Turnover to reach a derisory €250m

THE COMMERCIAL property world has been turned on its head in the past two years. With the fallout from the banking crisis and the recession showing little sign of abating in Ireland, the property market is striving to cope with a full scale crash, writes JACK FAGAN

There has been a peak-to-trough fall in capital values since the end of 2007 of around 56 per cent, overall returns in the year to September declined by almost 30 per cent and property sales are at their lowest level for many years. Worse still, few experts are calling the bottom of the market yet.

The tailspin of the last two years has meant that capital values are now back at the same level they were at in December, 1999, according to the Irish Property Index compiled by Jones Lang LaSalle. Even with the collapse in capital values, sales have been extremely sluggish, largely because of the absence of debt finance and uncertainty about the role of Nama in dealing with toxic loans and devalued properties.

Sales turnover this year has only reached €172 million and present indications are that the final figure will be no higher than €250 million to €270 million – a long way behind €1.64 billion invested in 2007 and the €3.62 billion spent in 2006. The discrepancy has been even more marked in the overseas markets where Irish investors have spent only €86 million so far this year compared with €2.1 billion in 2008 and a staggering €9.9 billion in 2007.

The harsh reality is that the worst downturn since the Great Depression has plunged much of the Irish property market into crisis. As the Government scrambles to prop up the banking system, ever more development companies are falling into the hands of receivers and liquidators because of a stagnant market, a severe shortage of working capital and the realisation that the value of most development sites and buildings bought in recent years bears no resemblance to the borrowings already incurred.

Nama is seen as the only possible panacea to the awsome problems but, with €77billion in bank loans due to be transferred to the “bad” bank, the prospects of an early respite for developers must seem extremely remote.

Those who borrowed on development land will be worst affected with values down by at least 50 per cent in the Dublin suburbs and by as much as 70 per cent in some provincial locations. Even sites bought for shopping centres and other commercial schemes in many provincial cities and towns are likely to lie idle for many years or may never be developed because of the recession and the tight funding policies likely to be followed by the banks even when a degree of liquidity has been restored to the banking system.

The banks are likely to reflect on the immense trading problems being experienced by some of the provincial shopping centres opened in recent years and the reluctance by anchor tenants, like Dunnes Stores, to proceed with new ventures in the present difficult climate.

German discounters Aldi and Lidl head a declining group of multiples still on the expansion trail.

Even Dublin’s principal high street, Grafton Street, is having unprecedented problems with capital values down even more than the norm because of declining rents and a higher than usual vacancy rate. A fall-off in consumer spending is accentuating the difficulties on a street where yields have drifted out in a matter of months from 3 per cent to 6.5 per cent.

One agent who specialises in rent reviews estimates that about 90 per cent of the stores on Grafton Street are over-rented by an average of 30 per cent, simply because the rents rose too rapidly during the boom years.

One of the best examples of this was the curious decision of an arbitrator to recommend that the rent of Bewleys should be increased by 93 per cent from €750,000 to €1.475 million. One can only presume that, like most other traders on the street, the Campbell Bewley Group has been trying to persuade owner Johnny Ronan to drop the rent by at least 20 per cent during the present recession.

Rents in the retail and office sectors will continue to be under pressure for the foreseeable future because of weakening occupier demand and high vacancy rates. Key money on the street is no longer available unless one of the top buildings with large floor plates becomes available such as HMV, A Wear or River Island. It is hard to believe now that only three years ago fashion multiple Karen Millen offered a premium of €1.45 million for the former Principals shop on the street. In that case the owners of the building bought-in the lease and relet the building at a higher rent.

The fall in consumer spending this year has led to an unprecedented number of shop closures in Grafton Street and other high streets but more particularly in provincial shopping centres which are feeling the brunt of the cutbacks. Even where replacement tenants have been found, they have frequently been prevented from taking over the leases because of the absence of bank finance to fit-out shops.

Despite all the problems, there have been few fire sales to date. Property funds do not want to part with most of their core real estate investments despite increasing demands for redemptions by retail investors.

Similarly, Nama will not be rushing to offload its high value properties in Ireland as long as bank liquidity remains so tight. Selling activity will be concentrated on the UK where there has been a rapid recovery in commercial property values from the deepest slump on record to near bubble-like conditions. Real estate values are set to overturn most of the losses suffered in the first half of 2009 as booming investor demand has taken prices back to near peak levels in some sectors.

Private investors in Ireland have been largely out of the market this year because of the absence of debt finance. Most sales have been below €5 million in value and have mainly involved sale and leaseback deals by banks who are happy to offer yields of 6–7.25 per cent in return for hard cash.

Though the immense difficulties facing the property industry have mainly focused around excessive borrowings by developers and poor judgment by bankers, there is an equally serious problem facing thousands of private investors who have lost most of the mezzanine finance they provided to help buy commercial investments and development sites over the past five years.

Most of this finance was borrowed and, despite the widespread cut back in salaries and the threat of job losses, will have to be repaid.

The most notable of these funding schemes involved Davy Stockbrokers which raised over €52 million from private clients to help developer Bernard McNamara to spearhead the €412 million purchase of the Irish Glass Bottle site in Ringsend along with the Dublin Docklands Development Authority (DDDA). The site is now valued at €60 million. The investors have taken High Court action to get their money back and McNamara, in turn, is suing the DDDA seeking an indemnity.

There have been a great many similar funding schemes sponsored by a range of finance houses where the write-down in values has not been 60 or 70 per cent but the full 100 per cent. Davy Stockbrokers and some of the other funding agencies don’t give up easily as they are already back in the market inviting private investors to grab part of the latest action – the “distressed properties” that must be sold at all costs. They really have some neck . . .