The decline and fall of property empires ends
After six years of decline, Irish property is starting to look like a good investment again – in some areas
This year played host to the most significant turning point in the Irish property market since 2007. Following six years of decline and a fall in values of more than 65 per cent, Irish commercial property prices were again finally on the rise.
While the numbers are small, the 0.3 per cent growth seen in the third quarter was psychologically crucial, putting a line under one of the deepest property recessions on record, and reinforcing the signs of economic recovery that have been appearing across the State in the last 12 months.
Total returns for assets, boosted by this growth, rose accordingly, also reaching their highest since 2007, and at the headline level rising to 2.6 per cent for the third quarter, bringing total returns to 7.3 per cent so far this year.
Total returns edged back into the black last year, as the IPD Ireland Quarterly Property Index last did back in the fourth quarter of 2011, but this was essentially due to high income returns boosting performance, rather than a turnaround in property values. As such it was a less significant marker for the burgeoning recovery in the commercial property sector. The recent growth in values is the real indicator, and one for which we have waited over six years.
Ireland’s turnaround in fortunes is testament to the confidence instilled in the market by a combination of strict fiscal discipline and aggressively competitive reforms by the Government.
Specifically for the Irish property sector, the abandoning of a retrospective ban on upward-only rent reviews, the capital gains exemption, and the reduction in stamp duty have combined to ease investor fears about the Irish market.
Furthermore, the increased transparency injected into the market through the launch of a public commercial lease database, as well as improved levels of market research, have boosted the market’s standing globally. There have been reports of up to six rounds of tendering for buyers of Irish offices, while the announcement of Ireland’s second real estate investment trust (REIT) in late November showed how domestic competition is heating up.
The recovery in the Irish prime market has clearly taken ground, but remaining competitive is key. Global investors will begin to chase similarly discounted assets in the UK (excluding London), Spain, Portugal and Italy.
The Irish market has experienced a unique upturn with its high levels of income, attractive entry yields and relatively solid occupier base. Income returns averaged 9.7 per cent per year at the end of Q3, well above the equivalent for UK property of 6 per cent, which has a similar tenant base and almost identical lease structure. Combined with an average initial yield of 8.9 per cent, a reversionary yield of 6.8 per cent, and a strong list of international occupiers providing these income streams, Irish property is well placed to continue to attract international investors, provided sufficient stock is available.
The issue for the market is in attracting these investors beyond prime Dublin offices because, though capital values are rising, they mask a far from standard recovery below the headline numbers. Just like London versus the rest of the UK in 2010, the Irish property recovery is shaping up to be very much in two speeds, as secondary locations await a positive turn.
High income returns have tempted so many back to the market, and are the highest measured globally by IPD, over-renting remains endemic and underlying rents have fallen over 50 per cent. This means many secondary locations will not be able to deliver the income returns investors are seeking. While office locations in high demand, such as Dublin 4, saw rents surging 5.1 per cent in the year to date, and IFSC/Docklands by 1.3 per cent; weaker markets, such as provincial retail, have seen rents contract an extra 12.8 per cent.
Nationally, rental values declined 2.3 per cent in the first nine months of this year, almost entirely due to lacklustre demand in the retail sector, which saw falls of 6.6 per cent. This was despite notable improvements in consumer spending and sentiment throughout the year.
A growth in domestic occupier demand remains crucial for the sustained overall recovery of Irish commercial property and, until that happens, we are unlikely to see movement beyond Dublin.
The rewards of lowering stamp duty, abandoning rent review legislation, keeping corporation tax levels and implementing government spending reforms have clearly started to pay off this year, but not for all of the Irish market.
Psychologically we have made an important step, but there is a long way to go yet.
Colm Lauder is a researcher at Investment Property Databank, a provider of real estate performance and risk analysis