The performance of a property market is dependent on economic fundamentals, and the retail sector is no different. The Irish economy continues to perform exceptionally well, with GDP growth at 7.8% (CSO) for 2017 (vs 2.7% for the Eurozone). Unemployment is 6.0% (CSO), down from 16% in 2012. With disposable income on the increase in Ireland, and unemployment continuing to decline, retail sales should prosper as a result.
The retail sector is receiving some negative publicity on foot of the continued expansion of e-commerce. In fact, retail sales (excl. new cars) grew by 4.1% in 2017 (CSO). While there has been an increase in e-commerce, big online retailers typically take a “clicks and bricks” approach, with a foothold in most prime locations. Retail is evolving to meet changing consumer habits. The evolution of retail is moving towards an experiential offering. Shopping centres are focussing on alternative offerings to increase dwell times (such as wellness and childcare), while high street stores (such as Nike) are holding fitness classes in store, as an additional draw for consumers. Zara has opened up its first technology-driven, click & collect store in London, with mirrors that have embedded technology to help shoppers make informed choices.
Retail Investment in Context
The Friends First Irish Property Fund is a retail focussed fund, with 43% currently invested in retail. It is important to differentiate the sub-sectors of retail within this as they each depend on different aspects of economic growth.
Dublin 1 & 2 Retail sector includes the two prime retail areas, Grafton Street and Henry Street, as well as the ancillary streets. Rental levels are continuing to increase, particularly on the two main streets, as occupier and investor demand outweigh supply. This supply/demand imbalance is driving up rent (currently c.€6,750 psqm / €650 psf) with prime retail rental growth expected at 6% for 2018 (CBRE). Following the recent lettings of numbers 32 and 72 Grafton Street, the street is close to full occupancy.
In the Friends First fund, our city centre retail assets include the Disney store on Grafton Street and 3 Mobile on Henry Street; 1, 3 and 5 St. Stephen’s Green, as well as our “off pitch” retail assets on South William Street, Clarendon Street and Merrion Row. These “off pitch” Dublin city retail properties are expected to benefit from the increased pricing on the nearby high streets. Niche retailers and food offerings who do not require the expensive prime pitches are chasing the available stock on these ancillary streets.
Dublin City Shopping Centres include St. Stephen’s Green, Jervis Street, Ilac centre and Friends First’s Royal Hibernian Way. Most of these are quite dated, and have not adapted to the changing retail environment. St. Stephen’s Green is due to undergo a major refurbishment, merging smaller units and introducing a cinema offering. Friends First’s Royal Hibernian Way (between Grafton and Dawson Street) is going through a major redevelopment to upgrade the mall and amalgamate and convert some smaller retail units into high-end restaurants.
Dublin suburban retail includes high street shops and shopping centres outside of the city. This is a sub-sector that is struggling in some towns, where smaller landlords are not actively managing their assets. Friends First, however, has very clear strategies for their three properties within this sub-sector. Friends First owns SuperValu in the Pavilions, Swords and Bank of Ireland, Balbriggan, both of which are core, income generating assets, with high quality covenants and long leases. In addition, the Blackrock Shopping Centre going through a redevelopment which should differentiate it from other centres in the local area. The centre is anchored by Musgraves, which will be accompanied by artisan food providers, niche retailers and experiential offerings.
Regional retail parks are a different asset class to high street retail or shopping centres. The type of goods sold in retail parks (furniture, textiles, garden products etc) are the ones that consumers want to “touch and feel”, and will always require a physical presence. This sector is improving as the volume of new house builds is gathering momentum.
Within the Friends First fund, there is The Globe (Naas), and Kilkenny Retail Park. A number of asset management initiatives have been completed, and both parks are at full occupancy. A coffee pod unit has been constructed in the Globe, with Costa Coffee in occupation. A similar strategy will be implemented in Kilkenny over the coming months.
In the right hands, retail investment is an evolution, not an endangered species. Landlords must be flexible and adaptable, or their properties will fall victim to the retail evolution.
Senior Manager – Property Fund Management
The views and opinions expressed in this article are those of the author.