Retail Sector Battles Market Conditions
10 March 2011It has been another tough year for the retail property market and 2011 looks sets to be equally testing featuring the painful process of market value readjustment and ongoing insolvency matters – both the unfortunate consequences of any economic downturn.
The retail sector faces many challenges this year, including the recent increase in VAT, the anticipated rise in interest rates and the unavoidable impact of Government spending cuts. Firstly, it is clear that most retailers will initially try to absorb the increase in VAT in order to remain competitive and it is anticipated that consumer expenditure will contract due to Government budget cuts and the resultant erosion of consumer confidence. Add to this, concerns over bank support for the retail sector and a dramatic worldwide increase in the cost of fuel and raw materials, which will undoubtedly drive up costs and one can see the difficulties that lie ahead.
A clear reflection of the current difficult market conditions is that retail property vacancy levels remain above average due to limited occupier demand. The net effect is the common sight of vacant retail units in High Streets and shopping centres with landlords across Northern Ireland having to be very realistic and imaginative in terms of filling vacancies and securing tenants by offering enhanced rental packages and lease terms.
Nevertheless, selective demand still exists for retail space notably from the food sector, value clothing and discount operators. Last year saw strong demand from such occupiers as Poundland, Poundworld, B & M Bargains, Poundstretcher and Home Bargains along with discount fashion retailers Peacocks, New Look, Primark and Blue Inc. This will continue to be the case in 2011 with value retailing leading the way in retail property demand and dictating the profile of High Streets and shopping centres across the province.
Out of town, we witnessed a fair degree of activity during 2010 with French sporting goods retailer, Decathlon and Bhs Home both opening their first stores in Ireland at Holywood Exchange outside Belfast. Meanwhile, the last remaining unit at Damolly Retail Park in Newry was let to Mothercare and a new unit for Lidl commenced construction.
Meanwhile it is business as usual for the food store sector with Asda, Tesco and Sainsbury's continuing to expand province-wide, along with Lidl and the convenience store sector also showing a strong appetite for well-located new store opportunities. Clearly, in this sector, the planning system remains key and lengthy delays in processing applications continue to stifle potential development, investment and jobs.
Beyond the Greater Belfast area, certain towns have fared better than others in terms of expanding their retail offer. Going into 2011, we anticipate that current vacancy levels in many of the town centres and shopping centres across the province will prevail with only the strongest retail centres such as Belfast, Londonderry, Newry and Ballymena in a position to move forward being best placed to attract new retailers.
The retail investment market during 2010 had an outstanding year highlighted by the sale of Damolly Retail Park in Newry to London based Metric Property Investments Plc from local development company, Corbo Ltd, for £34.5 million, reflecting a net initial yield of 6.25%. Following on from this Scottish Widows purchased Longwood Retail Park, Newtownabbey, from Corbo Ltd at a price of £48.0 million, reflecting an initial yield of 6.20%. Finally, CBRE Investors, on behalf of an international investor, purchased the Marks & Spencer store in Donegall Place for £8.75 million, reflecting an initial yield of 5.25%. All in all, a very impressive performance which reflects UK institutional confidence in the Northern Ireland retail sector and we expect further similar transactions in 2011 as UK funds and property companies take advantage of market conditions and the opportunity to invest further in the province.
Ultimately, there is no doubt that times are difficult and very competitive for retailers. More so than ever the need to control cost, offer value, a point of difference and adapt quickly to market trends will be vital for survival let alone making a profit. By its very nature, retailing attracts entrepreneurs and therefore many will be able to adapt and chart a path through these difficult times. Unfortunately, as we have seen in recent previous years, there will be casualties both within Northern Ireland and on a UK wide basis. Undoubtedly, the retail market in 2011 will continue to be turbulent and will require clear vision, bold decision making and above all else determination in order to survive.