Retail Realities by Neil Bannon
Consumer demand in Ireland is up, but new retail outlets are few and far between, and rental Growth is modest.
Before writing a piece on the retail market, I should address the elephant in the room: retail has become a dirty word in the property market. Investors are happy to buy private rental sector (PRS), sheds, hotels and offices without recourse to supply demand dynamics or potential technological disruption, but they are spooked by retail. The impact of technology on remote working is ignored in the office market, but the ability to buy from home has become the obsession of the investment community. Like many issues in the world today the narrative has drowned out the reality. Retail real estate, like all other markets, is driven by the dynamics of supply and demand. What has spooked the market is the arrival of a new element of supply it doesn’t understand – the internet. Online shopping is just another form of supply into the market, another conduit through which consumers can purchase products and services. It has a different impact on different products and services because some, such as music, are easily supplied online, whereas others like getting your hair cut or buying a cup of coffee are clearly not. Most things we buy fall somewhere in between and can be acquired through multiple channels, and it is in this non-binary world that retailers are targeting consumers. A simple way to think of the impact of online is as additional supply into the market because, as with all markets, the supply-demand dynamic will ultimately determine value.
The danger of comparison
Now that we have outed the evil internet, let’s consider what’s happening in Ireland’s retail market and how this compares to other markets in Europe. Except that’s quite difficult. Retail is local and consequently direct line comparisons expose different approaches across Europe and can be very misleading. For example, in Ireland we have retail parks – collections of large sheds beside big car parks where in most cases you can only sell bulky goods due to strict planning restrictions. In France they have a lot of retail warehouses but they can sell anything from shoes to deckchairs, and in most cases they are stand-alone boxes. In the UK, shopping parks with the same form of development but with much greater open use are more common. In Germany, the supermarket business is dominated by discounters who in large part rent their stores, whereas in Ireland around 90% of the supermarkets are owner occupied.
Searching for common statistics in such widely different markets is dangerous. In a recent representation to a European institutional investor, we were quoted vacancy rates that they had been sent indicating that Ireland suffered from similar vacancy rates to the UK. As Bannon is instructed on about 25% of Ireland’s stock of shopping centres and retail parks, we were able to advise that our composite vacancy rate was only 7%, significantly lower than they had been advised, meaning that either the stats they had been given were incorrect or the rest of the Irish market is having a torrid time and the owners of these assets should appoint Bannon quickly to sort out their vacancy issues. The same problems arise with respect to rates per square metre, growth in rents and yields. Euro-wide stats should be taken as a broad guideline only. We look beyond the statistical morass to what makes retail really tick, which brings us back to the supply-demand dynamic.
Stagnant supply
Supply in the Irish retail market has been stagnant for over a decade. Other than a couple of stragglers that were committed to construction when the lights came on in the casino in 2008, nothing has opened and nothing new has been started. This makes physical supply very easy to measure. During the recession Bannon data based the entire market, and keeping it up to date to accommodate new supply has been depressingly easy. There have been some stand-alone supermarkets but the pace of new development here has also been light and mainly focused on openings by the discounters Lidl and Aldi. The mainstream supermarket players are currently opening stores at the rate of one every five years.
Goodbody Stockbrokers measured the supply in the Irish market per capita in 2017, which showed us to be mid table in Europe, and 20% less than the UK. Strikingly, the US, where all the scary mood music is coming from that the internet is going to kill shops, has six times the supply of the Irish market. Think of the five biggest shopping centres near you and then imagine there’s five more of each of them within easy reach and you get a sense of the oversupply in that market. Since the Goodbody report the supply ratio has further improved as the population continues to grow, whereas new retail supply is minimal. There are now 500,000 more people in Ireland since we last built a new shopping centre and the pipeline for new retail centres is limited to the Special Development Zones (SDZs) where retail is required to match the large increase in housing supply.
UK woes
Since the low point of the recession in 2012, retail sales have grown by 34%, household disposable income has grown by 7%, and consumer savings are now at an all-time high, as is household net worth. Supply is stagnant but consumer demand has grown strongly, so rents should be charging ahead. But growth has been modest. The reason has been the poor demand for space from UK retailers. Traditionally, UK retailers dominated demand for Irish shops, in many cases squeezing out domestic players. By way of example, 11 shopping centres opened in Ireland in 2007 (Bannon let seven of them). They all opened fully let and UK retailers dominated, especially in the fashion space. In Athlone Towncentre over 70% of the space was occupied by UK-based retailers.
The current retail recession in the UK means that this demand has dropped dramatically. We lease a retail portfolio for Oaktree and Sigma Retail Partners, and recent analysis of their portfolio shows that only 18% of leasing has originated from the UK, with increasing presence from European retailers. This trend is likely to be reinforced by Brexit.
So, in summary, the Irish retail market is in good shape, largely full and supported by an excellent demand-supply dynamic in terms of consumer demand and muted development. However, rental growth is modest as we wean ourselves off an over-reliance on the UK-based retailers. When investors will get over their irrational fear of the sector is anyone’s guess.
