Retail rents on Grafton Street and Henry Street spark debate
Prime Dublin high street retail market rents fell in the last quarter of 2018 according to the latest MSCI Property Index, the authoritative monitor of the Irish property and investment markets undertaken in conjunction with the Society of Chartered Surveyors Ireland (SCSI).
Grafton Street rents fell by 1.2pc compared to 12 months earlier, and Henry Street rents fell by 4.5pc.
However, the MSCI index also shows that retail property in other parts of Dublin city centre performed well, with rents across those locations rising by about 1.5pc in the last quarter and 3pc over the 12 months, and these helped to boost overall returns for investors in this area by as much as 6.6pc in 2018.
Indeed some agents are reporting that food and beverage (F&B) operators are offering key money to move in to rental properties in the city centre.
Kate Ryan, head of research at BNP Paribas Real Estate Ireland (BNPPRE), takes issue with the MSCI findings on rental trends on Grafton and Henry streets, however.
"We can only assume this includes both small and large floorplate properties which… command very different rents in the present market… From our perspective there is no evidence of a decline in rents on Grafton and Henry/Mary Street.
"Indeed recent letting evidence on Grafton Street in particular, even for smaller units such as No 32 (Smiggle - July 2018) and No 81 (Rituals - September 2018) shows that Zone 'A' rents in excess of €6,500 per sq m are being achieved. This is an increase relative to 2017 when Zone 'A' rents for standard units were in the region of €5,500 - €6,000. Rents for larger stores such as The White Company are at €7,000 per sq m," she says.
"There is a distinct under-supply of larger units which are more sought after in the current market and which command higher rents. This, along with low vacancy levels on the two main streets, has led retailers to look towards other city centre locations, leading to rental growth in the surrounding area.
"Very few opportunities are becoming available in core city centre locations and when they do, a number of parties will be chasing the same stores," Ms Ryan adds.
BNPPRE also welcomes prospects for increased retail space around the city's top shopping destinations with almost 20,000 sq m (215,278 sq ft) of new or re-purposed retail/food and beverage space in the city centre pipeline. It instances Central Plaza, the former Central Bank on Dame Street, being redeveloped by Hines, which will include more than 6,500 sq m (69,965 sq ft) of retail/F&B space in a 'Covent Garden' style destination due to open next December.
MSCI's index also shows that retail warehouse rents grew 6.3pc over 2018. Colm Lauder of stockbrokers, Goodbody, attributes growth in retail park rents to a recovery in Irish consumer spending, particularly for household goods as those retailers benefit from the growth in house buying and home improvement activity.
MSCI shows that shopping centre rents also grew, up by 3.6pc on average in 2018 with prime shopping centres and particularly Dundrum Town Centre, but also Blanchardstown, Pavilions and Liffey Valley, being the main drivers of this growth.
According to the MSCI index, industrial property was the top performer in 2018, with North Dublin properties in the vicinity of Dublin Airport posting the strongest total returns at 14.4pc in 2018 - over 500 basis points above the market average of 9.1pc for the 12 months.
The 'Other' property segment, predominantly made up of Dublin Residential PRS assets, was also a strong performer with annual rental growth of 9.9pc, leading to capital value growth of 11.8pc for the year.
Since the index was published, CBRE has announced that it intends to move prime PRS (Build-to-Rent) residential net initial yields in by 15 basis points (bps) to 3.85pc.
Mr Lauder says this translates to a 4pc uplift in capital values and is likely to lead to expectations that net asset values (NAV) for PRS will increase for investors in this sector.
He compares the 3.85pc yield for prime PRS to the 4pc for prime Central Dublin offices and 5.1pc for prime Dublin logistics. "The PRS sector has now become a mainstream investment sector of the Irish market, accounting for 30pc of investment spend in 2018," he adds.
MSCI's Irish property index is based on the performance of almost €10bn of assets and it shows that the value of Central Dublin offices increased by 4.4pc in 2018, with capital values of prime offices rising by 5.9pc.
Overall, Central Dublin office market rents rose by a modest 1.6pc compared to the corresponding quarter of 2017, while prime office rents rose by 3pc. Suburban Dublin rents rose by 3.1pc on average, with prime suburban offices the strongest office segment with an increase of 7.9pc compared to the fourth quarter of 2017.
MSCI says that income returns from Dublin offices are near their record lowest level as pricing across sectors narrows.
At the time of his commentary on the MSCI index, Lauder forecast that prime office rents would be broadly flat in 2019. Since he published that commentary on the MSCI index, an update report from Goodbodys says that while landlords may reduce incentives for new office tenants, headline CBD rents will hold steady at €55 to €60 per sq ft. However, those prime CBD rental levels are below estimates from some estate agents.
For instance, HWBC's Paul Scannell says that 2018 saw them range between €60 and €65 per sq ft.
Cushman & Wakefield said that the 2018 levels were €60 per sq ft, and its economist Marian Finnegan expects core CBD rents to rise 4pc to €62.50 per sq ft this year.
She acknowledges that the current scale of development activity should ease rental pressure, with rents remaining at that level to 2020 and adds: "Thereafter, with completions and construction starts in prime locations expected to slow, and the absorption of vacant sites in Dublin's docklands perhaps reducing the scope for further CBD development, the market is anticipated to experience a further increase in prime rents in 2022, to €700 per sq m (€65 per sq ft)."