| Tide has turned for commercial property market |
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| Overall, Ireland’s commercial property market enjoyed a strong 2005, with retail again the top performer, over both the office and industrial markets, for the fifth consecutive year, writes Marian Finnegan. Looking to 2006, retail will continue to be a strong performer as the demand for opportunities will far out strip supply, while demand for industrial accommodation will be strong where covenant and lease terms are attractive and higher yields relative to other sectors are. The office market has had a tough few years, with the vacancy rate at around 17 per cent. However, Finnegan says that there are now some clear signs that the market is showing signs of recovery. |
2005 proved to be a very advantageous year for the Irish property market. The combination of stronger than anticipated employment growth, exceptional immigration figures - the highest ever on record and perhaps the feel good factor brought about by the stability of the interest rate environment despite assertions in late 2004 that rates would be increasing led to a buoyant expansion of the economy which enhanced the performance of the property market.
The strength of the economic performance had a positive influence on all sectors of the property market but perhaps the clear winner was the retail sector. At the time of writing the latest available data revealed that the total returns for retail property stood at 26.0 per cent for the twelve months to September 2005, according to the IPD Index, a figure which suggests that the retail market is set to outperform both the office and industrial markets for the fifth consecutive year. This reflects very robust capital growth rising to 21.2 per cent for the twelve months to September, while rental inflation was also very strong at 11.1 per cent.
Grafton Street recorded the strongest performance during the year with total returns of 33.1 per cent compared to 17.0 per cent for Henry Street/Mary Street. Comparing the different retail sectors reveals that retail warehouses recorded the highest returns in the year to September at 29.6 per cent, just ahead of standard shops at 26.6 per cent, while total returns for shopping centres stood at 24.6 per cent.
The continued strength of the retail market is highlighted by the growth in the stock of retail space in the market in recent years. Construction activity was very robust during 2005 with just under 250,000-sq. m. of shopping centre accommodation and over 180,000-sq. m. of retail park space added to the market in the twelve month period. This brings the total stock of shopping centre accommodation in Ireland to 1.4-million sq. m. while the stock of retail park space was just over 700,000-sq. m. at the end of December.
The expansion of the shopping centre market includes the completion of two significant developments in early 2005 namely Mahon Point Shopping Centre in Cork and the first phase of the Dundrum Shopping Centre in Dublin both totalling approximately 70,000-sq. m. of shopping centre accommodation.
The continued strength of supply has led to greater competition for tenants with landlords beginning to follow the UK model and focus on tenant mix in order to remain competitive. One issue that is being explored is whether very high levels of fashion are sustainable on their own. Landlords are also looking at turnover related rents to ensure that space is affordable for smaller retailers who add value to the overall tenant mix.
The retail park market also enjoyed considerable expansion in 2005 including the first phase of the Carrickmines Retail Park in Dublin comprising 15,000-sq. m., while the second phase of Airside Retail Park also opened during the year with a total of 14,500-sq. m. of accommodation. In Naas, Globe Retail Park began trading totalling 12,400-sq. m. Further down the country in Limerick, Childers Road Retail Park completed construction comprising 20,700-sq. m. while in Cork the first phase of Mahon Point Retail Park also opened adding almost 6,900-sq. m. to the market.
The current level of development activity in the retail park market has resulted in an oversupply in some areas, with more than one scheme being built in the same town. These schemes generally target the same market, and as such there is a need for planners and local authorities to examine the impact of these schemes more closely and prevent this oversupply from occurring. Developers also need to be conscious of this and create a real point of difference between centres, a factor which will require an even greater focus than ever on tenant mix.
There is also a growing need to re-assess the Retail Planning Guidelines to reflect the changing market place, in particular retailers’ requirements for units of less than 700-sq m. It is also essential that we eliminate the confusion that exists over the interpretation of the ‘bulky goods’ definition by adapting a clearer guideline setting out use by classes. Without such amendment the success of many retail park schemes will be negatively impacted.
In contrast to the strength of the retail market, if there is one section of the property market that benefited most from riding the crest of the Celtic Tiger wave, only to suffer the slings and arrows of the global economic downturn, it is the office market.
That said, there are now some clear signs that the Irish office market is showing signs of recovery. The Dublin office market, which would represent over 50 per cent of the entire office accommodation in Ireland witnessed a strong recovery in activity during 2005 with the quantity of accommodation taken up totalling in excess of 150,000-sq. m. the strongest level in three years. Enquiry levels in the market have also increased which coupled with the continued strength of growth in the Irish economy suggests that demand is set to remain robust in 2006. That said, despite this improvement in activity the market continues to witness an oversupply with availability reaching an all time high of over 445,000-sq. m. and the corresponding vacancy rate of 16.9 per cent.
Taking a longer term perspective an analysis of employment trends suggests that we can anticipate a relatively strong period of employment expansion which will underwrite the performance of the office market in the short to medium term. Translating such employment growth into gross take up activity would suggest that the quantity of office accommodation taken up in Dublin will average in excess of 170,000-sq. m. per annum between 2006 and 2010. Such a strong level of take up activity bodes well for the future performance of the industry.
The impact of the resurgence in economic growth in Ireland is also clearly evident in the strengthening of activity levels in the industrial market. Activity levels in the Dublin industrial market for example were very strong in 2005 with the quantity of transacted space reaching in excess of 500,000-sq. m. for the twelve month period, the highest level in four years. Reflecting this strength of demand, the supply of industrial accommodation fell significantly over the twelve month period with the vacancy rate falling to 10.3 per cent at the end of December, significantly lower than the peak of 17.8 per cent recorded less than two years previously.
Demand in 2006 is likely to remain focused in the South West and North West regions, reflecting the well established transport infrastructures in these locations and the completion of the Port Tunnel in 2006. Supply levels are expected to remain stable with a resultant low vacancy rate which will positively enhance growth in rents and capital values.
Overall, 2005 was an impressive year with regard to growth and performance within the various sectors of the property market in Ireland. This was well reflected, in the record turnover levels recorded in the Irish investment property market which at the time of writing was estimated to average €2 billion, equivalent to more than the total level of activity in 2003 and 2004 combined. That said it should be noted that in volume terms half the transactions completed in 2005 were for lot sizes of less than €5-million. In contrast the top eight deals completed amounted in value terms to over €1.1 billion. As such the turnover figure was driven by a small number of large deals such as AIB Bankcentre sale and lease back of €360 million and the sale of the Scottish Provident portfolio at €140-million.
Demand for property remains extremely strong. This is not just unique to Ireland but is replicated all across Europe. A number of factors have been behind this trend however the most important factor has been the ability to borrow significant amounts of debt to buy property at a time when interest rates have been historically low. The range of investors in the market is backed by a steady supply of debt. This weight of money has pushed down yields, thereby increasing prices.
Looking to the future the trends evident in 2005 are likely to continue as demand outstrips supply for quality investments in the Irish market.
While interest rates are set to increase economic growth is also expected to remain strong underpinning demand. Supply continues to be restricted as investors prefer to hold and re-gear rather than exit the market and have to buy back in, possibly at a higher price as well as paying 9 per cent stamp duty.
The recovery in the city centre office market in terms of rental levels is expected to result in a further reduction in yields in this sector. Retail will continue to be a strong performer as the demand for opportunities will far out strip supply. Location will remain to be the strongest influencing factor in this sector with strong demand for prime units. Demand for industrial accommodation will be strong where covenant and lease terms are attractive and higher yields relative to other sectors are available. |
Marian Finnegan is chief economist of the Sherry FitzGerald Group
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| Article appeared in the February 2006 issue.
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