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Property is still a worthwhile investment Back  
In spite of the slowdown that the commercial property sector has recently experienced, Marie Hunt says that it is still performing strongly compared to other investment vehicles.
While the Irish commercial property has undergone a marked slowdown in the last year, in spite of turmoil in capital markets, property has demonstrated its defensive qualities by performing quite strongly in comparison to other investment mediums, albeit at significantly reduced rates of return than in the late 1990s.
In the period 1997-2001 an average of E674 million was invested in commercial property in Dublin each year of which an average of 60 per cent was invested in the office sector. Following on from the slowdown witnessed in the investment sector towards the end of 2000, there was a further easing in activity, with E508 million invested in 2001 - significantly down on the amount invested in the three preceding years (See Figure 2). The main reason behind this easing in activity has been a lack of supply with much Irish investment having to move abroad, particularly to the UK and Eurozone markets.
E335 million was invested in commercial property in the first nine months of 2002 of which 55 per cent was invested in office property, 38 per cent was invested in retail property and 7 per cent in industrial property. By comparison, approximately E270 million was invested in the UK market by Irish investors in the same period.
Looking at property performance over time, it can be seen that the commercial property market is a cyclical market with a slowdown occurring in every decade since the 1970s. The marked difference between the current downturn in the market and previous downturns is that interest rates were at levels in excess of 10 per cent when the market slowed previously. In the current market, interest rates are at historically low levels.
The fact that interest rates are expected to remain relatively low going forward bodes well for a quick turnaround in performance. Total annual returns for 2002 are unlikely to exceed 5 per cent. It is expected that as a result of the low interest rate environment, property returns are likely to bottom out at this level and avoid going into negative figures as has happened in previous downturns.
Considering the current interest rate environment and the slowing development pipeline going forward, the prospects for Irish commercial property is positive if stock is selected wisely. Although there is little prospect of rental growth in the short term (with the exception of the retail sector) the prospect of strong returns in the short to medium term is good particularly in relation to other investment mediums. Property is essentially self-financing in the current climate and it is difficult to see values coming under any significant pressure.

The Dublin office market
According to the OECD, foreign direct investment in Ireland plummeted by 60 per cent in 2001 and this has had a notable impact on demand for office accommodation, as is evidenced by fall in the level of take-up in 2001 and 2002 to date. In addition to demand levels being down, a lot of new supply has come onto the market. As a result, the overall vacancy rate in Dublin has increased to 15 per cent (340,000 sq. m.), ranging from 8 per cent (75,000 sq. m.) in Dublin 2/4 to 18.5 per cent (195,000 sq. m.) in the suburban market, which has been the hardest hit by the slowdown in tenant demand.
Take-up in the third quarter of 2002 reached 30,334 sq. m., bringing total take-up in the first three quarters of 2002 to 113,749 sq. m. compared to 108,659 sq. m. in the same period last year. The city centre has accounted for 76 per cent of office take-up in the first nine months of 2002, although there is evidence of deals being done in the suburbs with tenants taking advantage of the rental deals on offer in the current market. The most significant lettings signed in 2002 have included the pre-letting of 18,580 sq. m. at Spencer Dock, IFSC to PriceWaterhouse Coopers; the letting of 16,700 sq. m. to Microsoft at Block B, The Atrium, Sandyford; the letting of 7,434 sq. m. at 2 Burlington Road, Dublin 4 to EBS Building Society and the letting of 4,550 sq. m. at Iveagh Court, Charlemont Street, Dublin 2 to Marsh McLennan.
There is still a considerable divergence between prime city centre rents and those being achieved in the suburban market (See Figure 5). Prime rents in the city centre have now levelled off at E519 per square metre and suburban rents range from E172 per square metre to E246 per square metre, although inducements are now included in most deals.

The retail market
The retail market in Dublin has thrived in recent years on the back of positive economic development, much of it the result of falling unemployment, low interest rates, favourable demographics, falling tax rates and entry into the single currency. This has led to large increases in personal disposable income and substantial retail sales growth during the 1990s. Retail sales growth has been phenomenal in the last five-year period and Ireland has a high retail spend per capita in comparison with other countries even exceeding the UK (See Figure 6).
There has been a notable increase in the number of overseas occupiers seeking to enter the Irish retail sector, particularly since the adoption of the euro in January 2002, which made the market more transparent. The only obstacle to entry has been a lack of product. The lack of opportunities on Dublin’s prime city centre streets has increased demand for retail space in the out-of-town shopping centres and has resulted in significant rental increases being seen in these centres in recent years.
This restriction on large-scale expansion has cushioned existing retailers in the capital, who report strong trade despite the slowing economic climate. The retail planning guidelines have also had the effect of reducing the amount of competition coming to the market giving existing centres preferential treatment. This has led to strong competition for the existing prime pitches, which will have consequences for rental growth.
The most significant letting in the retail sector in 2002 was undoubtedly the letting at 1 St. Stephens Green, Dublin 2 to Reiss at a Zone A rent of E5,188 per square metre which sets a new Zone A precedent for prime Zone A rents in Ireland.
As a result of domestic and global economic conditions and the fear of further Government cutbacks, consumer sentiment in Ireland has been affected and it is likely that this will lead to a reduction in the spending power of Irish consumers going forward.

The industrial market
The downturn in demand in the industrial sector was not as significant as in the office sector due to the relatively short build time for industrial stock. Developers were able to react to the market slowdown more rapidly and as a result; the industrial sector was not adversely affected in terms of oversupply to the same extent as in the office market. The current vacancy rate in the industrial market at 8 per cent or 300,000 sq. m. is artificially high due to the large number of functionally obsolete buildings which are classified as available and buildings which have occupier restrictions i.e. IDA ground leases only allowing manufacturing or production companies to occupy premises. These buildings are clearly not suitable for the modern occupiers who are taking space in the Dublin market. Therefore, in reality, the vacancy rate is closer to 4 per cent or 150,000 sq. m., which reflects a healthy rate of vacancy. There has been little speculative development in 2002 with the majority of new vacant stock being excess supply from 2001. However a number of developers are now considering construction of a limited number of units on a speculative basis as the supply of new stock is slowly diminishing.
Despite the slowdown which manifested itself in the industrial sector over the last 18 months, a reasonable level of transactions are still taking place with 185,800 sq. m. of take-up expected in 2002. Capital and rental levels have remained stable at E1,504 and E116 per square metre respectively for new buildings in prime locations. With more choice available in the market, occupiers are choosing new modern space. This has reduced demand for older stock and inevitably impacted on rental levels for these older units in secondary locations, which had been commanding inflated values in recent years due to limited supply of stock.
As in the office sector, incentives are increasingly being offered in order to entice tenants. All indicators point towards improving demand with well-located industrial units being offered for sale or rent still attracting considerable interest in the current market.

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