Property Market Weathering the Storm Well according to CB Richard Ellis
03/03/08
Property Market Weathering the Storm Well according to CB Richard Ellis.
Property consultants CB Richard Ellis, who were this week announced the ‘Best Company to Work for in Ireland’ in the 100 to 250 employee category, today released their latest bi-monthly review of performance in the various sectors and sub-sectors of the Irish property market, which concludes that the Irish market is weathering the storm very well although activity in each sector of the market is quite different.
According to the March bi-monthly report from CB Richard Ellis, despite the fact that economic activity is slowing, there is no evidence that wider global financial concerns have had any negative impact on demand for office accommodation in the Dublin market. That said, they say that potential occupiers are undoubtedly being more precise in determining their exact requirements in the current climate. Their research indicates that an additional 50,000m2 of new office requirements have been activated since the beginning of the year, which is remarkable. While no significant rental growth is foreseen in this sector in 2008, CB Richard Ellis remain confident that the strength of demand from both Irish and overseas occupiers for new office accommodation in Dublin together with the fact that a lack of speculative funding is curtailing new development will sustain rents at current levels.
Meanwhile, the property consultants believe that despite many ‘doom and gloom’ predictions in recent weeks, the Irish retail market remains in good health, with consumer spending relatively strong and new development coming on stream at what appears to be a very controlled basis, which will ultimately sustain rental levels. In the industrial sector, CB Richard Ellis point towards a number of significant lettings agreed during January and February in this sector. They welcome the fact that the Government has recently decided to postpone a previously-announced decision to close the ‘resting on contract’ mechanism which is widely used in the industrial sector. Despite the fact that development land values in Ireland have fallen in recent months, the value of prime industrial zoned land has remained stable according to CB Richard Ellis.
Outside the main occupier markets, the property consultants state that the property investment climate is more cautious than it has been for some time, particularly in the UK. Having said that, they say that the pace of decline in property values in the UK is now showing signs of easing and following very rapid re-pricing since last Autumn, prime yields now appear to be stabilising, most notably in London’s City and West End office markets. The fact that Sterling interest rates were cut by 25 basis points to 5.25% in February (with further declines expected over the coming months), coupled with a general softening in yields, means that many investors, particularly German funds, are now gearing up aggressively to purchase in Central London. However, restricted real estate funding and limited investment opportunties being offered for sale is hampering buying activity. Despite reports to the contrary, there is little evidence of forced selling in the UK market at present according to CB Richard Ellis. Their research indicates that Irish investors spent €4.7 billion on UK property investments in 2007, of which approximately half was invested in Central London. It is inevitable that total Irish spend in the UK in 2008 will be less. Despite the increasing weight of demand for investment oppotunities in the UK, CB Richard Ellis are not anticipating any major pick-up in transactional activity until such time as the discord between the real estate and financial markets alleviates and liquidity improves.
CB Richard Ellis say that the Irish investment market has been characterised by a notable decline in transactional activity in recent months, primarily as a result of a lack of bank funding arising from the ongoing credit crunch. Despite a lack of transactional evidence, the property agents believe that prime yields in the Irish market have moved out by approximately 25 basis points since Christmas, and have re-priced yields accordingly. They say that prime office investments in the Irish market are now yielding approximately 4.0% and prime high street retail investments are yielding approximately 2.75%. With rental growth now stabilising in all occupier markets and yields shifting slightly, they believe that it is inevitable that total returns will be lower in 2008. Despite this, they fundamentally disagree with flawed analysis issued by UBS in recent weeks, which suggested that total returns in the Irish commercial property market have the potential to decline by 30%, pointing out that unlike the UK market where institutions dominate, the bulk of investment property in Ireland is privately held and unlikely to be offered for sale unless market conditions improve.
With regard to the development land market, the bi-monthly report notes that debt-funding for large scale-development projects is reportedly particularly difficult to secure in the current environment. That said, they say that there is strong appetite for good development sites in prime locations, particularly where prices have fallen since last year. From a planning perspective, developers are understandably frustrated by the recent announcement from Dun Laoghaire Rathdown County Council that they intend to suspend planning permissions in Sandyford indefinitely until sewage and services issues have been addressed. While many developers are seeing opportunities to purchase land at value in the current market, funding these purchases will undoubtedly remain difficult for some time, according to CB Richard Ellis.
CB Richard Ellis says that there has been somewhat of a recovery in the new homes sector of the Irish property market in the last two months, most notably in Dublin. They say that agents are reporting strong viewing numbers at housing show units since Christmas, to some extent buoyed by the fact that prices have been reduced by between 10% and 20% in some schemes in an effort to boost sales. Not all developers have had to adopt this strategy to generate sales however. According to CB Richard Ellis, homebuyers are very conscious of ‘value’ and are starting to take advantage of the relative value now available in the market, particularly in light of the fact that interest rates now look likely to decline over the course of 2008. However, they say that regardless of a slight recovery in new homes sales activity, there is no doubt but that housing completion levels will fall further this year to approximately 50,000 units of which approximately 20% will be located in Dublin.
So far in 2008, CB Richard Ellis say that the hotel sector has been relatively quiet with some hotel vendors reluctant to put their properties on the market while the availability and cost of funding is causing difficulties for potential purchasers. Activity continues at pace on the hotel development front however. They add that the Dublin pub market has been slow to get into its stride in 2008. While there are a number of Dublin pubs on the market, there has only been one transaction concluded in the Dublin market in the first two months of the year, namely The Long Stone on Townsend Street, Dublin 2, which was sold after having been withdrawn from auction at €4.2 million.
According to Marie Hunt, Director of Research at CB Richard Ellis, who compiled the report “Activity levels in the Irish property market have been quite encouraging during the first two months of 2008, albeit every sector of the market is performing to varying degrees. While economic and property market fundamentals are still basically sound, the big issue in most sectors is the scarcity and cost of debt-funding. Despite the fact that total returns are easing in line with yield movements and lower rental growth potential, investor appetite for property remains strong but there is no doubt but that transaction levels in all sectors would be higher if funding was more readily available. The strength of occupier demand in the commercial market is very encouraging, with no evidence of a decline in terms of occupier requirements despite a less favourable economic backdrop. It is also encouraging to see some ‘green shoots of recovery’ in the new homes sector”.