Retail MarketBuoyant levels of consumer spending are leading to an explosion of retail space and rental values around the country, writes Gretchen Friemann
At the end of last year many property pundits wondered whether the retailing phenomenon in Ireland could sustain another year of record low yields.
The conventional wisdom was that there would be some moderation in the market. Instead the reverse has occurred.
Yields on Grafton Street have sunk below 2 per cent while premiums for space on the world's fifth most expensive thoroughfare have soared to new highs.
Despite successive interest rate hikes, consumer spending is hurtling ahead and property agents are predicting yet another bumper Christmas shopping season.
In a recent survey, accountants Deloitte and Touche estimated that Irish households will be the biggest spenders in Europe during this festive period.
Such solid prosperity is firing competition in the market for retail investments, and developers, private investors and institutions are focusing most of their attention on well located shopping centres where international brands can satisfy their requirements for large-scale units.
In fact, 2006 may be remembered by many in the industry for the €575 million forked out by developer Joe O'Reilly for the Pavilions shopping centre in Swords. His determination to beat off the competition for the site resulted in the largest ever single property deal in Ireland. It also confirmed O'Reilly as one of the most prolific developers in the country with the Swords acquisition bringing the value of his retail investments portfolio to around €2 billion.
Shortly after the sale, it emerged that two major institutions, IPUT and Irish Life, had negotiated a €240 million stake in the complex, bringing the level of money on this transaction to €815 million.
The eye-watering price that was paid for the Pavilions is largely down to its development potential. O'Reilly, the property tycoon behind the Dundrum shopping centre, South King Street and the refurbishment of the Ilac centre, wants to extend the scheme into a major retail destination serving the ballooning population belt of north Dublin.
But the Pavilions deal also underscores the strength of the retail boom. The ferocious demand for the property among the country's largest investors illustrates what a dominant force the shopping centre has become in the Irish economy.
According to Dr Clare Eriksson, head of research with Jones Lang LaSalle, "Ireland now has the third highest level of shopping centre space in Europe".
In the past few years vast acres of mall space have been built to satisfy the consumer spending binge.
In 2005, Europe's largest shopping centre - the Dundrum Town Centre - was unveiled, while last April the doors opened on the €400 million Whitewater scheme, the largest retail complex outside of Dublin.
Aside from Ireland's unwavering consumer confidence, a key driver of this growth has been the expansion in the market of major retail chains, such as Debenhams, Dunnes Stores and Marks & Spencer.
These anchor tenants are crucial to the success of a scheme, as they attract smaller, complementary retailers and so often determine whether the development achieves critical mass in what has become an increasingly competitive market.
Earlier this year the prospects for shopping centre developers across the country were particularly rosy.
Debenhams was on the lookout for nine department store locations. Then, in one swoop, the retailer erased two major players from the market with the takeover last August of the Roches Stores properties.
Larry Brennan of HOK describes the move as "the most fundamental change" in the retail sector this year. "Effectively, it has taken both Debenhams and Roches Stores out of the market and we need to find a strong alternative to the British anchor."
However, Kevin Sweeney of Bannon Commercial, speculates that Debenhams might be back on the hunt for space before long. "Some of the old Roches stores are not as big as Debenhams would normally use for its department store format. So it's highly probable that some of these units will trade as the Desire at Debenhams range, allowing the company to continue to expand its department stores."
He also questions whether developers will have to rely as heavily on anchor tenants to fill their schemes in the future, given the number of international retailers looking to either enter or expand in the Irish market. "It should be possible to fill a development with medium-sized operators, such as Zara or H&M," he says, while also pointing out that this was the strategy employed on the new Athlone Town Centre, which is scheduled to open in 2007.
While shopping centres are often the launch pad for an international brand's arrival into the Irish market, city centre locations remain the preferred flagship location for retailers.
According to Stephen Murray of Jones Lang LaSalle, this is why values on Grafton Street continue to hit unprecedented heights.
Zone A rents on the thoroughfare are now close to €11,000 per sq m (€1,022 per sq ft) following the Karen Millen letting last summer.
And yields on the country's leading high street have dropped below 2 per cent with the sale of the freehold of the O'Connor's Jean shop earlier this year.
In 2005 many commentators expressed dismay at the down-market range of shops on Grafton Street. But Murray claims there has been a "clear improvement over the past 12 months" with the arrival of high-end retailers, such as jewellery chains Boodles and Swarovski.
He argues that the massive redevelopment projects on the other side of the Liffey, which include the revamp of an eight-acre site by Arnotts, as well as the Ilac centre overhaul, will dramatically increase rental values on Henry Street.
"Once we see re-lettings on Henry Street I think we will see a significant rise in the zone A rents. The problem so far has been the thin turnover but this will change over the next 12 months."
