Threat to regional retail centres

IRISH regional retail centres may be in danger of being left out in the cold, as Dublin’s retail sector begins a recovery process.

Capital values in Cork city have fallen 70%, and Limerick’s by 73% since 2008. And the international pick-up now visible in Dublin has not surfaced in the country’s second and third cities.

That is according to London-based property monitors IPD, which has just done its first-ever analysis of regional high street performances in Cork and Limerick cities.

IPD analyst Colm Lauder says that regional/provincial city high street retail units here are suffering from low consumer demand, as well as a lack of tenants, despite early signs of optimism and as Irish returns have just outperformed the UK’s for the first time in five years.

Having fallen by over 65%, property assets in Ireland “offer an extremely competitive income yield for investors prepared to undertake the investment risk. The last six months has finally seen institutions willing to wade into the heavily discounted market,” say IPD.

However, the Irish retail sector remains subdued, particularly outside of Dublin, where tenants are still unwilling to take new space, due to economic uncertainty, low consumer demand, and continuing unemployment.

Cork and Limerick cities, along with other smaller cities and towns, have seen rents drop by a further 3% in the last six months. Rents have fallen by 52% since Q3 2008 in both Cork and Limerick, notes the IPD, but “only newly-signed retail leases have benefited from this; 75% of regional tenancies are still over-rented and as such still paying 2008 level rents”. While upward-only rent reviews are to be continued despite strong lobbying from struggling retailers, leading to strong income returns from Irish property, this over-renting means retail tenants are paying more than they should and “its sustainability is debatable, leading many to question the income security offered on such assets”, warns the IPD.

Average lease length in Cork and Limerick is over 20 years.

Researcher at IPD Colm Lauder says “much like in the UK recovery three years ago, there are positive signs of life emerging in the prime, more central areas of the market. But this has yet to reach the battered retail sector, even in Dublin, and despite some high- profile lettings. Dublin is benefiting from heavily discounted assets, a re-emergence of the local economy, and a lot of international companies moving into the now extremely competitive city,” he adds. “It is outside of the capital where we need to keep a closer eye on the performance of retail assets because, at the moment, there is very little demand from tenants, and this is leading to more falling values.”

On the investment front, “as assets are unwound by struggling Irish institutional and private owners, UK and international investors will be considering all possibilities offered in Ireland, and not just in Dublin. They will buy where they believe value exists. Cork City’s investment grade retail properties, with solid tenants, offer extremely good value, and will be attractive to investors due to their strong income returns and competitive rents. However, reversionary yields that are significantly below initial yields will also pose a risk to investors for leases that expire before rental values recover. Double-digit income returns will make Cork and Limerick of interest to investors, but until values and rents stop declining, there is unlikely to be any movement into the city.”

See Irish Regional High Streets report on www.ipd.com