Why retail investment can still be a success
While the retail market continues to experience challenging times, investment opportunities are available to those who do their homework.
The economy and debt markets will continue to impact on the performance of investments and there is a flight to quality from buyers looking at medium-term holds.
The Government announced in the December 2011 Budget that it was abandoning plans to abolish upward-only rents on existing leases, which provided badly needed certainty, and investors can now look at a potential investment with some confidence.
Nevertheless, a two-tier market pertains for both leases and investments depending on whether they have an upwards-only review or not.
For investors, the new leases mean there is a stronger focus on the unit, the pitch, the covenant and the lease terms.
There is logic to aligning the interests of the landlord and the tenant to ensure both maximise the performance of their capital. But it requires a more forensic approach to retail development in the future, with developers/investors and banks taking a greater, long-term interest in how a retailer will trade.
Over the past two years, the dynamics of the occupier market have changed considerably from a market dominated by multiple fashion retailers from the UK, Europe and indeed Ireland, to a select few looking at focused opportunities.
Investors need to look closely at the sectors that are performing and understand consumer demand. Fashion occupiers are showing less interest, and demand for large space has also diminished. Nevertheless, a few within the sector are still looking to take advantage of the competitive terms and grow their portfolio. These include the Swedish retailer H&M who like others, are looking at deals that are almost solely turnover related thus offering them a form of protection from adverse market conditions.
The dramatic fall in prime rents has attracted a number of new entrants to the Irish retail market, which include Disney on Grafton Street; Abercrombie & Fitch, which has signed to open in part of the old Habitat building on College Green; and Hollister, which opened in the Dundrum Town Centre last autumn, and this trend is likely to continue. The economy will see the discount and fixed-price retailers perform well, such as Dealz, which trades as Poundland in the UK, and is the largest fixed-price retailer in the UK.
Dealz has opened six stores already in Ireland and plans to deliver a further 15/20 stores over the next 12 months while offering a strong covenant to investors.
With the trend for online shopping continuing to grow and the recent VAT increases, there is no doubt 2012 will be another tough year for retailers.
Location and ability to respond to market demand are key to survival in this sector.
There is a flight to quality from many investors who are looking for either bond-type income with attractive yields or prime property, which, at a price, will be well positioned for the recovery of that market.
For parties with large portfolios under their control, the piecemeal sale of assets is likely to create evidence that has a knock-on effect on values.
However, supply to the market is very limited. The market needs a bottom in order to recover and transactions are needed to identify where this pertains.
Receivership sales have been a feature of the investment market in 2011 and are likely to continue, with these sales providing investment product, given the unwillingness of non-distressed vendors to sell in a market at the current pricing.
With limited banking, 2012 retail investment demand is likely to split into two categories.
The smaller retail investments that offer an opportunity with attractive yields in a good pitch are more likely to appeal to cash buyers who will seek to use their cash to leverage a better price.
The second category is larger prime investments that appeal to international buyers, who will also have cash if the supply of product is available.
Michele Jackson is director, investments, DTZ Sherry FitzGerald