Retail sector dominates as investment in office and residential sectors collapses

We signed off on 2022 stating “we expect to see retail re-enter the fray as a relevant investment sector and would anticipate that it will break into double-digit market share for the first time since 2018″.

The actual outcome moved from relevant to dominant. It broke into double digits by Q1 2023 and averaged 35.7 per cent of turnover for the next two quarters.

The virtual collapse of office and residential investment has clearly played a large part in its relative performance. However, we expect retail to be the largest sector in the final quarter of the year for the first time since 2016 and the largest quantum of assets expected to actually trade in the year to come with some very big tickets currently on the sales block.

While the rumoured sale of AIB’s Blanchardstown debt at about €140 million will not be included in this turnover, the four competitive round-two bids received are likely to represent a serious boost for the perception of the sector.

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Retail owes its renewed relevance to a number of key fundamentals. Most notably, and in stark contrast to the office sector, it enjoys a relatively stable supply/demand dynamic.

These historically high occupancy levels follow its emergence from the dual body blows of the global financial crisis (GFC) and Covid-19 demonstrating its long-term resilience.

The repricing the retail sector went through as a result of these blows is the other major attribute that sets it apart from the rest of the real estate market, where successive interest rate rises are exposing the exuberance of the free-money era.

Occupational demand is strong with a wealthy Irish consumer base buoyed up by unprecedented levels of savings, high employment, and a growth in wages.

At a time when capital expenditure costs and in particular ESG retrofitting tops the list of investor fears, it’s not surprising that retail parks lead the way in terms of sectoral yield performance and are second only to shopping centres in terms of market turnover, predominantly due to an absence of stock for trade.

Retail parks have limited landlord capital expenditure exposure and at the same time boast impressive environmental, social, and governance (ESG) attributes, aligning very comfortably with the principles of responsible investing with this centralised distribution model also incorporating PV panels, rainwater harvesting and on-site EV charging as frequent asset features.

Retail parks represented over €200 million of turnover in the last four quarters with a total of 10 parks trading.

The key transaction of the year was undoubtedly the trade of the B&Q at Liffey Valley Retail Park to Intergestion at a price €26.6 million, significantly ahead of its fund valuation.

The sales process involved multiple major investing institutions despite the short lease term (less than four years) and a passing rent significantly in excess of market rates.

The implied equivalent yield was an unexpectedly strong 5.65 per cent! Outside the Greater Dublin Area (GDA), regional yield levels generally spanned the 8-9 per cent bracket.

The biggest trade in this subsector saw the $38 billion American retail park behemoth that is Realty Income Reit enter the Irish market with the acquisition of two regional parks in Limerick and Navan for a reported €45.9 million.

Also notable was the trade of Eastgate Retail Park for almost €24 million to the park’s anchor tenant, Harvey Norman. The sale of any asset to its primary occupier is always a telling sign of the sector’s true performance.

No surprise then that there probably isn’t an owner of a retail park in the country that has not received an unsolicited bid from a European (largely French) or American fund this year.

We would expect rents to continue to improve on the back of nominal vacancy and increased occupier competitive tension. Consequently, unlike many of its non-retail contemporaries, value is likely to strengthen in the year ahead.