Monday 16 September 2019

Will property retail market get the rub of the Green?

With yields softening, the price St Stephen's Green Shopping Centre fetches will tell us a lot about the state of the retail property market, writes Dan White

The landmark St Stephen's Green Shopping Centre - which was put on the market last week - will be a barometer of the retail landscape based on its selling price
The landmark St Stephen's Green Shopping Centre - which was put on the market last week - will be a barometer of the retail landscape based on its selling price

The Irish economy is the fastest-growing in Europe with the ESRI forecasting domestic growth of 4pc this year and a further 3.2pc in 2020. Employment and earnings are also increasing rapidly. The total number of people in work rose by a further 81,000 to an all-time high of 2.3 million in the past year while average earnings are up by 3.4pc.

Total earnings, which include both the increased earnings of those who were already in employment and the impact of new jobs, rose by 7.4pc in 2018.

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Under 'normal' circumstances this combination of very strong employment and earnings growth would be feeding through into bumper retail sales. This doesn't seem to be happening.

While the value of non-motor retail sales jumped 4.1p in the first quarter of 2019, they increased by just 2.1pc for the whole of 2018. The total value of retail sales has risen by just 9pc over the past four years.

What's happening?

While very high housing costs are definitely contributing to the failure of strong employment and earnings growth to translate into retail sales, the major culprit is almost certainly the rise and rise of online shopping.

Up to recently there has been a dearth of 'hard' data on online retailing, forcing us to rely on survey results and guesstimates instead. That is beginning to change. The Central Bank is now publishing detailed credit and debit card statistics, including the amount spent on ecommerce. These show that a total of €10.2bn was spent on ecommerce in the six months to the end of April. That was more than a quarter of the total €37bn spent using cards over the same period.

Strip out ATM withdrawals on debit cards (€9.75bn) - this figure isn't available for credit cards - and the proportion of card spending on ecommerce rises to at least 36pc, well over a third. The fact that such a high percentage of total card spending is now going online should hardly come as any surprise.

While the Central Bank figures exclude sales paid for with good old-fashioned cash, they still provide us with the first hard data on the rise of ecommerce. As we get more numbers it seems reasonable to assume that the proportion of card spending going on ecommerce will continue to rise from its current, already very high, level.

All of which is bad news for traditional retailers and their landlords.

Time was when retail was a central part of most institutional property portfolios. Not any more.

"On the investor side there is a shallower pool of buyers, not just in Ireland but throughout Europe," says Marie Hunt, head of research at property consultants CBRE.

"The sector is now keener to invest in offices and multifamily residential. However, there are still some investors buying retail because yields are attractive."

One result of the shift to online has been the deceleration of the rate of increase in retail rents with average annual rental growth now running at just 1.6pc.

It isn't just the market share that traditional retailers have lost to online. As Savills' head of research, John McCartney, wrote in a recent report, they have also had to cut prices on their remaining sales.

"A less obvious challenge from online retailing is the fact that the internet creates almost perfect [price] transparency, forcing traditional retailers into cutting prices to remain competitive with the online offering. This pressure is clearly visible within the Irish retail sector". An indication of this discounting is provided by the gap between the increase in the volume of retail sales and the increase in the value of retail sales, with the 3.7pc rise in the volume of non-motor sales recorded in 2018 being 1.3pc greater than the increase in the value of sales.

For many millennials the traditional store now serves as a kind of showroom where they can touch and feel the merchandise before heading home and then ordering it online. What this means is that chain retailers now need far fewer outlets than they once did, five or six compared to 20 or 30.

These 'showrooms', which will generally be smaller than traditional stores, will only be located on the very busiest streets or shopping malls rather than in secondary venues. The recent tribulations of UK fashion chain Arcadia, which has announced plans to shut up to 10 of its Irish stores, are part of this trend.

With fashion retailers now needing far less space, demand is now increasingly coming from food and beverage and leisure operators.

"Their preference will be for well-located retail stores in good mixed-use and well-designed centres along with high-profile high street locations," says Hunt. However, she doesn't believe that this shift in demand will result in tenants on shorter leases.

"If they want to get the pitch that they want then they will have to pay the market rent. There is a lot of capital outlay at the start, including expensive fit-out, for these outlets. They are signing the same leases as everyone else," she says. At the same time as the demand for main street and shopping centre retail space is shifting from fashion chains to food & beverage and leisure outlets, there has also been a resurgence in investor demand for out-of-town retail warehouse space. In 2018 over half of the money spent by investors on retail property went on retail warehouses. While this was largely accounted for by just two deals, the Westend retail park in Blanchardstown and phase 2 of the Carrickmines retail park, Savills' McCartney reckons that "it also reflects fundamental demand for this type of asset.

"In the immediate aftermath of the economic crisis the demand for retail park assets evaporated as residential construction halted and consumers stopped spending on non-essentials such as homewares, furniture and electrical goods.

"However, since the recovery, stores selling these items have consistently traded well and investors are seeking opportunities, particularly in out-of-town locations that are heavily populated and can benefit from further residential development," McCartney adds.

Last week two prime pieces of Dublin retail property came on the market. Two investors, with a combined 62.4pc shareholding in the St Stephen's Green Shopping Centre, are seeking a buyer for their stake. The asking price of €130m values the 30-year-old shopping centre at just over €200m.

Meanwhile, books and stationery wholesaler and retailer Eason is quoting a price of €24.5m for its flagship O'Connell Street store.

New York-based Madison International Realty paid €60m for its 35.4pc stake in the St Stephen's Green centre in 2015. It stands to receive €73.75m if the guide price is achieved, a 23pc return inside four years. Not bad but only a fraction of the returns earned by some of the overseas investors who piled into residential land and office buildings immediately after the crash.

Potential buyers have been briefed that there is the potential to build up to 200,000 sq ft of new office space above the St Stephen's Green centre. It is this new office space that will almost certainly be of greatest interest to most would-be investors.

Whoever the buyer is, they will almost certainly take a much more hands-on approach than the pension fund and insurance companies who were traditionally the main buyers of prime retail property.

"Investors [in retail property] now need to roll up their sleeves. Only where there is intensive asset-management can value be created," says Hunt.

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