Retail Review: Retail has been a star performer again in 2005 but, with so much competition in the sector, opinion is divided as to whether the boom can continue, writes Gretchen Friemann
The domestic retail sector has continued to defy gravity this year. Capital growth has rocketed in prime areas while yields have sunk below 3 per cent for the first time ever.
But opinion is divided as to whether the boom can continue.
Some property experts predict yields on Dublin's Grafton Street will edge upwards in 2006 as rental growth hits a ceiling.
Over the past three to four years, Zone A rents on the thoroughfare have more than doubled from €4,305 per sq m (€400 per sq ft) to €8,827 per sq m (€820 per sq ft).
These are unprecedented levels that many believe are unsustainable. Hugh Linehan, head of property at Hibernian Investments, argues "it's hard to see where the growth is going to come from in such a market. I can't imagine yields can get any lower. It looks like we've reached the bottom."
Traditional traders on the world's fifth most expensive thoroughfare must be pinning their hopes on such predictions. The staggering rents achieved at open market are forcing punitive rental review hikes with some tenants swallowing increases of over 100 per cent.
Multinational phone companies are among the few retailers that can stomach such rates but their presence on the street has led to accusations that the nation's premier shopping thoroughfare is rapidly losing its reputation and appeal.
The European Central Bank's widely anticipated decision to raise short-term interest rates this week may create additional pressure in the market.
Recently, property bears have warned a change in the rate cycle could seriously weaken consumer spending, as credit levels have soared to record highs following five years of downward rate adjustments.
But Ann Hargaden, Lisney's investments director, claims it would take a 1 per cent increase in interest rates before any effect is felt on the high street.
She also argues that yields in prime retail areas, such as Grafton Street, could dip even lower next year due to the "sheer volumes of cash chasing property", as well as "the pent-up demand" for space from multinational retailers.
"Grafton Street will always be the first preference for companies looking to enter the Irish market and that means rents still have room to grow."
She claims large-scale suburban shopping centres, such as Dundrum Town Centre, have soaked up some of the supply constraints constricting the market but questions whether the malls can perform as well as the city centre. "Traditionally, rental growth in the shopping centres has been significantly below city centre rates. I'm sure Dundrum will do very well but it's in its infancy and many traders will want to assess how things are going before they agree to rental increases."
While Dundrum Town Centre has attracted most of the attention this year, with the high-profile openings of House of Fraser and Harvey Nichols, many property experts predict that Henry Street will be the star performer in 2006.
IPUT's investment manager, Niall Gaffney, claims the Zone A rental levels of €4,575-€5,382 per sq m (€425-€500 per sq ft) "signal ample growth opportunities".
Stephen Murray at Jones Lang LaSalle agrees. "There is no reason why, given the footfall and the calibre of retailers, rental values on Henry Street can't reach similar levels to Grafton Street. In fact, the only reason rents haven't risen significantly over the past few years is because there have been very few open market transactions."
However, not all sectors in the retail market enjoy such rosy prospects. Neighbourhood schemes and retail warehousing are dangerously over-supplied in some city areas and provincial towns, according to Murray and he claims rental incomes will either stagnate or drop in those schemes failing to achieve a "critical mass".
A few years ago developers of retail warehouse parks had DIY operators queuing up to lease space. But the scale of construction in this sector has turned the tide in favour of the tenants. And with two of the largest operators, Atlantic Homecare and Woodies, no longer competing directly against each other following the merger of parent companies, Heitons and Grafton, many provincial schemes are struggling to attract an anchor tenant.
Those that do are likely to survive, Murray claims, but he thinks in many cases new retail warehouse schemes will "fail to ever move off the plans".
