While many businesses have not survived the credit crunch, international brands are attracted here by a correction in rents and letting terms, writes JACK FAGAN

IT’S BEEN a testing time for the retail sector over the past two years. The crippling recession combined with credit restrictions and the fall-off in consumer spending have wreaked havoc on the market, sending property values into freefall and rents back to where they were eight years ago. A considerable number of businesses have not survived the trauma while others have re-emerged much leaner from the insolvency process.

The high failure rate has quickly been followed by a surge in demand from international brands anxious to take advantage of the correction in rents and the availability of more flexible letting terms. All have had one thing in common – they have only been interested in the top trading locations on the high streets and the best performing shopping centres. The list of overseas traders who have opened or signed up to start trading here includes Jack Wills, Dalvey, Disney, Sketcher, Republic, Pumpkin Patch, Aquascutum, Hollister, Pandora and Forever 21 . With any luck, Abercrombie and Fitch will also be landed shortly – they have been taking a close look at the former Habitat store at Dublin’s College Green.

As part of the major shake-up taking place in the retail sector some of the longer established brands such as Tesco, Boots, Specsavers, Next, River Island, New Look and Fat Face have also availed of the lower overheads to move ahead with their expansion priorities.

More importantly the nature of the relationship between landlord and tenant is changing in previously unanticipated ways. The once standard open-market rent is increasingly being replaced by a base-and-turnover rent which first emerged in New York after the Wall Street collapse in 1929. The adoption of the same principle here is not linked to the recent financial bailout but rather the urgent need by landlords to get an income stream flowing again from vacant shops. High profile traders such as Zara set the pace a few years ago by negotiating turnover rents.

Stephen Murray of Jones Lang La Salle says the new rental arrangement has been made possible since the law was changed to allow landlords and tenants to contract out of the right to renew leases. Similarly some landlords who were required to take a leap of faith on the projected turnovers of tenants were insisting that they could now break leases if turnover thresholds were not met. “This is bringing some commercial balance to transactions which are becoming increasingly complex to document” says Murray.

The Government’s decision to ban upwards-only rent reviews on new leases has contributed to the severe fall in capital values, particularly on Dublin’s high streets. The respected researcher IPD has calculated that the peak-to-trough decline in values over the past three years has been 69.1 per cent in the Henry Street/Mary Street area and 67.5 per cent on Grafton Street. The ending of the upwards-only rent review could mean that in future landlords will have to rely more on the quality of their building than the strength of the covenant.

The lower consumer spending of recent years has forced many landlords to reduce rents by at least 25 to 30 per cent to help keep their tenants in business. This has happened mainly on secondary streets and in shopping centres which are under performing.

Grafton Street has had a fairly dramatic change of fortune with Zone A rents down from an average of €8,500 to between €3,000 and €4,000 per sq m. The slippage on Henry Street has been of almost equal proportions.

Nevertheless, the demand for retail space in the best locations has been exceptionally strong, particularly in the second half of the year, according to Larry Brennan of Savills. He says the vacancy rate on prime city centre streets is now extremely low and largely confined to smaller stores. Equally the main suburban shopping centres at Swords, Blanchardstown, Liffey Valley and Dundrum also had few vacant units.

Michael Harrington of agents HWBC says there is unlikely to be any prime retail development in the short to medium term because of the rental levels currently being bid, the perception of prime yields and the complete lack of bank development funding. In addition most of the prime sites, he said were either in, or en route to Nama and it remained to be seen if selected projects would be progressed in the immediate future to take advantage of the considerable international interest which continues to be shown in Irish investment opportunities.

There are any number of new shopping centres planned for provincial towns and cities which may never see the light of day. Three others, partially built, in Naas, Waterford and Limerick must have a better chance of being completed when funding is more readily available and anchor tenants are back on the expansion trail.

There is considerable doubt as to when, if ever, development work will start on two major schemes – each costing €1 billion – planned for Dublin’s north inner city. One of them involved the redevelopment of Arnotts department store, from Henry Street back to Liffey Street and Middle Abbey Street.

Close by, Joe O’Reilly’s Chartered Land has planning approval for the second, Dublin Central, an ambitious shopping scheme linking O’Connell Street with Moore Street.

Even if funding remains tight in Dublin, both of these projects could attract overseas interests – and funding – as soon as property values recover and retail rents bounce back.

Michael Harrington says there are some encouraging signs that the market is starting to recover from a very low base. Vacancies are disappearing and with supply on hold the next logical step was to see some improvement in terms for prime product.

“The next wave of retail development will need to be significantly pre-let before it is given the green light but terms will need to recover quite a bit further to reach viable levels. In summary, it would appear that we might just be turning the corner – but how much momentum we can gather on the road to recovery depends on whether customer confidence and spending can survive the Budget.”

A Wear's new deal looks set to start a trend

FASHION retailer A Wear is one of the first substantial traders on Dublin’s Grafton Street to benefit from the Government’s decision to end upwards-only rent reviews.

It has just agreed a new upwards-or- downwards lease with landlord Aviva at the same headline rent of €1.25 million per annum. The trader had been paying almost €1.5 million in recent years for what is acknowledged to be one of the best laid out stores on Grafton Street.

Strictly speaking A Wear had not been entitled to look for a new-style open lease because its old lease ran out in September, 2009, long before the legislative ban on upwards-only leases came into effect. However, Aviva offered A Wear the new upwards-or-downwards lease knowing that if the trader moved out it would be difficult to attract an alternative tenant prepared to sign up to an upwards-only lease.

Under the new 15-year lease with a 10-year break option A Wear will be paying a stepped rent for the first five years ranging from €900,000 to €1.45 million. It will also be entitled to a 10 per cent discount in each of the first two years if, as expected, a specific turnover target is not reached. This will bring the rent down from €900,000 to €810,000 in the first year and from €1.2 to €1.08 in the second year. The tenant has also secured a six-week rent- free period from the time the last lease expired.

The A Wear store has some of the best floor plates on Grafton Street, from 102sq m (1,100sq ft) on the ground floor to 332sq m (3557sq ft) on the first floor and 373sq m (4,024sq ft) of retail space in the basement. With rents on Grafton Street still falling, several other traders are in line for a reduction once their leases run out.

McDonald’s fast food restaurant is currently rented at €1.4 million but with the lease due to run out in December of next year, a rent reduction is clearly on the cards.