while the UK’s retail pains are down to oversupply of space and Brexit uncertainty. “Ireland is seeing some contagion from the UK retail crisis as many brands and retailers who would be looking at Ireland are headquartered or have their base in the UK and the negativity in their home market does have an effect.
“Notwithstanding that, there are still retailers expanding in the Irish market such as Superdrug, Bookstation, Skechers, Mountain Warehouse, Rituals, The White Company, Kingdom of Sweets and Hotel Chocolat. There are challenges in the market, particularly in the fashion sector where expansion by the larger brands and multiples is restricted to prime opportunities and is often deal-led. On the back of this, it is likely some assets within the retail market may need to be adjusted but we are still seeing strong demand in core prime areas and around strong convenience-led schemes.”
Given the ongoing growth in online retailing, Stone believes there are too many shops nationally – especially in the fashion sector – and these will be replaced by more lifestyle shops and daily shopping uses. “Shopping high streets and schemes that are most vulnerable are those outside key population areas, and those that don’t offer wide varieties of retail, leisure, food and beverage options,” he says.
“Underlying occupier demand is almost static in the fashion and footwear sector and is weak in many others, though there is reasonable tenant demand in the furniture and home furnishings sector, no doubt buoyed by increased housebuilding activity. The value sector – Lidl, Aldi, Sports Direct, TK Maxx, Penneys – is more active as customers strive to get more bang for their buck. Still, most regional retail schemes will be slow to secure full occupancy and generate meaningful rental – and by extension capital – growth for the foreseeable future. In many cases, well-known retailers in all sectors have reached virtual saturation in the Irish market, and new entrants will be needed to fuel rents.”?
Against the disruptive backdrop of growing online sales and cooling investor interest, it’s reasonable to ask what will happen to the traditional high street. Cronin suggests mixed-use strategies “will strengthen retail performance” but the idea of retail units being directly converted to residential is “unlikely, expect in exceptional cases”. However, Stewart believes some prime retail locations will increasingly have “residential integrated into it” as across the globe “we are seeing the integration of uses such as residential, work, leisure and retail into one as the market responds to the demand from consumers for a better experience”.
“I don’t think the traditional high street is dead by any means but I firmly believe that it will change as we know it,” says Marie Hunt. “Where local authorities and local communities are proactive, they can fight to save their high streets and improve occupancy and footfall. The nature of occupancy will be different, with more artisan butchers, bakers and community uses in evidence in the future.”
Fewer fashion shops
Stone believes city-centre shopping will survive but with fewer fashion shops, as high street clothes sales are standing still or dropping off. “City-centre shops will become more like showrooms than fully stocked stores. They will have to enchant customers with increasing amounts of in-store activity, technology, customer service, entertainment and a feeling of ‘experience’ each time you cross the threshold of a shop.’
Hunt says retailers will now focus on providing customers with a “unique experience” which is not about lifting sales in the physical store but to “increase footfall, build brand awareness and showcase their goods so that shoppers can then opt to buy online. We will see more ‘experiential stores’ where you can’t actually make a physical purchase. Any retail schemes that don’t have sufficient leisure and food and beverage offerings will have to retrofit to incorporate these elements to sustain footfall and create better experiences for shoppers.”
For shopping centres, Cronin says landlords need to “provide point of difference in their schemes via leisure and food/beverage offerings. The key message is that if landlords plan correctly they can provide a destination for customers to want to visit a centre for the experience and in turn will likely wish to shop in the array of outlets.”
According to Stone, the future retail experience will be about integration between shops and hospitality, leisure and cultural uses such as cinemas, theatres and art galleries.