Arnotts to get over €50 million for Grafton Street investment

The River Island store is to be sold by tender now that its owner, Arnotts, is restructuring. Jack Fagan, Property Editor, reports

The River Island store on Dublin's Grafton Street is to be sold by tender next month following the completion of a new lease agreement at a record rent level.

Agent Druker Fanning & Partners is quoting in excess of €50 million for what is the most important single retail investment to come on the market in recent years.

The double-fronted building near the bottom of Grafton Street is being sold by Arnotts as part of a restructuring of the company which was recently taken private in a €280 million deal.

The sale comes after the giant UK multiple River Island completed contracts to lease the landmark building at a rent of €2.1 million per annum.

The 20-year full repairing and insurance lease provides for five- yearly upwards-only rent reviews. The new rent equates to a Zone A level of €13,751 per sq m (€1,275 per sq ft) - more than double the going rate on the street.

River Island has more than 200 stores in the UK and Ireland and has been trading successfully at number 102/103 Grafton Street for about a decade. One of Arnotts' trading subsidiaries, Impulse, which has also been based in part of the Grafton Street building, is to transfer to Henry Street.

This will allow River Island to have the full use of the entire 1,393 sq m (15,000 sq ft) on six levels.

Three of the floors are in retail use, the ground floor with 321.4 sq m (3,460 sq ft), the basement with 218.3 sq m (2,350 sq ft) and first floor level of 202.2 sq m (2,177 sq ft).

The building is located along one of the busiest stretches of Grafton Street and has a frontage of 44 ft next to jewellers Weir & Sons.

Although the institutions have been mainly sellers rather than buyers in the property investment market this year, it is thought likely that some of them will pitch for River Island, given the high quality of the landmark building and the strength of the covenant.

There is also likely to be interest from pension funds, business consortia and high net worth individuals looking for a secure investment.

Institutions which own most of the buildings on Grafton Street have done exceptionally well in recent years through steady rental and capital growth.

Only three months ago, the Irish Pension Fund Property Unit Trust prepared the ground for another round of rent increases on Grafton Street when it re-let Thorntons chocolate shop to O2 at a Zone A level of €6,201 per sq m (€576 per sq ft), representing an increase of 25 per cent on the old rent.

Though the new Zone A rent agreed for River Island will take traders on the street by surprise, there is little likelihood of it being used as a benchmark for other rent reviews due to be negotiated in the coming months. A general Zone A rent level anywhere near the €13,751 figure agreed for River Island (equating to a Zone A rate of €1,275 per sq ft) would put many of the businesses on the street at risk.

Most of the smaller shops do not have a large enough turnover to justify such a high rent level.

River Island has little or nothing in common with the general run of shops on Grafton Street and for rental reasons can only be compared to BT2 and A Wear, two large stores controlled by Brown Thomas.

Yields on both Grafton Street and Henry Street have been falling steadily in recent years because of intense competition between investors looking for solid long-term growth at a time of continuing uncertainty on stock markets.

Last November, a leading businessman paid over €15 million for 21 and 22 Grafton Street, let to O'Connells Pharmacy and Fields Jewellers.

The purchaser's decision to settle for a return of 3 per cent surprised the market but only for three days. At that stage, an even lower benchmark yield was set - 2.93 per cent - when Lisney completed the sale of the Grafton Pharmacy for just over €6.5 million.

Arnotts, which has owned number 102/103 Grafton Street for decades, surprised the market last month when it paid over €40 million for four shops on Henry Street.

Though the initial yield is expected to be no more than 2.25 per cent, the equivalent yield will probably be at least 3 per cent.

Arnotts' long-term strategy would obviously be to incorporate the four shops into its department store, easily the most successful in the city.

The decision by Arnotts to sell the Grafton Street store is thought to be have been triggered by its plan to invest around €130 million on the expansion of its Henry Street store. The company has acquired an extra two acres of space between Henry Street and Middle Abbey Street, most of it in the head office of Independent Newspapers.

The chairman of Arnotts, Mr Richard Nesbitt, has forecast that the fortunes of Henry Street will be greatly enhanced by the Arnotts expansion and also by the recent opening of the Zara shop.