Today heralds three news items which confirm the deteriorating condition of the office property market and the risks to both the retail and the restaurant property market.
1. Office rents in prime Dublin locations now range from €300-430 psm (under £25 psf) sometimes “with additional incentives available, which may represent an over correction as this level of return is not sustainable for prime space”. Of course this level of return is not sustainable as the capital values are so over-valued in the first place! Although capital values have collapsed, there is plainly some way to go.
2. Retail Ireland today called for government intervention to bring down rents stating that retail rents in Ireland were amongst the highest in the world. Separately Debenhams announced today the loss of 250 jobs at its stores in the State as some of its stores were no longer profitable. The Mandate union claimed that the main reason for the job losses is people going across the Border to do their shopping. Both stories augur badly for retail rents.
3. Although high minimum wages are cited as the main cause, it is claimed by the Restaurants Association of Ireland today that one third of restaurants in the State may close their doors in the next six months unless there is Government intervention. High food costs and rents are cited as secondary reasons for the bleak outlook, but all in all, risks of defaulting leases and business failure don’t augur well for the recovery of capital values in this sector. Carluccio’s (that restaurant with the delicious Med-themed cuisine) has announced today that it is closing due to uneconomic rent.
To counter the negativity of the above stories which I think crystallize the problems in the Irish economy (lack of competitiveness through regulation, high property and labour costs), it is claimed that lower office rents (together with our corporation tax rate, reasonably well educated, young and flexible workforce) are attracting Foreign Direct Investment. Property will to an extent find its own value though it is my opinion that NAMA is distorting future assessments of value. The wage “market” is more difficult because it is regulated and as stated in the Restaurants Association story above,
“The minimum wage in the catering trade is €9.32 per hour in Ireland — compared with €5.38 in the UK and €1.93 in Spain — as restaurant wages are pegged at 8pc above the national minimum wage.
And restaurants are still forced to pay time-and-a-third for Sunday work — or €12.10 per hour — making it too expensive for some outlets to open even though this could be one of the busiest days of the week.”
If wages remain high by international standards then it stands to reason that the other costs of production (including property costs) will need to fall below international standards before we can regain competitiveness.
NAMA Wine Lake 