TRENDS ANALYSIS OUTLOOK

RESEARCH

THE HENRY STREET REPORT

32

SUMMARY HENRY STREET1. Growth in real incomes is

supporting an expansion in consumer spending

2. Prime Zone A Henry Street rents are now in the order of €4,850 psm

3. Competition between institutional investors for prime retail assets in Dublin has benefited Henry Street

4. Prime yields currently stand at 3.75%

5. Henry Street and its environs are undergoing a substantial facelift, with a number of redevelopment projects at various stages of delivery

conscious Irish consumer, a behavioural legacy of the recent recession. Whether this changes as real incomes grow remains to be seen. The fall in the value of Sterling against the Euro since the Brexit referendum is providing a further incentive for cross-border shopping. This, together with the continued rise of online retailing, will limit the scope for greater high street retail pricing power.

LettingAn early marker of Henry Street’s rental recovery was Mango’s letting in Q1 2014 of 1,797 sq m at 46-47 Henry Street at a Zone A rent of €3,444 psm. At the time, the deal represented an important endorsement of the street from a leading international brand, in what is one of the largest units on the street. In Q1 2016, Ann Summers let the former Pamela Scott premises at 3 Henry Street – which extends to 345 sq m – for a Zone A rent of €4,585 psm, setting a new bar for prime Grade A rents on the street at the time. The high rent achieved can be attributed to the building’s prime positioning on Henry Street, which places it at the juncture between the Jervis Shopping Centre, Arnotts and the Ilac Centre. More recently, Elvery’s Sports moved from Arnotts to let 808 sq m in Q1 2017 under a ten-year lease at 18 Henry Street for a Zone A rent of €4,413 psm.

With 1 GPO Buildings now let agreed, the only building available on a new lease is 45 Henry Street, which is being marketed at a rent of €3,660 psm. Regarding the shadow letting market, 52 Henry is let agreed while a new tenant is being sought for 17 Henry Street.

The Arcadia Group last year triggered co-terminus 20-year break options at its five stores in the Jervis Shopping Centre. The retailer has dropped its Wallace, Miss Selfridge and Burton stores, replacing them with one large unit extending to 1,858 sq m

THE HENRY STREET REPORT RESEARCH

Introduction Situated in the north city centre, the retail thoroughfare known as Henry Street is comprised of a single pedestrianised street bounded by O’Connell Street to the east and Jervis Street to the west. However, it should be noted for reference purposes that Henry Street is technically comprised of two separate streets, namely Henry Street and Mary Street, with the demarcation between the two occurring at Liffey Street. Recording an annual footfall of 30 million, the street has arguably the best retail offering in Dublin due to the combination of high street shops, department stores and two shopping centres all in close proximity. Prominent occupiers include Arnotts, Penneys, Debenhams, M&S, Dunnes Stores, TK Maxx, Zara, H&M, Mango and River Island.

Economy

The macro underpinnings that provide the basis for the case to invest in Irish retail remain compelling, with employment, wages, immigration and consumer confidence all trending in the right direction from an investor’s point of view.

With the recovery of the labour market bringing employment back to 2006 levels, wage inflation has begun to take hold – average hourly earnings are

projected to rise by 2.5% in 2017 according to the Economic and Social Research Institute (ESRI). In the context of a 0.6% forecast for general inflation, the growth in earnings will boost real incomes and thus consumer spending power. Also, net migration returned to positive territory last year for the first time since 2009, providing another layer of demand. This all supports increases in consumer confidence, which is almost back at the ten-year high level achieved in early 2016, before the uncertainty surrounding the Brexit referendum forced a retreat. These trends have seen total private consumption rise by over 10% in the past three years to now exceed pre-crisis levels, although on a per capita basis they remain slightly below, suggesting scope for further appreciation. In this regard, the ESRI are forecasting private consumption to grow by 3.1% in 2017 and by 3.0% in 2018.

Despite the strong headline fundamentals, challenges remain for the retail sector, challenges which are best illustrated by comparing retail sales versus volumes. While retail volumes have recovered to such an extent that they are approximately 10% ahead of pre-crisis levels of 2008, retail values remain approximately 10% below. Strong discounting and price deflation are two factors behind the difference, and encapsulate the competitive pressures faced by retailers who are pitching their products to a value

spread over ground and upper ground levels, a reduction of a third compared to its previous combined footprint. The new larger unit is the flagship store for its Topshop brand in Ireland, with the Zone A rent standing at €4,155 psm. The letting illustrates a preference for large floorplates by high-end international retailers, unit configurations which are presently in short supply in Dublin City Centre. A further example of this demand was TK Maxx’s letting of 3,250 sq m at the Ilac Centre in 2014, where they pay an annual rent of €550,000 per annum.

FIGURE 1

Retail Sales Index (Excluding fuel, motor and bar sales)

VolumeValue

2016 Q2 2017

20152014201320122011201080

90

100

110

120

130

Source: CSO

FIGURE 2

Prime Henry Street Zone A Rents

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Q32017

€/sq

m

Source: Knight Frank Research

ON HENRY STREET ARE €4,850 PSM

FOR PRIME ZONE A SPACE

RETAILRENTS

54 54

THE HENRY STREET REPORT RESEARCH

3

1

267

8

5

45 4

9

32

1

O’C

ON

NELL STR

EET

MO

OR

E STREET

KIN

GS IN

N STR

EET

MARY STREET HENRY STREET

ABBEY STREET

PARNELL STREET

DO

MIN

IC STR

LOW

ER

JERVIS STR

EET

LIFFEY STREET

DEBENHAMS

DUNNES STORES

MANGO

VODAFONE

LET AGREED

TO LET

CARROLLS

EVANS

GINOS

OFFICE

GAME STOP

HOLLAND & BARRETTELVERYS SPORTS

ALDO

THREE

NEXT

FOREVER 21

McDONALDS

MARKS & SPENCERS

TOPSHOP

PETER MARKS

HICKEYS

SKECHERS

ZARA

H&M

DEALZ

LIFESTYLE SPORTS

ANN'S BAKERYDIFFNEY

JD SPORTS

PENNEYS

RIVER ISLAND

ANN SUMM

ERS

CARPHONE WAREHOUSE

H SAMUEL

EIR

LUSH

THREE

BAG CITY

DIRECT SPORTS

POST OFFICE

LET AGREED

PANDORASWAROVSKI

KORKYS

SUGAR DOLLSHICKEYS

FIELDS

DIRECTION

CLARKS

JD SPORTS

PULL & BEAR

HEALTH STORE

BOOTS CHEMIST

VISION EXPRESS

HAIRSPARY

STAR BUCKS

DIESELEIR

ICONNECT

BUTLERSVODAPHONE

TOURSIT INFO

Ilac Shopping Centre

Jervis Shopping Centre

Cineworld

3458

Arnotts Department

Store

9 7 612

35 Henry StreetSale Price: €9,500,000Yield: NIY 4.27% EY 3.50%Sold: Q4 2016Buyer: Friends First

2

5 GPO BuildingsEstimated Sale Price: €8,500,000Yield: NIY 4.55% EY 3.25%Sold: Q2 2015Buyer: Irish Life

1

42-43 Henry StreetSale Price: €20,500,000Yield: NIY 4.04% EY 3.88%Sold: Q2 2017Buyer: AEW

3

18-21 Henry StreetEstimated Sale Price: €34,000,000Yield: NIY 3.66% EY 3.93%Sold: Q4 2014Buyer: Irish Life

4

17 Henry StreetSale Price: €3,500,000Yield: NIY 6.02% EY 7.83%Sold: Q3 2014Buyer: IPUT

5

51 Henry StreetEstimated Sale Price: €5,600,000Yield: NIY 3.39% EY 3.75%Sold: Q2 2015Buyer: Irish Life

6

52 Henry StreetEstimated Sale Price: €7,100,000Yield: NIY 4.05% EY 3.50%Sold: Q2 2015Buyer: Irish Life

7

43-44 Mary StreetSale Price: €17,000,000Yield: NIY 4.76% EY 3.99%Sold: Q4 2014Buyer: SSGA

8

14-16 Mary StreetSale Price: €17,000,000Yield: NIY 4.13% EY 4.04%Sold: Q3 2017Buyer: SSGA

9

Key Lettings Sales

Significant developmentsLuas Cross City LineLuas Red Line

36 Henry StreetDate: Q4 2014Tenant: iConnectOwner: HammersonAccommodation: 492 sq mRent: €160,000 paZone A: €1,841 psm

1

22-23 Henry StreetDate: Q3 2015Tenant: Pull & BearOwner: SSGAAccommodation: 632 sq mRent: €375,000 paZone A: €3,014 psm

3

21 Henry StreetDate: Q3 2016Tenant: The Health StoreOwner: Irish LifeAccommodation: 332 sq mRent: €200,000 paZone A: €4,004 psm

4

18 Henry Street Date: Q1 2017Tenant: Elverys SportsOwner: Irish LifeAccommodation: 808 sq mRent: €460,000 paZone A: €4,413 psm

5

46-47 Henry StreetDate: Q1 2014Tenant: MangoOwner: Irish LifeAccommodation: 1,797 sq mRent: €650,000 paZone A: €3,444 psm

7

45 Henry Street For Let: Q3 2017 Owner: IPUTAccommodation: 402 sq mQuoting Rent: €420,000 paZone A: €3,660 psm

6

37 Henry Street Date: Q4 2015 Tenant: eirOwner: HammersonAccommodation: N/ARent: €215,000 paZone A: €2,917 psm

2

3 Henry Street Date: Q1 2016Tenant: Ann SummersOwner: Irish LifeAccommodation: 345 sq m Rent: €360,000 paZone A: €4,585 psm

8

39 Mary Street Date: Q3 2015Tenant: DealzOwner: Irish LifeAccommodation: 431 sq mRent: €275,000 paZone A: €3,401 psm

9

Former Clery’s Department StoreDeveloper: NatriumStatus: Planning grantedRetail space: 3,478 sq mNote: Planning permission allows for two medium sized units at basement, ground and first floors

1 Dublin Central Developer: HammersonStatus: Planning grantedRetail space: 56,155 sq mNote: Total planning permissiongranted for this mixed-use development extends to 158,000 sq m

2 3 7-9 Henry StreetDeveloper: Fitzwilliam Capital PartnersStatus: Under ConstructionRetail space: 3,783 sq m Note: Consists of the creation of a single retail unit via the separation of 7-9 Henry Street from Arnotts with completion due for September 2018

4 3 Jervis Shopping CentreDeveloper: Arcadia GroupStatus: Completed Retail space: 1,858 sq m Note: Consisted of the amalgamation of three retail units into one single unit

5 3 Ilac Shopping CentreDeveloper: Hammerson & Irish LifeStatus: CompletedRetail space: 735 sq mNote: Amalgamation and extension of existing retail units to incorporate part of covered walkway as internal space

32

Former Clery's Department

Store

GPO Arcade

HENRY STREET

76

RENTS

3.75%PRIME YIELDS CURRENTLY STAND AT

FIGURE 3

Prime Henry Street yields

0

1

2

3

4

5

6

7

8

%

2016 Q

320

17

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Source: Knight Frank

“ AEW’s acquisition is a timely indicator that there is still value to be had in Dublin’s prime retail investment market when viewed in a European context.”

THE HENRY STREET REPORT RESEARCH

DevelopmentHenry Street and its environs are currently undergoing a substantial facelift, with a number of redevelopment projects at various stages of delivery. When finished, these projects have the cumulative potential to significantly augment Henry Street’s retail appeal.

Leading much of this change is Hammerson, who have acquired a significant interest in the area following their acquisition of Project Jewel from NAMA in 2015, which included a 50% stake in the Ilac Centre as well as the Dublin Central site. At the Ilac Centre they, along with joint venture partner Irish Life, have recently completed the reconfiguration of ten smaller units into five larger ones, with the rental uplift achieved, returning twice the €1.5 million capital expenditure invested. With the Ilac Centre achieving rents of about a third of Dundrum – despite having the same annual footfall of approximately 18 million – there is a clear opportunity to enhance returns through active asset

management. As detailed earlier, much of this value creation is being achieved by amalgamating smaller stores into larger ones in order to meet the demands of large international retailers. In a similar vein, Arnotts has just announced that they will inject a further €4.0 million in capital expenditure into the store following the €2.5 million commitment announced last year, with a major component of this expected to be spent on reconfiguring the store. Meanwhile, following a deal with the Westin Family, Noel Smyth has started construction to separate 7-9 Henry Street from the Arnotts store in order to create an independent retail unit which will consist of 3,783 sq m of retail space.

Long-term, however, the real catalyst for change will be Hammerson’s ‘Dublin Central’ project. Assembled over a decade by Chartered Land, the five acre city centre site has planning permission for 158,000 sq m of mixed-uses. With the majority of the development fronting onto Upper O’Connell Street, the proposed addition of

two new streets under the plan would link Upper O’Connell Street and Henry Street, boosting consumer draw and enhancing the accessibility of the location. In addition, the portion of Dublin Central with frontage onto Henry Street should significantly strengthen the retail offering of the GPO end of the street which has struggled to attract high-end retailers, owing to the presence of a number of small and poorly configured retail units.

On the eastern side of O’Connell Street, the redevelopment of the former Clery’s Department Store will provide for 3,478 sq m of retail and will re-establish the street as a retail destination once again, having become increasingly dominated by food and beverage retailers in recent times. The Clery’s and Dublin Central redevelopments along with the addition of two Luas stops on the new Cross City Line will bring increased footfall to O’Connell Street and Henry Street. The linking with the Luas Green Line will help the location make inroads into the south-side retail catchment area.

Investment Institutional investment competition for prime retail assets in Dublin has benefited Henry Street and resulted in yields declining from 6.5% in 2011 to 3.75% now. Mirroring their activity in Grafton Street, Irish Life have been a key long-term stakeholder on Henry Street, having built up a substantial portfolio of assets through the years. Chief amongst these is their 50% stake in the Ilac Centre – an acronym of ‘Irish Life Assurance Company’ – which was the first city centre shopping centre in Dublin and the largest in Ireland when it opened in 1981. In addition to this core holding, they own many own door retail units on Henry Street with their most recent large acquisition being the purchase of 18-21 Henry Street as part of the Capital Collection for an estimated €34 million.

More recent transactions of note include SSGA’s purchase of the McDonald’s tenanted 14-16 Mary Street in Q3 2017 for €17.0 million at a net initial yield of 4.13%. In a welcome development, international fund AEW completed the purchase of 42-43 Henry Street for €20.5 million in Q2 2017 representing a net initial yield of 4.04%. The property is let to the Arcadia Group Ltd, trading as Evans, and has an unexpired lease term of over three years and will sit in its City Retail Fund, a fund targeting prime high street retail in Europe. It is unlikely that Evans will seek to renew the lease upon expiry given they unsuccessfully marketed the lease for assignment/sub-lease in 2014.

With pan-European portfolio managers seeing prime retail as the best way to gain exposure to an expected pick-up in European consumer spending while mitigating the negative impact of online spending, we perhaps would have expected greater interest from international funds in Dublin high street retail given Ireland’s out-perform growth prospects relative to its European peers. While yield compression has been significant, it is interesting to note that of 27 major European cities tracked by Knight Frank, there are still ten cities that are at least as expensive as Dublin based on current yields. AEW’s acquisition is a timely indicator that there is still value to be had in Dublin’s prime retail investment market when viewed in a European context.

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