Less than three years after it was bought for €750 million, Blanchardstown Centre is coming to the market again at a discount. News last week that agents had been appointed to find a buyer for the centre underline the intense pressure that traditional retail finds itself under in the wake of a pandemic that cut a swathe through the sector globally, claiming a number of high-profile victims, and from ecommerce in the Amazon era.
But the impending sale of the 1.2 million sq ft (111,500sq m) hub is part of a larger pattern than has emerged over a number of years. A slew of both urban and regional properties have come to market and been sold in that time, many of them for well below their guide price. Rough calculations indicate that the gap between the achieved and asking prices of a non-exhaustive sample of around 10 of the more high-profile individual transactions was around 4 to 5 per cent.
In some cases, the gap has been considerably larger. A portion of Eyre Square Shopping Centre in Galway, part of a portfolio of retail hubs US investment giant Marathon Asset Management built in the aftermath of financial crisis, came to market with a price tag of €12.75 million but was sold to a Davy Real Estate fund for €9.575 million in November 2022, a discount of 33 per cent. While the scheme comprises over 70 retail units and kiosks, negotiations led to the sale being confined to eight retail units and control of the centre together with the freehold common area units.
If and when it is sold, Blanchardstown itself is likely to be another example. It is expected to carry a guide price of €650 million-€725 million, some €25 million-€100 million less than Goldman Sachs paid for it in 2019 and also considerably lower than the €950 million for which Stephen Vernon sold it to Blackstone in 2016.
The doom and gloom has had a knock-on effect on rents, dragging down the perceived value of shopping centre assets
— Investor
By and large, industry experts, investors and analysts seem to agree that although there is still considerable investor interest in the asset class, the top of the market has come and gone. Others who spoke to The Irish Times this week say they believe that Goldman will struggle mightily to offload Blanchardstown in the current climate, despite its lucrative rent roll and current occupancy levels.
So is the slow, seemingly endless death of retail beginning the take a bite out of shopping centre valuations? It depends who you ask in the industry. Most, however, seem to agree that the market is heading into uncharted waters, buffeted by headwinds, some structural and very specific to the asset class. Other, more familiar issues are affecting the commercial property market here in general.
“Amid high inflation and interest rates globally,” the Central Bank of Ireland stated baldly in its most recent Financial Stability Review last week, “[commercial real estate] markets are coming under increasing pressure.” By its calculations, capital values in the overall commercial sector here have slipped by a hefty 9.4 per cent in the year to the end of March, “in line with the deteriorating global environment”.
The issue is, of course, the Irish market’s “sensitivity to external shocks” such as “rising funding costs” and “tightening credit conditions”, given that “a high share of expenditure in the Irish [commercial real estate] market originates from abroad”. By contrast, with central banks buttressing financial markets in the teeth of the Covid pandemic, interest rates were hovering at historic lows when Goldman acquired Blanchardstown for a reported €750 million in December 2020.
Knock-on effects
A lot of water has passed under the bridge since then, with the European Central Bank, to take just one institution, hiking rates by 3.75 percentage points since last summer. The knock-on effects have been pretty clear, according to one investor, who wished to remain anonymous. “I think probably the single biggest problem is the fact that the return of the bond market gives asset allocators the opportunity of going back to bonds and out of real estate.”
Indeed, the increasing attractiveness of bonds for investment funds against the backdrop of rising rates is an acute issue in the commercial sector, given the “bond-like” characteristics of retail rent rolls. “I would imagine that asset allocators in pension funds and places like that would be quite keen to sort of start thinking about fixed income again,” he says, “at the expense of alternatives like real estate.”
I think there is a future for the public space, and shopping malls are at the heart of that. But someone has got to figure out how you really organise and monetise it given all the negatives
— Stephen Vernon
Then there are more specific issues that the retail subsector is facing. It is no secret that the rise of ecommerce over the past decade, turbocharged by the pandemic, has taken a bite out of bricks-and-mortar retail. Traditional retailers are among the most shorted stocks on Wall Street and other bourses.
The doom and gloom has had a knock-on effect on rents, dragging down the perceived value of shopping centre assets as investments across Europe and further afield, one investors explains.
“Shopping centres have been hit disproportionately by ecommerce and also the demise of the department store anchor,” the investor says. “And the problem now is that department stores expect very low rents, and in many cases they don’t want to pay their share of the service charge. So they’ve got much more power in the negotiation than they had before, because department stores aren’t exactly fighting each other to take space.”
The flipside to the doom and gloom is that despite the decline in values, activity in the retail subsector of the commercial property market has been on upward trajectory over the past year, particularly outside of Dublin.
“Retail has actually been a sort of unpopular investment over the last four or five years,” says John McCartney, head of research at BNP Paribas Real Estate. “But certainly, over the last 12 months, retail as a proportion of overall property investment has gone up. It was around 14 per cent in the fourth quarter of last year, having hovered around 3 or 4 per cent for a long while. I think it was 11 per cent or 12 per cent in the first quarter of 2023 as well. So there has been quite a bit of investor appetite”, he says, “particularly for regional shopping centres.”
Anecdotal evidence would seem to back to this up. A raft of shopping centre assets have changed hands over the past two years, largely due to Marathon’s ongoing disposal of its Irish shopping centre and retail park portfolio, most recently at Eyre Square Shopping Centre in Galway and City Square in Galway. Other highlights have included developer Clayton Love’s roughly €23 million sale of Douglas Shopping Centre in Cork to the Tom Coughlan-helmed Urban Green Private in February. he investment firm was happy to pay a slight premium for the property over its guide price. With both the Paul Street and Opera Lane shopping centres having hit the market in recent months, more deals are likely in the offing.
Occupancy rebounding
McCartney says: “I think the rationale is as follows: offices were traditionally the mainstay of the investment market, and they’re now facing the kind of structural challenges that retail was facing five years ago. Working from home or hybrid working to [the office market] is what online was to retail five years ago.” So with retail occupancy rates rebounding towards 2019 levels after the pandemic, the steady rental income that a community-based, convenience-led shopping centre or retail park can generate is proving particularly popular. Some of those assets – Douglas, for example, which is anchored by Tesco and Marks & Spencer and generates annual rental income of more than €2.4 million – have “very attractive yield profile”, McCartney says.
While the retail side remains at the forefront of investors’ minds, there is something else going on as well. One Dublin-based analyst at an international property agent, who wished to remain anonymous, says that in a least some cases, new entrants to the market are, if not planning to repurpose the shopping centre, then certainly not ruling out down the line.
“What they’re looking at is a relatively recently built building,” he says, “usually very well located in a city or town centre or on an edge of city with car parking and a lot of space. So you have an existing footfall but maybe they’re looking at that property and thinking they’re not planning to use every inch of it for retail. So they can let it go to leisure use or medical use or hotel use.”
At the end of the day, “they occupy extremely valuable pieces of land”, says Stephen Vernon, whose sale of Blanchardstown to Blackstone for almost €1 billion in 2018 seems to have been the market’s high watermark. “I don’t think towns are going away. If anything, they will become more important hubs in the long run with people wanting to socialise, moving away from sitting at home and working on their computers.” Against this backdrop, he says: “I think there is a future for the public space, and shopping malls are at the heart of that. But someone has got to figure out how you really organise and monetise it given all the negatives.”
Is the bottom of the market fast approaching? “I just don’t know,” Vernon says. “But I think fortunes will be made when people do buy at the bottom of the market and figure out how to really make it work. I think it’s a question of somebody’s got to figure out how you reimagine the shopping centre in the modern world.”
Blanchardstown and the other larger suburban centres, however, seem to be horses of a different colour. A temperature check of analysts this week indicates a general scepticism among the experts about whether the requisite appetite, or indeed the funding, is forthcoming for some of the larger assets. While the strength of the broader commercial property market seemed to take everyone by surprise post-Covid, the interest rate environment coupled with general concerns about the global economic outlook could well conspire against Goldman Sachs in its efforts to achieve value for the property.
After suffering the loss of anchor tenant Debenhams at the outset of the pandemic, the US investment banking giant has put time and effort into giving the 27-year-old retail hub a facelift. It secured new anchor tenants, Zara and the Mike Ashley-owned Flannels, last summer. Blanchardstown and the other big centres such as Dundrum (co-owned by Allianz and Hammerson) and Liffey Valley, which is managed by Hines on behalf of a German pension fund, are “looking better than they ever have”, says one analyst, and have certainly “stabilised from a leasing point of view” in the aftermath of the pandemic. “But it sort of ends there really,” he says, “because the problem is who’s going to take them on?”
The size of the properties and the onerous capital expenditure requirements over time are the main issues that narrow the field of potential buyers. Blanchardstown and its ilk are virtually “mini cities”, as one expert put it. “They are complex, living organisms that are very challenging assets. It is a very specialist sector, you can alarmingly quickly lose an alarming amount of money.”
Seasoned operator
That means that whoever takes them on needs to be a seasoned operator, developer or asset manager with experience in the sector. The trouble is, however, that this category of investor is generally not in buying mode at the moment.
“The timing is not great for those assets in the macro sense from an investment perspective,” says one analyst. “They’re in as good a shape as they’ve been in years, they’re free from Covid and fully leased or the leasing risk has been minimised. It’s just that, unfortunately, the macro global investment market is not in the same place at the moment.”
