Up to 15 leases on Grafton Street in Dublin city centre are currently for sale, with retailers desperately trying to offload the shops as the downturn in consumer spending hits their bottom line. Retail sources said that, while about 10 leases are available on the open market, another five are quietly being marketed.
Retailers are now willing to pay up to €200,000 to a tenant willing to take a unit off their hands. The so-called reverse premiums are a massive turnaround from last year, when retailers who had shops on the street were seeking to be paid up to €1m from those looking to buy out their leasehold interest.
Exchequer figures released last week show that VAT receipts fell almost 17% year on year to less than €2.25bn. That steep decline is primarily a result of the fall in new home sales – figures released by the Construction Industry Federation last week show that national house building guarantee registrations were down 83% in January compared to the same period last year – but it also partly reflects the drop in consumer demand and the surge in the number of people doing their shopping in the North.
As more and more people are laid off work, their spending decreases, while those outside the public sector who are worried their jobs may be on the chopping block have to save rather than spend their disposable income.
That change in mindset is forcing all fashion retailers who are not in the value end of the market – those not named Penneys or New Look, essentially – to look at their cost structure, and as a result many British high-street staples are now looking for substantial rent discounts across the board, including for shops on Grafton Street.
Some institutions on Grafton Street will be willing to do deals for a reduced rent because they bought the buildings many years ago, but private investors who bought in recent years face major difficulties as their borrowings were based on the anticipated rental income.
It is circumstances like these that highlight how the Anglo Irish Bank lending model failed; they will also affect those who borrowed substantial sums to buy property on the street. At the peak of the boom, yields ended up as low as 2.5%, meaning that buying a shop there cost the equivalent of 40 years' rent. Those landlords will either have to try to keep their rents at current rates or plough in more cash into an investment that is falling in value.
The number of pre-packaged administrations by retailers in Britain is exacerbating the problem. Stylo, the company behind shoe company Barratt, which has a shop at Grafton Street, recently completed a deal to rescue the group's Barratt and Priceless shops and another 160 concessions. Several retail sources have confirmed to the Sunday Tribune that the company is now looking for a 50% reduction in the rent of all of its shops in Ireland, and a six-month rent-free period as it seeks to stabilise itself.
Of more interest perhaps is the fact that Aurora Fashions, the new name behind high-street staples Karen Millen, Coast, Warehouse and Oasis, has entered into negotiations with the landlords of all of its 900 British shops, and in some cases is seeking turnover-related rents and/or a rent-free trading period of four months. Although those negotiations have yet to happen here, it is believed to be only a matter of time.
The latest bimonthly report from CBRE confirms the extent of the fall in property values on the street. Yields on prime high streets have risen to 6.5%, it states, despite rents apparently staying relatively firm.
"However, with tenant defaults increasing and rents now coming under pressure in the occupier markets, current yields are still vulnerable and we could well see further upward pressure in the immediate future," it says. "On the supply side, we have as yet seen little evidence of distressed sales in the Irish investment market. So long as rental income continues to service interest payments it is unlikely that we will see direct sales on this basis. However, the risks remain on the down side until such time as we see signs of stability in the economy, banking system and public finances."
That point of view is confirmed by one of the largest landlords on the street. "Retail experienced the greatest reduction in values [last year] with capital reductions by year end in the range of 40% to 60%," the Irish Property Unit Trust, which owns six buildings on the street, stated in its quarterly report for the last three months of 2008.
It will be many months before we find out how much further they have to fall.