Grafton Street retail rents rise 25% to €6,500 per sq m

DublinRetailMarket 2016_MAP

Introduction

This blog post discusses the significant rebound in occupier, investor and development activity in Grafton Street, Dublin’s premier retail destination. For a more detailed analysis of Grafton Street, click here to read Knight Frank’s Grafton Street Market Analysis Report 2016.

Occupier Market

Grafton Street is experiencing a significant rebound in occupier interest with a number of prominent international retailers establishing on the street. For example, Victoria’s Secret have let 2,152 sq m, of which 505 sq m is located on the ground floor, at 28-29 Grafton Street where they will pay a Zone A rent of €6,400 psm. Other recent deals of note include Dune London’s letting of No. 69 and & Other Stories pre-let of the newly redeveloped No. 26-27.

Meanwhile, L’Oréal owned Urban Decay are reported to be taking a sub-lease at 50 Grafton Street which will help strengthen the southern end of the street while IPUT are currently marketing 72 Grafton – which is undergoing a high-spec redevelopment – for a quoting Zone A rent of €7,500 psm.

With the vacancy rate essentially at zero, occupiers are bidding strongly to get a foothold on the street which has led to Zone A rents growing by 25% over the past year alone to now stand at €6,500 psm. However, unlike the office and residential sectors – where rents are near pre-crisis highs – prime retail rents still trade at values that remain significantly below their pre-crisis peaks indicating that there is plenty of scope for further rental growth in the coming years.

The lack of space on Grafton Street is increasing occupier activity in the surrounding areas, particularly amongst larger retailers for whom the small floorplates on Grafton Street act as a further limiting factor. Examples include H&M and Abercrombie & Fitch locating on streets just off Grafton Street. This activity has resulted in Grafton Street becoming the focal point of an ever expanding retailing hotspot which extends beyond the street itself.

Investment Market

Investors, keen to get into the market at the early stages of the rental recovery, have bid Grafton Street yields down to 3.50% in Q3, down from 4.00% at the same period last year. The main obstacle for buyers looking to make this play is the lack of product now coming to market with long-term Irish institutional investors having substantial holdings on the street.

Irish Life, already one of the largest property owners on the street, further cemented its interest in the street in Q3 with the purchase of 50 Grafton Street for €6.75 million representing a net initial yield of 5.39%.

This added to the acquisitions they made in 2015 which comprised of the Sovereign Portfolio – which included 7-11 and 85-86 Grafton Street – and the Lifestyle Sports tenanted 57-58 Grafton Street.

Significant investment sales currently on the market include the Grafton Collection, which incorporates a substantial retail block on the corner of Grafton Street and Duke Street. Guiding €40.0 million to give a yield of 4.62%, the property is attracting interest from national and international investors.

In addition, Knight Frank are marketing the ‘Madrid Portfolio’, a 7,100 sq m retail focused portfolio located on the fast appreciating streets directly to the west of Grafton Street, for €27.0 million. With a WAULT of 4.56 years, the sale represents the opportunity for investors to gain exposure to the Grafton Street area rental appreciation story with future redevelopment potential.

Development

Grafton Street and its environs are seeing a wave of capital expenditure, with a number of high-profile refurbishments and redevelopments ongoing.

For example, luxury department store Brown Thomas has recently completed a €20.0 million upgrade and reconfiguration of its landmark premises including spending €€1.5 million on restoring the façade.

Institutional investors have also been active as illustrated by the aforementioned redevelopment of 26-27 Grafton Street by Aviva Investors and IPUT’s redevelopment of the former Karen Millen store at 72 Grafton Street. Irish Life are also thought to be examining the feasibility of amalgamating four adjoining units on Grafton Street, namely No. 47-50, in order to address the shortage of large floorplates on the street. The company has seen the advantages of this strategy having purchased 57-58 Grafton Street last year, which underwent an amalgamation prior to sale by vendor Nama.

A number of developers and investors are currently working on taking advantage of the demand from international retailers for large floorplates through a number of redevelopment projects on the streets surrounding Grafton Street. For example, Lone Star is appealing to An Bord Pleanála to allow for a mixed-use scheme on Chatham Street, just off Grafton Street.

The redevelopment will feature a number of retail units and will back onto Lone Star’s existing South King Street development, where tenants include H&M and Zara. Lone Star acquired the South King Street development in 2014 after purchasing loans from IBRC and assets from Chartered Land. Following on from their purchase of Project Kells for €92.0 million earlier in the year, London investors Meyer Bergman and BCP International Property Fund are seeking planning approval for 7,400 sq m of retail space and 9,300 sq m of office space at the corner of Dawson Street and Nassau Street.

In addition, following their acquisition of the remaining 50% stake in Royal Hibernia Way in Q2 of this year, Friends First have submitted plans which will see a substantial upgrading of the shopping arcade. The thoroughfare is expected to benefit greatly as a hop off point for Grafton Street when the new Luas stop on Dawson Street opens next year.

Construction work has also commenced on Green REIT’s One Molesworth which will consist of 2,137 sq m of retail facilities at ground and lower ground levels. Retail in the area will benefit from the footfall derived from the office redevelopments that are currently ongoing on Molesworth Street and which will house over 2,000 office employees when completed.

Finally, having acquired a 35.4% stake in St. Stephen’s shopping Centre in late 2015 for €60.0 million, Madison International Realty and their partners are expected to shortly begin spending €30.0 million upgrading and re-configuring the 30,000 sq m shopping centre which will further cement the long-term attractiveness of the Grafton Street area.

Knight Frank

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