| Buoyancy to continue as returns over 20 per cent earned in last five years |
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| Marie Hunt reviews the market from an investor’s point of view. |
The Irish commercial property market is still enjoying extraordinary performance, significantly ahead of the UK and other European countries. Strong domestic and overseas demand for prime commercial space has resulted in excellent overall returns to investors. Total returns from the commercial property market over the last five years have been in excess of 20% per annum, taking into account capital growth and rental income.
Irish commercial property returns continue to run strongly ahead of returns from other investment vehicles at 28.2% for the year to Q1 2000, compared to equities and gilts at 7% and -1.7% respectively. While it is accepted that such high levels of return are not sustainable indefinitely, the continued growth of the Irish economy is expected to produce attractive returns for the foreseeable future. The commercial property return for the first quarter of 2000 reached 5.1%. A recent survey conducted by the Society of Chartered Surveyors underlines that corporate values and rents in the commercial property market are not unrealistic and that prices are likely to continue to rise.
Transactions in income-producing commercial properties with values in excess of £500,000, reached £114.4m in the first four months of 2000. Institutional buyers accounted for 83% of these transactions.
Office sector
Of the three main occupier markets, the office sector continues to be the best performing property sector with an overall return for the year ending Q1 2000 of 31.9%. It is no surprise therefore, that 67% of the overall spend on commercial property investments in the first four months of this year comprised office properties, while a further 23% of the total spend comprised mixed investments, most of which had some office content.
The current vacancy rate in Dublin is 2%, which is the lowest office vacancy rate in Europe. Prime city centre rents have continued to rise and currently stand at £366 per m2 (£34 per sq. ft.). Gunne Research estimates that tenant demand will remain strong for the next three years with an average annual take-up of 185,800 m2 (2 million sq. ft) predicted. The IT, e-commerce, telecommunications and call centre sectors, will lead demand. Gunne Research is confident that the office sector will see continued rental and capital growth in the years ahead. Oversupply in the suburbs will not happen as long as development continues at its current pace of construction. There will be intense competition for prime buildings, and rents in excess of £430 per m2 (£40 per sq. ft.) will be achievable on the open market.
Retail sector
The rise in consumer spending, overall thriving economy and strong demand have resulted in record returns for the retail sector. In the last four years, there has been a 50% increase in retail sales. Inflation and interest rate rises in 2000 do not appear to have slowed growth. Investor demand for the retail sector is strong, particularly in the retail warehouse sector, where there is strong demand from tenants for space and where there is strong potential for rental and capital growth. Investors are also turning to well-located high street or shopping centre units in regional towns and cities let to good covenants on modern leases. We do not believe that the retail sector is under threat from the PC although retailers will certainly have to adapt their existing stores to cater for the technological age and develop shopping as a more leisure-based activity in order to be successful.
Industrial sector
The industrial market has performed extremely well in recent years, consistently achieving high levels of capital growth and rental value growth. Quite a lot of current stock consists of older buildings, which are functionally obsolete. Therefore, a shortage of accommodation currently exists because a large proportion of proposed developments are not scheduled for completion until the end of the year.
As a result of the shortage of suitable accommodation in the market, the first quarter of this year saw a slight increase in prime rents for purpose-built high bay facilities, to approximately IR£83.42 per m2 (£7.75 per sq. ft.). Capital values rose to IR£1,076 per m2 (£100 per sq. ft.) for prime units. This upward pressure looks set to continue for the rest of the year. While we anticipate many changes in industry in the years ahead as a result of technological advancement, we predict that the industrial sector will continue to perform well, as logistics and distribution become increasingly important.
A major change that has occurred in the investment market in recent years is that the market is now dominated by larger deals, which are driven by institutions and private investment consortia. 62% of the total investment spend in the first four months of 2000 comprised deals of IR£10m +.
As second-hand product is slow to come to the market, demand is focussed on new developments, many of which are pre-funded, primarily, although not exclusively, by institutions. 31% of all investment deals to the end of April 2000, comprised forward funding deals.
Both the tax and legal framework surrounding Irish property cannot be matched throughout Europe and these together with economic factors will continue to fuel occupier demand for commercial property in the years ahead. The outlook for Irish commercial property looks very bright indeed. |
Marie Hunt is head of economic research at Gunne Estate Agents
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| Article appeared in the May 2000 issue.
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