Short Term Game & Large Gains: The Shifting Retail Property Market

  From Boom to Bust to Bump For a small nation, with a population of just over 4 million, it is intriguing how property has, for so many years, played such a prominent role in the economic fortunes of Ireland. At the height of the economic boom in 2006, the value of construction output was […]

 

From Boom to Bust to Bump

For a small nation, with a population of just over 4 million, it is intriguing how property has, for so many years, played such a prominent role in the economic fortunes of Ireland. At the height of the economic boom in 2006, the value of construction output was €35.5bn or 25% of GNP. In addition, 415,000 or 19% of the national labour force, were employed in the sector. The effects of the housing market collapse, were amplified as a result of Ireland’s over extension in this sector, and in the ensuing financial crisis, developers lost large swathes of their commercial property portfolios to NAMA. When the dust finally settled, we were left with a fragmented industry and plenty of head scratching.

From the extensive de-leveraging that took place, a shallow recovery has only now emerged, with certain sectors of the retail market, particularly the high streets, experiencing a dramatic improvement. Retail rents on Dublin’s two main thoroughfares; Grafton Street & Henry Street, for example,increased by 17.9% and 7.7% respectively in 2015. With vacancy rates falling and development re-emerging, rental rates have been on the rise. These latest developments have brought about both demand & supply side issues for would be retailers targeting prime locations.

On the supply side, there is a severe scarcity of stock on our high streets and shopping centres. On the demand side, rising rents have meant that landlords have become more selective about both tenants and lease terms, with the result that negotiating times can become very protracted.
In addition, prior to new legislation introduced in 2010, Upward Only Rent Reviews had a pernicious effect on the market. The introduction of the new legislation brought about reviews both upward and downward for new lease agreements, but as leases prior to 2010 were never considered, legacy issues remain, and a two tier market has developed.

To circumvent this legislation, landlords have had to get creative and explore alternative options:

  • Turnover Rents: rent as a percentage of the Tenants turnover each year
  • ‘Cap’ and ‘Collar’ Provisions: rent can go up or down but must stay in between a certain range upon rent review
  • Short Term Leases: leases of less than 5 years, thus negating the necessity for a rent review.

Turnover rents, while proving very beneficial for both parties in the good times, are inherently risky for landlords, particularly as economically, Ireland is not out of the woods yet. ‘Cap & Collar’ provisions provide a certain level of certainty, but the free market has the potential to provide far greater returns for landlords.

In the current state of play, shorter term rentals are proving to be the most popular option. They are less risky for both tenants and landlords, and their ephemeral nature provides landlords with an opportunity to earn rents substantially more than the long term market rate.

lease-length-image

 

Lesson the Lease Length

Traditionally, commercial leases in Ireland have had a term of between 20 to 25 years, and in many cases even higher, with 35 years often seen in parts of the retail market, the most famous example of which being Bewley’s Cafe on Grafton Street. In recent years however, leases have been getting shorter and shorter. 10 years is now typically the norm, with break clauses and rent reviews all part of the package. As tenants emerge from the economic rubble, they are more due diligent, footloose, and willing to test the waters in new neighbourhoods on the shorter term, in the hope of finding the perfect location for their offering.

 

The Pop-Up Paradigm

What was once reserved for start-ups and artisan brands, and labelled nothing more than a niche sector or fad, the short term retail/pop-up market has exploded in recent years, as global brands such as Amazon and online retailers like ASOS, join the party – a point we discussed in great depth in our previous blog post.

Recent research emerging from the UK, shows that rather than being seen as a sign of the hard times, pop-ups have the potential to regenerate the traditional high streets. Not only do pop-ups help to utilise vacant floor space, but the growing and diverse footfall (particularly millennials) which these stores attract, is great news for permanent retail outlets, as it both freshens up, and breaths new life into the area.

supply-demand

A classic case of Demand & Supply

As the sector has grown out of it’s niche foundations, the number of market players has diverged, but their has been a convergence of needs. Established businesses, both traditional and online, have moved into this space to complement their other business activities & target specific consumers.

Given their ephemeral nature and purpose, choosing the correct location is now the key factor for larger brands such as Google and Amazon as they enter the fray. With increased competition for bullseye locations, and a lack of supply, the premiums paid for the reduced risk of short term rental agreements are rising.

For landlords, this is great news. Not only is the pop-up model a great way to showcase their space and attract interest from potential long term tenants, but having big brands utilise the space in the short term, drives up the property’s rental and sale value in the long term.

show-me-the-money

 

Show me the money!

The POPertee team did some investigating recently and found that the average annual rent on a retail unit on 5 of the main shopping streets in the Dublin 2 area (S.Anne Street, S.King Street, Exchequer Street, S.William street, Drury Street) is €52,648, or €4,387 per month, based on an average lease length of 10 years.

Rents Table

In the short term rental/pop-up sector, the average rent on any of these streets is €4,000 per week. This translates into earnings of up to 4 times what can be earned from the long term (€208,000 per annum).

vacant-retail-unit

Planning Ahead

One of the main areas where the opportunity for short term rentals arises for landlords, is when they have put in for planning permission on their space, be that a change of use, or alteration to the space. This period, between application and decision, presents a unique chance to earn passive income on otherwise ‘fallow land’.

The POPertee team recently did some digging on the Dublin Planning Permission website and found a couple of really interesting nuggets from the past 15 weeks of sample data:

1) 76: The average difference in days between application & decision date
2) 96: The average difference in days between application and granting date

For prime retail city centre spaces, there is an opportunity for landlords to earn up to €52,000 {€4,000 x 13 weeks (96 days)} by opening up their space to short term rentals, over this ‘fallow period’.

Dame Lane

Case Study: Dame Lane
One of our most utilised spaces to date is on Dame Lane. The space became available as a result of a planning authority application, to change its use from retail to restaurant. In the meantime, big brands such as Peroni, Boohoo.com, and Sony Playstation have used the space for activation events & product launches.

We recently caught up with the landlord, to discuss the opportunities the pop-up economy provides:

Hi, thanks for taking the time to meet today, and for using the POPertee platform, the partnership has been quite successful thus far. Could you please tell us why you decided to open up your space to pop-ups/short term rentals?

“Why wouldn’t I! The situation with my space is that the restaurant beside me has applied for planning permission for a change of use of the space from retail to restaurant. The application usually takes about 6 months to get an answer on, and can be longer if another retailer on the street makes an objection, which happens all the time. Short term rentals are a great opportunity for me to earn premium rent during this period, and I honestly don’t know why more property owners, in a similar situation to myself, would not consider it.”

Detail

 

The Nitty Gritties- So how does this all work?

 

For many landlords, short term agreements are a completely new ball game, where the opportunity cost involved is the time to learn. Thankfully, POPertee is on hand to educate the market, and make the process very straightforward and hassle free.

Insurance
It is up to the tenant to ensure they have adequate insurance for the duration of their pop-up.

Utilities & Rates
Landlords embed the cost of utilities, electricity and rates into the rental rate agreed between both parties. This avoids any confusion from the get go.

License Agreement
POPertee has it’s own licence agreement that will cover your property, and save landlords on unnecessary legal fees. We of course allow you to use your own if available.

Long term rental prospects
POPertee is not an exclusive service. You can list your property on as many platforms as you wish.

Shifting Landscape

 

Shifting landscape, shifting mind-set

 

The shifting landscape in both the commercial property & retail sectors, presents a unique opportunity for landlords to reconsider how best to maximize the earning potential of their property portfolios. As our examples have shown, delays in both planning permission, and a scarcity of available spaces in the short term, provide landlords with a unique opportunity to earn premium rent on otherwise ‘fallow land’, at prices up to 5 times the long term rental value.

In a sector that has been traditionally set in it’s way, and with many developers still licking their wounds, a change in mind-set will take time. We firmly believe we have spotted a real opportunity in the short term rental market for both landlords and tenants, and POPertee’s goal is to make this process as simple, easy and hassle free for both parties. If you have a space and would like to find out more about how you can maximize its earning potential, drop us a line today.

October 2016 . Daniel McCarthy