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Irish commercial property weathers the peaks and troughs Back  
Over the past 20 years, the Irish commercial property market has established itself on a global scale, writes John Mulcahy, benefiting from massive inward investment as global companies set up Irish operations, as well as outward investments as investors buy up properties around the world. The Irish market has also performed particularly well over the past 20 years, he adds, with average annual returns for the 1987 to Q1 2007 period standing at 16 per cent per annum.
In doing some research for this article I came across some scribbles I had done for the magazine Irish Business back in 1987. Within the article I was asked to provide predictions on the future performance of the property industry - being young and foolish I agreed. Few could have predicted the impending sheer growth of the economy and subsequent record breaking rates of return for property. Not that I am one to boast, (but sometimes I can't help it) but I did manage to call a few events that did come true: success of the IFSC, rejuvenation of the office & retail sectors, the benefits of property unitisation, and the impending development of the Customs House site.
It was my view back in 1987 that inefficiency in our property market was caused by stamp duty and the lack of ease of transferability of property. We have come a long way to improving the general transferability and transparency of property as an asset but the stamp duty situation has digressed with the nine per cent that we currently pay on almost every commercial property transaction.
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Simply put, the major change between Ireland in 1987 and 2007 is that we are now a worldwide player. This works in two main ways. We benefit from huge levels of inward investment primarily as a result of our favourable corporate tax rate resulting in numerous multinational countries having established their Europe HQs on our shores. On a commercial property level our home grown investors and developers have successfully built up an investment and development reputation on a worldwide platform. Developers such as Treasury, McNamara and Shelbourne and investors such as Warren, Davy and Quinlan are 'household names' within the commercial property network worldwide. To give an example of our international presence, in the first six months of 2007 alone, Irish investors have spent €4.7 billion internationally on commercial property. We have a lot to be proud of.

The commercial property market worldwide tracks economic cycles and therefore tends to follow a cyclical path with rents and yields rising and falling in what tends to be a five to seven year cycle. In the last 20 years the performance of Irish commercial property followed a cyclical path as normal, but the high points of our trend line have been exceptional, 39.2 per cent overall returns achieved in 1998 alone. In fact average annual returns for the 1987 to Q1 2007 period are 16 per cent per annum; there are few countries worldwide who can claim such a commercial property performance.

As our economy developed the commercial property market followed. The development of the IFSC and subsequent influx of international and highly desired tenants provided stimulus for the office sector. In 1987 a prime office rent was €95 to €123 per m2 (IEP ?7 to ?9 per sq ft) - they now stand at €645 per m2. Our office market will continue to evolve, and in the short term this will probably focus on the South Docks and planned schemes in the Ballsbridge area of Dublin. As the 1960s and 1970s stock comes of age these buildings become ripe for redevelopment which will further drive the natural future evolution of the office sector.
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City centre shopping centres were a relatively new phenomenon in Ireland in 1987 - at that time the planned St. Stephen' Green Centre was going to be the largest retail scheme in Ireland. National shopping centres stock has trebled since then and Ireland currently has the third highest shopping centre space per capita in Europe with a figure of almost 306 m2 gross letting area for every 1,000 inhabitants. We've also had a huge turnaround in the types of retailers that grace our shores. In the past national retailers dominated the retail scene and at one point Tescos attempted to break in to the country and failed. In contrast, almost all of the retailers entering the market in 2006 have origins outside of Ireland with the majority either based in the USA or the UK.

What's also interesting is to contrast where yields have gone over the period. Grafton Street yields traditionally tended to hover between five and six per cent but in the last number of years yields of three per cent and less have become commonplace. Needless to say, at this level of yields, the demand on rental performance is considerable.

Ireland is now a wealthy country; at the end of 2005 our net household wealth was ?681 billion. According to The Wealth of the Nation report we rank 2nd among the leading developed countries in terms of wealth per capita. It is imperative that we continue to build on this wealth through our economic policies and investment in infrastructure. Such an approach combined with the improvement in the European Union economy overall will ensure that the advancement of the Irish commercial property market continues.

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