Is retail at last coming back?
Retailing was one of the sectors hit hardest by the economic collapse. Not surprisingly, as unemployment and taxes increased, consumers lost confidence and discretionary spending collapsed. Now however there are real signs of recovery and developers, investors and retailers are planning how to take advantage of an upturn.
The retail sectors that suffered most were those related to home ownership eg. furniture, hardware and DIY. and bar sales and motor sales also collapsed. Electrical goods held up very well through the recession, underpinned by the shift to tablets. Grocery sales, fashion, footwear and pharmacy sales have also held steady although there was a move to the discounters.
Now there is evidence that consumer confidence and spending is increasing again. The widest measure of household expenditure is the Personal Consumption Expenditure Index (PCE), which represents about half of our economic activity. This index has been slowly improving since it collapsed in 2008 and the government are now forecasting improved PCE over the next two years. This is largely due to jobs growth which is the highest in the EU at 3.3pc. Consumers also spend more and this is being helped by the partial recovery in the housing market.
Overall retail sales are up 6.1pc, VAT receipts are up 6.9pc and Kantar's latest report shows that supermarket grocery sales are returning to growth. With the ESRI forecasting that we will add 52,000 new jobs, this year and next, the outlook is certainly for improving retailing-but how does this feed into the property market?
Savills director of research Dr John McCartney has done some interesting work in pointing to the correlation between improving consumer confidence, increasing sales and increasing rents. By tracking the Consumer Sentiment Index he has shown that improving consumer confidence inevitably leads to an upturn in the Retail Sales Index a few months later. With both of these indices now positive there is evidence to suggest that the IPD Retail Rents Index, which fell sharply from 2009 but has bottomed out this year, will also turn positive as rents increase.
In the market there are signs of a hardening of terms as the vacancy level in the capital's main shopping centres and "High Streets" has reduced. On Grafton Street, Space NK have taken the former Body Shop premises and Molton Brown are believed to have taken the former Barratts shop. While both deals are at Zone A rents in the mid €4000 per sq m. range, both tenants are understood to have taken 15 year leases with 3-4 month rent free periods. These are confident moves by retailers.
An interesting dynamic in the market is the effect of the upward and downward rent review clauses in new leases. For years retailers, particularly in shopping centres, paid inflated rents in return for "hello money" or long rent free periods, which funded fit-out's and operations. Landlords calculated these payments on the basis that rents couldn't reduce, but that has changed and there will be a re-structuring of terms in new leases.
Developers will be mulling this in considering their bids for the Cherrywood Business Park, a massive receivership sale in south Dublin. Apart from income from office blocks, there is 388 acres of development land, served by Luas, the M50 and in a Special Development Zone. Savills, are quoting a price of €220m
The zoning permits a shopping centre of up to 4,000 sq.m. plus leisure and ancillary uses and the construction of retail space is linked to the provision of housing units on the land. The big question is does south Dublin really need another shopping centre? The location and accessibility will underpin any scheme but Dundrum Town Centre won't be happy to see new competition and nor will "The Park" at Carrickmines, which also has a "town centre" designation for further retail space.
A new retail scheme at Cherrywood may not be viable yet but it's only a matter of time. The greatest impact from a new shopping centre will be felt in Dun Laoghaire and Bray town centres, which are already struggling. Developers, investors and retailers are positioning themselves now for a recovery in retailing.