It's having the job, not just an income, that spurs consumers
Published 07/05/2015 | 02:30
As we pull clear of our economic troubles, there is no doubt that retail was among the hardest hit sectors during what is now termed 'the great recession'.
Between September 2007 and March 2012, overall employment in Ireland fell by 16pc. As a result 345,000 people lost their incomes and pay levels were hit across the public and private sectors.
In addition, the banking crisis provoked an abrupt withdrawal of consumer credit, while higher taxes, which were necessary to fund the fiscal adjustment, drove a wedge between gross incomes and take-home pay. What these numbers don't capture, however, is the psychological impact of the crisis. At its lowest point, the consumer sentiment index had fallen by 63pc from its peak. Meanwhile, the gross savings ratio rocketed from 3.9pc to 18.1pc as households hoarded what money they had and reduced debt in the face of an uncertain future. All these factors had a profound impact on consumers' spending power.
Inevitably, this impacted heavily on the retail trade and, it follows, on the retail property market. According to IPD, a reputable source of commercial property data, retail rents dropped by 50pc during the crash.
But now spurred on by a general sense that the consumer economy has turned a corner, investors are once again in the market for Irish shopping space. From a position where commercial property investment had all but ceased in 2011, more than €4.5bn of income-producing real estate was traded last year - a new record for the Irish market.
Shops accounted for one quarter of this and, with Nama and others preparing to bring major retail portfolios to the market over the coming months, this proportion is likely to rise dramatically in 2015.
Ultimately, investors' willingness to pay for these assets will depend on their perceptions about future growth in retail rents. On the basis of simple intuition the outlook seems positive, with average earnings, disposable incomes, personal consumption, retail sales, consumer sentiment and employment all now moving on an upward trend. At the same time, households' spending power is being boosted by low interest rates and a fall in energy prices.
However, the real challenge for investors is to understand how this general improvement will impact on retail rents. Intuition alone does not provide an accurate gauge for how long it takes for changes in the economy to feed through to rental growth.
New research we have conducted shows that earnings and disposable incomes do not have a very big influence on retail rents. Instead, employment is by far the most important factor, with a 1pc rise in jobs growth bringing about a 0.9pc increase in rental growth 15 months later. A reasonable interpretation is that the security of income that comes with having a job is much more important than the size of that income in driving consumer demand. The implication is that people need evidence of a sustained improvement in their finances before making changes to their shopping behaviour which eventually drive retail rents.
One benefit from this research is that it provides us with a mathematical model for forecasting the retail rents index. Rents in the prime high street and shopping centre locations have been growing strongly for some time. However, performance varies greatly by region and store type, and the overall IPD index - which includes a significant weighting of provincial shops - only returned to positive growth in the final months of 2014.
This recovery has carried through into the first quarter of this year and, according to our model, we should see further modest growth in the index until mid-2016 at least.
Dr John McCartney, Director of Research at Savills, and Dr David Duffy, a Senior Research Officer at the ESRI, will present 'What Explains Retail Rents in Ireland?' at the AGM of the Irish Economic Association on Friday, May 8.