Archive for January 8th, 2011

THE big commercial property story in the latter part of last year was, in my opinion, the emerging evidence that commercial rents were tumbling at 20% per annum as evidenced by both commercial indices in the State (Jones Lang Lasalle’s and SCS/IPD’s). Remembering that upward-only rent reviews were only banned from 1st March 2010, indicates that those commercial tenants entering into new leases were agreeing rents at colossal reductions to rents contained in existing leases.

And before Christmas, a Circuit Court is reported to have determined Burger Kings rent at 4/5, Grafton Street should be €205,250 per annum. The premises extends to 2,750 sq ft and you can therefore deduce a rent of €76 psf which represents a reduction of 53% on the previous rent of €436,750 (€159 psf). Those following the operation of the valuation profession in the State might be interested in the landlord’s expert’s (Lisney) valuation of the rent at €323,000 and the tenant’s expert’s (College Properties) at €183,250. and the judge determined €205,250. The landlord is Aviva and the tenant is Patrick O’Leary’s OKR group.

Burger King competitor, McDonalds a few doors along at 9-11 Grafton Street where the leaseholder, Michael Mehigan’s Pantry Franchise, is reportedly paying €1.4m per annum in rent, has a lease which expires in December 2011. The landlord there is Royal Liver and last October a valuation of €20m for 9-11 Grafton Street was suggested with a 6.5% yield.

So €76 psf rent for a fast-food premises on what is arguably Ireland’s most upmarket shopping street. Use a 7% yield and you’re looking at capital valuations of €1,000 psf. The Irish Times is reporting Zone A rent estimates at €286 psf which compares with Burger Kings €76 psf. Three years ago Zone A rents were some €825-€875 psf according to the Irish Times and indeed three years ago, Grafton Street was 4th most expensive street in Europe.

The reason suggested before Christmas for the abandonment of the Royal Liver portfolio sale to TPG Capital was that the buyer was spooked by potential consequences of the IMF bailout. But isn’t the truth that commercial property values, already off 60% from peak, are in for further declines as the economy copes with poor domestic growth (as opposed to thriving export growth driven particularly by MNCs), legal changes promoting rent declines (banning upward only rent reviews, examinership companies can repudiate leases), a general over-supply which NAMA will stoke further in coming months and a negative outlook on financing Irish property. There are reportedly buyers with €10m-odd to spend on prime sites and I wonder if McDonalds will fall into that capital category in 11 months.

We expect the Jones Lang Lasalle commercial indices for Q4, 2010 will be released in the next week. Capital values fell just 1.1% in Q3 (4.7% in Q2 and 2.1% in Q1 – all Quarter-to-Quarter declines). I would expect declines to continue and to have increased in scale in Q4.

UPDATE: 11th January, 2011. The Irish Times reports that 33 Grafton Street, former home to West jewellers has been sold by Joe Moran of Manor Park Homes for a reported €5m with a new lease apparently agreed with John Brereton Jewellers. Jones Lang Lasalle has been seeking €300,000 per annum rent. Before leaping to the conclusion that the sale represents a 6% yield (which would be very optimistic at present), it is not clear if the jewellers will be the only tenant for the four storey building. West jewellers was controlled by Joe Moran of Manor Park Homes, while Geraldine L’Estrange West held a minority stake so it is not possible to compare new and old rents for the property. The Irish Examiner report that the building extends to 200 sq metres (implying capital values of €2,3000 psf). The shop element is reported at 140 sq metres (implying an asking rent of €199 psf). It should be stressed that neither the sale price of €5m or rent of €300,000 per annum is confirmed.


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