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When it comes to high-street stores, size matters

GRAFTON STREET and Henry Street are rapidly becoming two-tier markets for investors because of the lack of larger units on the streets. The dearth of large format ‘retail boxes’ measuring more than 10,000 square feet on our city’s prime pedestrianised thoroughfares has been acknowledged for some time. Modern retailers want, and are likely to continue to want, large format stores.

However, it does not stop there. They also want floor-to-ceiling heights of five metres or more, which in turn gives them a minimum of 3-3.5 metres clear trading height. They want this height not just on the ground floor but on all trading levels.

They want basement and first-floor plates extending to a minimum of 1.5 to two times their ground floor holding. They want escalators and lifts running from ground to basement or first floor, and they want them running both ways (not just an elevator that goes up with a fixed stairs down). How many shops on the entire length of Grafton Street and Henry Street or their feeder streets satisfy all these requirements? Apart from the city’s major department stores you will only need one hand to count them. This needs to change if investors are going to maximise value, or more pertinently, minimise loss.

Retailers want these store formats because they can provide fuller product lines and achieve better turnover per square foot at a lower base cost. Basic economics. Hence, it stands to reason that they would pay more money for a shop that delivers these requirements and as a consequence such a store has a stronger anticipation of rental growth and merits a better yield.

To date, many of the retailers on our prime thoroughfares have been settling for what they could get their hands on in terms of trading space. Simply getting representation on one of Dublin’s prime thoroughfares to capitalise on the Celtic cubs was sufficient. That’s what has driven rents to date. Redevelopment of units on Dublin’s high streets has been effectively zero.

Things are very different now and I’m not just referring to the economic conditions. The format of a store is going to significantly impact on its value, not just its location. As a consequence, yield differentiation of asset types within the retail high-street category is set to have a very significant impact on high-street property values. Those currently holding one of the 140 properties on Dublin’s Grafton Street and Henry Street that are less than 5,000 square feet should take positive steps towards addressing the issue or see their relative value undermined. That means combining units with neighbouring landholders where necessary.

On Dublin’s northside, modern retailer demands are likely to be met by the proposed Arnotts and Carlton redevelopments. The southside of the city is not so fortunate in terms of supply. A number of property commentators have recently referred to Grafton Street yield levels as having moved by more that 100-125 basis points. If we assume that prime Grafton Street yield levels were 2.5% this time last year then we are talking about current levels 3.75% which implies a 33% fall in capital values across this asset type.

However, the days of taking a generic grouping of all high- street retail shops have moved to such a degree that the record price paid for River Island on Grafton Street last year at 2.4% may not be as reckless as many believed and as the yield move would imply, and conversely for some, the negative impact of the yield movement may be more extreme.

Why? Well, investment yields are derived from a multiplicity of factors from tenant covenant to interest rates, but anticipation of rental growth is what essentially distinguishes the yield level of one asset type from another. In this regard, we usually group asset types together such as high-street retail, office, and industrial.

In respect of the latter two categories, the investment market has historically made a further categorisation of these asset groupings based on the physical characteristic of the property.

In the office sector, we can see a prejudice towards modern specifications, good floor- to-ceiling heights and more recently environmental sustainability.

To date, however, the high- street retail sector has been considered as a homogeneous grouping. A shop is a shop. However, one building on Grafton Street or South King Street is not necessarily in the same yield grouping as the one next door as a result of the inherent anticipation of rental growth.
As a result, a co-ordinated proactive ‘asset-management’ approach is going to be required from the heretofore passive investor community along some of the country’s prime thoroughfares to protect asset values going forward. Doing nothing is no longer an option. It may also require a more flexible approach from Dublin City Council in relation to architectural sensitivity.

Rod Nowlan is the director of Bannon Commercial’s investment division