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.
NAMA Wine Lake 
Excellent post.
It wholly undermines the arguments of those who suggest that high rental yields underpin commercial property can be of only limited comfort in valuing properties.
There appears to be no comprehension in the either the policy-making or commercial establishments that (a) because we had one of the largest credit bubbles in the history of the last century (b) we are likely to have one of the largest busts.
Instead of attempting to comprehend the problem (regardless of where the chips fall), “the Great and the Good” insist on interpreting events in the light of thier wishes. Thus the focus on “soft landings”, “green shoots”, “good news” and “green jerseys”.
I had thought that persistent disappointment would force the ultra-optimists to modify course. But in today’s Irish Times I read that Trevor Sargent is proposing a constitutional amendment with a new charge of “economic treason”, to have potential retrospective effect.
“If passed, this constitutional amendment would create a new offence of economic treason for: damaging the country’s reputation; imposing an unacceptable economic cost; and especially, surrendering the economic sovereignty of the State.”
The fact that an essentially decent person like Sargent could actually propose a measure which is, in its essence, fascistic hyperbole is a symptom of just how desperate people are becoming. With ever-worsening economic news, this process of desperation is likely to get worse in 2011.
Be careful out there.
I don’t want to detract from your conclusion that shop rents have fallen dramatically and are continuing to fall because I’m sure that’s right. But in some of your examples you’re comparing apples with pears.
In the case of the McDonald’s unit you’re comparing a zone A rent – which applies only to the area at the very front of the store – with an overall rent which applies to the whole store including the kitchen and storage areas at the rear and potentially upper floors. These are only rented at a fraction of the zone A rent.
€286 psf zone A is not necessarily out of line with €76 psf overall: it depends on the configuration of the individual store.
Without access to plans of the building it’s impossible to tell what zone A rent the judge applied when coming up with his rent of €205,250 on the Burger King store, but it will certainly be considerably in excess of €76 psf.
Hi Graham, I would accept totally the point about comparing apples with apples and as is generally the case with valuations there is some tweaking. I’m not sure if Burger King has a 24-hour licence but I’m pretty sure McDonalds has, for example. The Irish Times claims that BK has retail space on the ground and first floor of just over 2000 sq ft and the basement which is a store has 750 sq ft. But the bottom line is that 2,750 sq ft is available on Grafton Street at €76 psf. Compare that with the €1000 psf records being broken on Bond Street in London.
Bullseye, NWL!
With rumours that one of the largest supermarket companies is in serious financial trouble, it just underlines the fragility of the retail property sector and also the retail sector itself. Grafton Street is not the only retail “outlet” hurting. The sale of Liffey Valley SC is another “Lannigan’s Ball” of suitors and sellers.
This adjustment that is slowly and painfully taking place in rental values is stagnating the market and the fact that NAMA won’t dispose of the assets, held under its loans, at the rebased values is contributing to the economic stagnation.
[…] Grafton Street you may well have a lease on one premises paying €800 psf per annum and next door paying less than €100. Businesses with “old” leases (ie those entered into before 1st March, 2010) are feeling the […]