AKC News // Footfall drops in provincial shopping centres

RETAIL MARKET:As the realities of the changed economic climate set in, property agents are now urging retail landlords to adopt a more realistic approach to rental growth, writes Gretchen Freidmann.

A Growing number of retailers are resisting landlords' demands for substantial rental increases amid mounting concerns over the deteriorating economic environment.

Although prime areas are still reported to be performing well, poor footfall figures in regional and out-of-town shopping centres are providing fresh evidence that certain pockets of the market are at saturation point.

According to some industry experts, the owners of such schemes may face the prospect of having to either slash rents or redevelop the property for an alternative use if conditions fail to improve.

There are already reports that rents in one under-performing shopping centre, in the south-west of the country, were cut by up to 25 per cent after tenants there successfully argued their businesses were under threat from soaring overheads.

The news comes as Lisney is investigating whether the volume of retail space in the market now exceeds per capita income levels and the findings are expected to show that supply is outpacing demand in some counties.

While the question of whether Ireland is over-shopped has exercised pundits in the past, consistent anecdotal reports of low footfall rates in shopping centres in and around towns such as Drogheda, Sligo, Kilkenny, Dundalk, Athlone and Mullingar, as well as the outskirts of Dublin, indicate just how tough the trading environment has become.

After successive interest rate increases, the onset of the global credit crunch and the reversal in house prices, there are fears some shopping centres won't survive a prolonged consumer downturn.

One senior property agent stresses the severe problems are confined to a handful of developments where investors have failed to assess key market indicators, such as demographics and infrastructure.

He also points out that unlike the UK, a large number of provincial and out-of-town shopping centres in Ireland are owned by individuals or syndicates with little experience of the industry.

Yet he predicts that even if some malls do collapse, investors will be able to cushion the blow by turning them into mixed-use schemes. "I think planners would welcome the disappearance of some of these single-storey boxes in favour of something like a residential development with its own neighbourhood shopping scheme."

Despite fears over the rapid injection of floor space into the market - an additional 395,454sq m (4.257 million sq ft) is expected to be constructed by 2009, according to the latest figures from Jones Lang LaSalle - property experts also point out that there is plenty of evidence to indicate the changed economic climate is having little impact on well-established centres. In recent weeks the Irish fashion retailer Sasha offloaded the leases on its stores at Liffey Valley and Mahon Point on the outskirts of Cork city for around €750,000 and €630,000 respectively.

It is understood the retailer sold its leases in order to escape hefty rental outlays, which ranked among the highest in its network of 40-plus stores.

But one agent describes such reasoning as "contradictory", claiming the "shops obviously perform well otherwise why would they attract such high premiums?"

The same source says the Sasha deals are further proof that demand in the bigger shopping schemes remains "as strong as ever".

Mervyn Ellis of HWBC acted for Sasha in the disposal of its Liffey Valley lease but was unavailable to comment on the deal.

According to Aiden McDonnell of Colliers Jackson Stops, however, "landlords have lost the run of themselves" and he points out the disputes over rental increases are not limited to shopping centres. He claims the problem is widespread and particularly acute in city centres and the areas on and around Grafton Street and Henry Street.

McDonnell blames runaway Zone A rents for fostering unrealistic expectations in the sector. "We are seeing tenants with 2,000sq ft of selling space being asked to pay an annual rent of €1 million. But what the landlord doesn't seem to understand is that that level of rent means a retailer has to generate a turnover of around €12 million to keep the business viable. Tell me how you manage that on 2,000sq ft of sales space?"

The real problem of this system, McDonnell argues, is that headline Zone A rents don't reveal how many concessions or incentives a landlord has offered a tenant.

"So it is possible that in some areas the Zone A rents are totally unrealistic and not reflective of true market levels."

He argues one way around such obfuscation, would be to peg rental levels to turnover. "That way both the tenant and the landlord benefit when sales are strong and both share the pain when they weaken. It seems a fairer system to me."

The alternative, McDonnell suggests, would be the introduction of upward and downward rental reviews.

And he points out the current upward-only lease structure is fundamentally adversarial in that the tenant has little legal room for manoeuvre if it is unable to sustain an increase in the rent.

However, according to the Chartered Surveyors Institute, there has been a "significant increase" in the number of rental review disputes referred to arbitration since the start of the year.

That trend is likely to continue as consumers tighten their belts in the face of tighter borrowing costs and a weaker housing market.

As the realities of the changed economic climate set in, property agents are now urging landlords to adopt a more realistic approach to rental growth. But for those used to the double-digit returns of the boom years, this may be a difficult pill to swallow.

Source: The Irish Times http://www.ireland.com/newspaper/commercialproperty/2008/0416/1208249851288.html

Date : 16-04-2008