Retail woes mean rents must fall significantly
Retail Excellence Ireland (REI) said the retail trading entered its 16th consecutive month of decline at the end of the last quarter, even if the rate of decline had eased somewhat to 12% in June.
REI, which represents more than 580 companies with a total of 8,500 stores, said the average value of each purchase was €47.55, the lowest since the survey began over two years ago.
In the current climate of bad banks and debates about property valuations the survey showed rents as a percentage of sales standing at a record 13%.
Other figures from the Consumer Market Monitor paint an equally depressing picture of the state of the retail sector that remains depressed despite indications consumer confidence is starting to pick up.
In Britain a recent survey from the London-based Royal Institute of Chartered Surveyors (RICS) reported that Ireland was one of the countries with the sharpest declines in the value of global commercial property.
Given the rise in values this economy has witnessed the findings hardly surprise. And if we were in any doubt the draft NAMA legislation on Thursday was a reminder the property sector is in deep trouble.
It’s not the first time of course and back in the late 1980s following a boom in apartment building, values slumped 33%.
Taking into account the difficulties in the retail sector highlighted by REI, the property market will have no choice but to cut their rents.
The old saying that something is worth what people are willing to pay is true when prices are falling as well.
And after well over a decade of rising rental yields and booming property prices the sector is now facing a serious correction.
Any property developer arguing with NAMA that valuations will have to be based on current rent values is in for a shock.
Conor O’Brien, a chartered surveyor based in Mitchelstown, Co Cork, said the situation will bring the property sector back to reality, with some suggesting prices will fall by 50%.
There is a “massive oversupply” of retail space even in prime areas that will inevitably lead to a huge fall in rents achievable, according to Mr O’Brien, who is familiar with the property bubble that arose following the collapse of the Berlin wall in 1989.
He said Ireland is “a picture postcard of what happened in Berlin in 1997 when the city became dramatically oversupplied with residential, retail and office space”.
It resulted from the huge building boom that followed the collapse of the Wall.
O’Brien said the Berlin experience has serious lessons for Ireland.
Good quality apartments built in Berlin in 1997 at a cost of €280,000 were sold recently for a good bit under €100,000.
O’Brien said the reality has meant a lot of pain was endured over the past 10 years as prices were driven down by the oversupplied and over priced market.
As NAMA moves closer to reality, we are now facing similar prospects. “Ireland can no longer be out of step with Europe with hyper property inflation,” O’Brien warned.
Until recently, retail businesses were driven from their shops in Dublin because the property moguls could demand and get higher asking prices from others.
This correction is the reason NAMA is about to be foisted on the banks and the property developers, with huge risks for taxpayers.
This change should enable the next generation to buy homes for a lot less than €200,000 and businesses will not be driven to the wall because of absurd rents.
