Irish property market: Slow road to recovery

At first glance, Poundland’s move into the Republic of Ireland seems to have been straightforward. It has rolled out 10 stores under the Dealz brand in six months and, as consumer spending is still tight, the market is crying out for value shops.

But scratch beneath the surface and a different picture emerges. Not a picture of Poundland’s success or failure, but of the property market it’s moving into and the problems the environment is causing for retailers.

Poundland property director Craig Bales says: “Our initial view was that entering the Republic of Ireland would be fairly straightforward. On the retail side it’s been good, but on the property side it has been challenging. It has been very tricky to unlock the market over there.”

So what’s going in the Irish market, and what does it mean for retailers aiming to expand there?

The one positive note in the latest Retail Update by property agency Lisney, which reports on the health of Irish retail property, was a slight increase in demand in top destinations such as Dublin’s Grafton Street and Henry Street. Activity remains low in terms of actual deals, but agents report a big jump in the number of enquiries since the start of the year.

Overall, however, things are still tough. As Lisney head of research Aoife Brennan says: “Outside of the prime streets it’s pretty bleak. Any sort of secondary centres around the city are suffering quite a lot and vacancy rates can be bad.”

Rental values in Ireland have fallen by 46.1% since their highest point in 2007. On Grafton Street they are down by 54.6%. But Karl Stewart, retail director at agency DTZ Sherry Fitzgerald, believes that a fundamental shift is occurring.

He says: “There’s been a lot of correcting done in terms of rents. Landlords are trying to do more with tenants to do things better. We’re having to remodel the economy.”

As well as the correction in rental values that Stewart describes, another interesting development, says Brennan, is the emergence of the turnover-based deal, which many retailers see as fairer. Turnover deals mean retailers pay a small minimum amount of rent, with the rest determined by how much turnover they generate that year. Not only does this mean they pay less rent during a bad year, but it incentivises landlords to invest money in stores to keep them looking attractive to shoppers – because both parties benefit if footfall and revenues are higher.

Levelling out

So surely if rents are coming down and leases are becoming fairer, that’s a good thing for retailers? Brennan agrees the rent reductions are good news for many. “Some great deals are available for retailers. You will find some retailers are expanding rapidly like the discount retailers. They’re doing pretty well.”

Poundland has seen the potential. It unveiled ambitious plans to open up a raft of stores in the Republic of Ireland last autumn, trading under the Dealz fascia, and already it has exceeded its targets. In the next year it will add at least 15 more and will keep going until it reaches around 45 stores.

The thinking was simple. With a 28% fall in consumer spend in three years, huge drops in rents and a relatively uncrowded value sector, Poundland spotted an opportunity.

But, Bales explains, the property market has been trickier to navigate than the retailer first anticipated. There are few new opportunities because retailers are still locked into long-term, expensive contracts, and rents still haven’t fallen as far as they need to. “The market’s in a stagnant state,” he says. “It’s stuck and it’s not moving either way. Lots of retailers are locked into very high rents and very long leases. Now they’ve come down but they’re still above market rent.”

A two-pronged problem has arisen. The fall in rents hasn’t gone as far as it needs to for retailers, but it’s big enough to create a problem for landlords.

Plummeting yields and rising vacancies means stagnation in development. Landlords are unable to get bank credit to fund new developments, which further down the line will be bad news for retailers looking to for expansion options. Plus, there’s not enough money floating around for landlords to spend on sprucing up their existing properties – and retailers will bear the brunt of this if shoppers are put off by shabby stores.

Unless, of course, they want to pay for refurbishment themselves, which is what Dealz has done. Bales says: “The landlords don’t have cash for redevelopment or asset management. Our capital investment is far higher over there as a result of not getting contributions from landlords.” Which means, he adds, rents will have to fall even more.

So what’s the solution? Clearly long term, the return of consumer confidence and spending is the only real way for the situation to improve. But as Poundland’s experience and the development outlook show, things won’t change while credit remains unobtainable.

Nobody expects swathes of new property to be built, especially while demand is so weak. But if retailers are going to be encouraged into the country, further rent reductions and some activity in the financial sector will be needed.

Peter Cummings, director of global asset management company Turner & Townsend, says that the overall outlook is tough but that opportunities are there for retailers who are willing to invest.

He says: “It gives retailers an opportunity to step into the market. Ultimately the landlords are taking a hit but maybe on the flipside they might think it’s better to be fully occupied with lower rents, than half occupied at full rents.”

Things appear to be heading in the right direction. GDP growth by volume increased in 2011, after three years of decline in 2008, 2009 and 2010. Unemployment, while high at 14.3%, doesn’t appear to be rising, and there was a slight rise in retail sales of 0.2% in March this year compared with March 2011.

But these are only slight improvements. There isn’t anyone with an interest in retail or property in Ireland who expects a miraculous recovery in shopper spend, occupancy levels, rental values or investment in development any time soon.

Healthy days for the property market might be “several years from returning”, as Bales says. But this hasn’t discouraged the Poundland property director from investing in Ireland, and there are others willing to do the same if the conditions are made slightly more favourable.