AS EARLY as 2005 you could see the country was heading towards an oversupply of shops, particularly outside Dublin.

A snapshot in 2007, clearly showed the emerging situation. Between 2002 and 2007, major centres emerged at Dundrum, Mahon (Cork), Sligo, Drogheda, Dundalk, Carlow, Newbridge, Athlone, Kilkenny, and Arklow along with extensions at Blanchardstown, Navan and the Crescent (Limerick). This amounted to an additional 232,257sq m (2.5 million sq ft) of retail space, ignoring the smaller, less competitive, centres and a massive amount of proposed centres.

That additional gross leasable area would yield roughly 185,806sq m (2 million sq ft) of sales area. These were sophisticated shopping environments, well tenanted centres, targeting high sales. Let’s say they could achieve an average of €1,000 per sq ft of sales, giving a total of €2 billion. The population of Ireland in 2007 was 4.25 million and the per capita spend was close to €6,000, which made roughly a national spend of €25 billion. So the new centres would be looking for 8 per cent or thereabouts of the total market.

In 2007, the market stalled as retail spend flattened out. With no growth in the market, this level of penetration – or anything like it – was simply not achievable. An additional problem was that not nearly enough of the new shopping space was of good quality. It was often poorly conceived, based on negligible research and effectively designed by local planners with their preference for mixed-use developments.

In providing suitable shopping for the future, quality is as important as quantity and rents have to be at sustainable levels of the retail business generated.

Since the economy has contracted retail spend has fallen by about 20 per cent. The result is falling shop turnovers, rents in many cases becoming unsustainable, shops failing and voids appearing in shopping centres and high streets around the country. It has now reached the prime pitches in Dublin city centre.

Spreading like a plague, the gaps in the retail streets deplete the strength of the tenant mix and hence the competitiveness of these streets. Some landlords were quick to realise the importance of maintaining competitive strength. However, many landlords’ eyes tend to glaze over when one tries to explain the delicate relationship between rent and turnover.

Rent reviews had always been upwards-only and based on evidence of the latest and highest rent achieved in that location. But it did reach a ludicrous situation where the tenant was being asked to pay a rent which equated to 20 per cent or more of turnover which was unsustainable.

If a tenant pays a rent of €500,000 a year for a shop of 186sq m (2,000sq ft) with back up of 93sq m (1,000sq ft) he needs turnover of between €5 million and €6 million depending on his volume and margins. This implies a sales density of €3,000 per sq ft, where the reality is probably more like €1,400-€1,800 per sq ft. As a result, his rent capacity is more like €280,000-€360,000 a year.

In the future, the Grafton Street and Henry Street shopping areas are best positioned to provide the most suitable higher order comparison shopping in Dublin.

There are potential threats from the increasingly competitive regional centres ringing Dublin, which are very accessible, have the critical mass, superb retailing environments and strong tenant mixes. The landlords and management companies of these centres have been quick to plug the gaps and probably have a greater degree of flexibility in doing more adventurous deals than high street landlords.

The city centre needs (and indeed plans are afoot to provide) a better stock of desirable modern retail spaces – bigger and more efficient spaces – to maintain a highly competitive position.

The relationship between a landlord and tenant should really be a partnership and they should share the risk. One obvious way of doing this is turnover rent. This is becoming increasingly the case in many shopping centres, and high street landlords should seriously consider going this direction.

It is still a competitive situation as some tenants will be able to achieve higher turnovers than others. The landlord needs something he can bank and so often a guaranteed minimum rent (GMR) is built in. The turnover percentage can be anything between 6 per cent for high volume fashion retailers with low margins to 10 per cent for more exclusive brands.

A typical scenario might be a shop with a 279sq m (3,000sq ft) sales area in, say Henry Street, where the expected turnover is €4 million a year. The turnover rent could be the higher of a GMR of €300,000 per annum or 9 per cent of turnover.

Plugging the gaps enhances the collective strength of the tenant mix and the street’s trading position.

It will improve the overall turnover in the street and provide a better return to the landlord in the future. The landlords need to invest in the future of their streets.

• Aiden McDonnell is head of retail at agent Colliers Jackson-Stops