Problems for retail behind the facade
The extraordinary Brexit events in London this past week have already had an impact across the Irish Sea. Witness the sharp downturn in share values and a plunge in the value of sterling.
There will be more “days like this”, to redirect that old Van Morrison tune.
Despite the political and financial turbulence in the wake of the Brexit referendum vote, almost two and a half years ago, the economy here has remained remarkably resilient, but we must guard against complacency.
What we could be witnessing is the calm before the storm.
Irish retailing has traditionally served as a bellwether for the economy. On the surface, everything appears to be in good order.
In contrast to the UK, where spending in bricks-and-mortar stores is contracting, the picture here is one of modest buoyancy, with annual growth in spend of around 3.5%.
The Irish commercial property market has performed remarkably, in terms of returns for investors, since 2012 — when the economy bottomed-out — with valuations rebounding by over 90%.
According to a report, issued in March, by Goodbody, investors pumped €3bn into shopping centres in the Republic over the preceding two years.
This is real money.
Prime retail rents have, at the same time, been boosted by a near lack of new supply since 2009.
This has meant that supply and demand have stayed in balance.
Following a period of sustained rises, prime retail rents have been stable, this year, except in Dundrum Town Centre, where its troubled co-owner, the giant commercial UK landlord, Hammerson, is looking to Ireland to make up some of the ground lost in Britain.
Across the water, a real retail bloodbath has been underway, in recent times: Big names, like Debenhams, Bhs, House of Fraser, and Toys R Us, are either retrenching or completely disappearing.
There are now a huge number of empty UK shops and this could double within a decade, leaving the sector with a 20% vacancy rate.
The share prices of leading, commercial-property stock market firms have fared poorly.
The late businessman Tony Ryan used to say that you only find out who is naked when the tide is out.
This principle certainly applies in today’s Britain, where big retailing names, such as Philip Green, have shipped enormous reputational damage.
The British financial journalist Patrick Hosking posed this question: “Who can we trust to say that the high street emperors have no clothes?”
Mr Hosking was quoting a banker friend, who has concluded that property experts are taking a far-too-sunny view of retail asset valuations.
The share markets are sending their own pointed message.
The average discount to net assets of the big, listed commercial vehicles is now more than one-third.
It has risen dramatically — the average discount over the past 15 years was just over 4%.
The problem is that the people making the valuations are conflicted, as they rely on the asset owners for other work.
They do not wish to be bearers of bad news.
Property agents tend to look on the bright side of life; cheeriness is deeply embedded in their DNA.
Besides, we have seen this before, with the auditors and their assessment of a roll call of duff companies, and, above all, with the rating agencies in the run-up to the economic crash.
No-one wanted to be the guy who called it as they saw it.
Doubts have also been raised by academics about the quality of the analytics in property valuations.
There has been much academic research over the decades.
The conclusion is that commercial valuation reports over-relied on historical market performance, while depending on a “limited use of comparables”.
A lack of independent market analysis posed a threat to the integrity of such reports, in the banker’s view.
His views are all the more relevant in the light of the online selling revolution that is now overtaking retailing.
Retailing in Ireland is in a relatively sweet place, but, behind a well-dressed shop front, problems lurk.
A sharp downturn could expose flaws in some investment rationale, while accelerating the move of many sellers out of Irish subprime properties.
Tenants paying high leases in large shopping centres could also come under huge pressure, reviving calls for an overhaul in commercial tenancy laws.
Property analysts and investors tend to focus on a narrow part of the market — prime real estate located on main streets from Grafton Street to Patrick St, and including our top shopping centres, such as Dundrum.
But a large majority of retailers ply their trade well away from those locations.
Optimistic analysts argue that much non-prime property may be undervalued, given the lack of bank funding for retail properties of this kind.
However, Thomas Burke, director of business group Retail Ireland, says that, in the past, retail has closely tracked domestic demand.
This year, the core economy is growing at around 4%, yet retailing is lagging.
Evidence of this is the inroads being made by offshore online companies.
Mr Burke also cites a trend among consumers away from the purchase of goods and towards seeking out services in the form of “experiences”.
This implies that the performance of the retail and wider leisure property markets could also begin to diverge.
A failure to grasp this could lead to distortions across a range of areas.
Government — central and local — may be placing too many bets on the continued sustainability of retailers, when it comes to revenue raising.
Put simply, the retailer donkey could be struggling to carry his load, whether in the form of commercial rates, insurance, local charges or wages.
A no-deal Brexit, or some other, unwanted external event, could derail growth, boosting the number of closures in retail.
Poor analysis of retail trends and performance could also hit the industry surrounding selling pensions and investments.
Over-optimistic projections could be encouraging companies to make large investments in new retail capacity, which may turn out to be unjustified and, indeed, dilutive of returns across the broader sector.
The funds could be relying on income flows from retail sources that may not be there to quite the same extent in the long-term.
The disruptive impact of online providers could hit the size of those pension cheques down the line.
Valuation analytics may not be a sexy sounding subject, but if people get it wrong again, as they did a decade ago, many of us could end up with less to spend on the little luxuries of life in our sunset years.
