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Credit crunch

Published:  05 November, 2007

Opinions in the retail development sector about any possible credit crunch and its effect on future mall projects are surprisingly sanguine, with few expectations of retail property values being scaled back. During 2007, houses prices in Ireland fell by 15 per cent, but this decline hasn't been mirrored in retail property values. Neither does the decline in house values appear to have had much impact on consumer spending.

No one in the sector appears to expect cutbacks in the availability of finance for future retail developments. However, even if consumer spending tightens in 2008, this isn't expected to have a dramatic slow-down effect on mall development. On the other hand, any significant reduction in spending is likely to have an impact on rent reviews and leases in the sector next year.

Marie Hunt, director of research at CBRE Dublin, expresses a commonly held view in the sector when she says: "I don't think that a credit crunch is a major issue in Ireland and I'd be surprised if it became one."

If a credit crunch does have any impact on the value of retail property, it will tend to affect older shopping centres in secondary locations that are not as well turned out as Dundrum Town Centre, for example. Hunt believes that in the near future there will be more pressure to refurbish and redevelop these older centres, rather than tending towards brand-new sites.

"Older centres built in the 1970s and 1980s are looking tired in terms of fashion and design, and so much new retail has been built there's now an over-supply in some areas," says Hunt. Overall, she doesn't believe that there will be much slippage in terms of valuations, but developers will have to rethink how they finance schemes.

Hunt comments: "Previously, retail property developments here in Ireland have had a 70 to 80 per cent loan to value rate, but this may drop to 60 per cent, so more equity will be needed. Until now, retail property developers have been largely dependent on bank finance, but they will now have to look towards other sources, such as mezzanine finance and private equity."

Over at DTZ Sherry FitzGerald, Maria Duffy, associate director, concurs: "The impact of shopping centre values depends on the duration of the credit crunch, but in our opinion few investors are likely to be under pressure to sell in the short term, so pricing won't shift materially." Fitzgerald doesn't expect a fall in retail property prices and says that rental growth is still positive, particularly in prime locations. But a greater concentration on pre-lets and pre-funding will take place, giving the banks greater security.

Joan Henry, head of research at Savills Hamilton Osborne King, has a similar opinion: "We don't expect tightness in the financial markets to impact on long-term plans and projects that are in place and positioned to contribute to the continued successful development and performance of the sector," she says.

Owen O'Neill, director, lending Ireland, of the Anglo Irish Bank, says that future funding terms are likely to be less palatable for many developers, because of the increased volatility of capital markets. He believes that demand will be more subdued and the pace of growth somewhat less frenetic.

A senior banking source in Dublin did say however that the banks in Ireland have an extremely good record on liquidity, so that major problems in making lending available for further development aren't expected.

However, some doubts remain as to whether consumer spending will hold up as strongly next year as this year. The Economic & Social Research Institute in Dublin says that 2008 will see 4 per cent economic growth in Ireland, almost half this year's level. Higher mortgage repayments, rents and food prices are sucking money out of consumers' pockets, and job losses are occurring at up to 5,000 a month.

Dermott Jewell, chief executive of the Consumers Association of Ireland, believes that there will be an economic slow-down as consumer borrowing tightens. He adds that the Budget on December 5 could exacerbate the situation, the general expectation being of a tight Budget with few 'goodies' for hard-pressed consumers.

However, Stephen Murray, director of retail agency at Jones Lang LaSalle, says that with no interest rate rises expected in the near future, consumers who are mortgage holders should not experience any significant impact on disposable income in the short term. He believes that the downward pressure on interest rates to support the markets may in fact help to maintain strong consumer spending.

CBRE's Hunt believes that after eight increases from the European Central Bank, interest rates will stay flat - at worst. "I don't expect any massive decline in consumer spending," she says.

The final word goes to Don Nugent, manager of the Dundrum Town Centre. He says that in the light of the current economic climate, the centre reviewed its expectations and predictions on footfall growth. "This review turned out to be unnecessary, as growth has been maintained at 10 to 12 per cent compared to the same period last year. More importantly, sales growth across the various sectors has averaged at 15 per cent and upwards." He concludes that there is little sign of any significant drop in consumer confidence, and expects strong growth in Christmas sales.

That seems to be the case right across the retail sector, with analysts in Ireland almost dismissing any possible credit crunch as an irrelevant issue. However, if there's any decline in retail property values in the UK, where many Irish people have invested, this could have a knock-on effect across the water.

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=== The view from the North ===

Northern Ireland is unlikely to be hit quite as badly as predictions would indicate when it comes to the credit crunch.

At the end of June 2006 there were 769,000 people employed in Northern Ireland, the highest ever figure on record.

While the current economic slip may see unemployment rise for the first time in more than five years, industry experts in commercial property and the shopping centre industry are feeling positive.

Brian Lavery, managing director of CB Richard Ellis in Belfast, believes that commercial property is less at risk than residential developments. However, he warns that there are some commercial sectors that may be adversely affected.

"Those properties purchased over the last 18 months at very low yields and those where there are possibilities of vacant use are most at risk of being devalued," he says. "The low yields paid allow no margin for refurbishment costs, marketing and transactional costs, whereas those purchased that are subject to long leases may see a slight variation in their valuation due to softening yields, but not a major movement."

Criona Collins, one of the directors of retail at BTWShiells, puts it simply: "There's definitely a slow-down, but certainly not a melt-down, as many major developments are still moving forward. However, it would be remiss of me to say it's all totally rosy, as it's probably a lot harder to get deals through, but at the same time those retailers who have the correct business model still have an appetite for investment."

Collins points out that customers will begin to spend more carefully and investors and property developers are likely to move into a period of considered consolidation.

"While there are significant retailers spending significant sums of money, the market certainly isn't as buoyant as it was, for example, two years ago," she says.

"The doom and gloom that you read about in the papers is not as bad as it seems. But there's no doubt about it - there's going to be less money about and those retailers who have the right package will be the ones who make sales.

"Instead of going on a big spending spree, investors will be looking to manage their assets more intensely."