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Uncertain outlook for commercial property market Back  
Marie Hunt examines the commercial property market and predicts continued good health, but with caveats.
In recent weeks there has been much discussion on the likely implications for our economy should the US proceed with a war on Iraq and undoubtedly the consensus of opinion is that our economy would certainly be negatively affected should this come to pass.

Much has been written also on the impact war might have on the Irish residential property market with many commentators predicting the onslaught of negative equity. The likelihood of this scenario arising is highly unlikely in my opinion, on the basis that the housing market in Ireland is driven by unique forces of supply and demand, which are not overly dependent on international political or geo-political factors and on the basis that loan-to-value ratios in Ireland are relatively low.

Any slowdown in house price inflation in the Irish economy in 2003 will be a result of emerging equilibrium between supply and demand in the housing market as opposed to the impact of the threat of war overseas. Neither do I believe that the impact of war will have disastrous consequences for the Irish commercial property market.

Over the last two-year period, we have seen a significant slowdown in all sectors of the commercial property market, most notably the office and industrial markets, in direct response to slowing economic conditions, reduced business confidence and reduced overseas investment. Therefore, we are unlikely to see significant growth in commercial property returns in 2003. At best, we can expect modest growth in all sectors of the commercial market - office, industrial and retail.

Total returns from commercial property were down significantly in 2002 compared to the extraordinary rates of growth achieved in the late 1990’s, achieving just 2.2 per cent in the year. However, relatively speaking, property has shown its defensive qualities and in comparison with other investment mediums, particularly equities, property has performed well. Indeed, we have seen many investors diversifying into the relative safe haven of property in recent times.
Considering the relatively attractive rates of return available in the property market in the long-term, it is not surprising that over e900 million was invested in commercial property in Ireland in 2002. However, this level of investment is unlikely to be matched in 2003 as a direct result of the Governments intervention in the market in Budget 2002.

The increase in the rate of stamp duty for ‘non-residential property’ from 6 per cent to 9 per cent and other penal taxation measures will have a major negative impact on commercial property investment in Ireland at the very time when the Government should be attempting to encourage external investment and encouraging the retention of as much domestic capital in the economy as possible. As a direct result of these Government measures, the overall spend on commercial property investment in Ireland in 2003 is unlikely to exceed €500 million.

Irish investors have increasingly been attracted to the UK commercial property market in recent years. Indeed, Irish investors accounted for over 20 per cent of property acquisitions by overseas investors in the UK market in 2002, spending over €1.7 billion. Until now, the main factors driving investment into the UK was a substantial yield differential, similar lease structures, similar returns and a more extensive choice of product.

However, considering that recent data from the Investment Property Databank shows that the UK property market out-performed Ireland in 2002 and the Irish Governments decision to increase stamp duty from 6 per cent to 9 per cent, it is widely accepted that despite the inherent currency risk, that a significantly higher volume of Irish money will go into UK property investment in 2003.

The office market
There is undeniably an over-supply of office stock in the suburbs of Dublin at the moment, however a sensible approach has been adopted and the supply of new office stock has been significantly curtailed. As a result, the over-supply situation will eventually be reconciled over the next few years. There have been some significant lettings completed in the first two months of the year. Most notable was Merrill Lynch taking 9,290 sq. m. on a phased basis in Central Park in south Dublin and Bank of America and Mellon Fund Administration acquiring approximately 1,050 sq. m. respectively in The Harcourt Building, Dublin 2. Some suburban schemes still continue to come under pressure and will have to offer exceptional terms in order to secure tenants. The good news is that there are deals still being done and provided the location and quality of product are right and the terms are flexible, take-up levels should remain constant. However, the Georgian office market is now over-supplied and facing a challenging year.

The retail market
In comparison with other economies, the fundamentals of the Irish retail market are still very favourable. Going forward, demographics, in particular, will continue to sustain the market. It is important however that retailers and developers consider the demographics and plan new retail developments in locations, which can ultimately sustain such schemes.

While the Irish population is set to increase further, the structure of the population is changing rapidly and retailers who plan new retail offerings with these changes in mind will profit accordingly.

Retailers will have to wait until 2004 before significant new shopping centre space opens for trade in Dublin when the Dundrum town centre, Blanchardstown town centre extension and the Clare Hall scheme on the Malahide Road are due to open for business. The Mahon Point scheme in Cork is also scheduled to come on stream in 2004/5.

All of these centres will cater for some of the unsatisfied demand for retail accommodation in the market, particularly from international operators. While there has certainly been a marked slowdown in the volume of retail sales in recent months, with demand continuing to outstrip supply, even in a slower economic environment, the outlook for retail consumption is positive which will lead to ongoing property development and acquisitions throughout the country. In addition to international retailers, we expect many Irish retailers to continue their aggressive expansion trail in 2003.

The industrial market
Competitive construction costs, increased demand for modern accommodation as previously shelved expansion plans are re-appraised, coupled with lower land values will encourage some speculative development in the industrial market in 2003.

Interest rates will continue to drive demand to purchase rather than lease. Nonetheless, we expect that tenants will increasingly benefit from greater flexibility in lease conditions over the next few years with break options being offered earlier and shorter terms being offered. This coupled with a controlled level of speculative development will help stabilise rental and capital values in the short-to-medium term.

Capital values are likely to fall in the short term until the market becomes accustomed to the new rate of stamp duty set in Budget 2002.

We expect industrial land values to remain stable at current levels throughout 2003. Locations in close proximity to the M50 road network, the new Dublin Port Tunnel, Dublin Airport and the Northern Corridor will undoubtedly be in most demand, with the latter benefiting from the opening of the M1 motorway later this year.

Prospects for the Irish commercial property market going forward are positive in spite of geo-political factors.

However, recent measures implemented by the Irish Government, particularly the increase in the rate of stamp duty have been ill-thought out and which will have severe repercussions for the Irish economy and the property market going forward. I would urge the Government to re-consider these measures with immediate affect.

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