2012 was a year of positives

Have the hard fought reforms in last year’s budget had a discernible impact on the Irish property market, or have the Minister for Finance’s proposals been lost amidst a wave of doubt over the euro zone crisis?

There is no clear answer, which will be disappointing for a government looking to reduce uncertainty and attract investment, but it does look like some parts of the Irish market are beginning to improve.

For the first time in five years, there might be a positive annual total return for the Irish commercial property market. Fourth quarter results will not be available until early February, but there has been a slowing in the capital declines affecting Irish values, to the extent that Ireland has (so far) outperformed the UK this year. Irish returns over the 12 months to Q3, 2012 are positive at 4.8 per cent, ahead of the UK’s 3.5 per cent.

Signs of stability

But positive returns do not mean the market has turned a corner, capital values are still declining, with a further 5 per cent shaved from prices in the year to September, while rental values, a measure of occupier demand, continued to fall, by 2.6 per cent.

But the contraction in rents and values is the smallest seen in five years, and masks the outperformance of subsectors of the market that are seeing considerable improvements and performance to rival that of even London.

Much like in the UK, better performance has been limited to prime assets, and when any recovery truly emerges, it will be for quality assets in good locations, particularly offices.

Dublin’s central offices, one of the better performers for the past five years, have seen a partial recovery in the past six months, with docklands returning 6.5 per cent for the 12 months to September, ahead of the City of London, at 5.4 per cent.

Docklands has profited from an appeal to multi-national tenants. Capita and Ancestry.comhave both taken significant space in the past few months. The area also has a high quality of stock that is unsurpassable across most of the country.

With rents there now discounted by 48 per cent, competitive government business tax rates, and a young and educated workforce, international tenant demand has been strong.

As a result, investors have been more confident about the sector, and values have only fallen by a minimal -0.7 per cent year-on-year in docklands, where there have been some of the largest transactions in the past five years.

But while Dublin’s prime office space may be seeing a burgeoning recovery, the retail sector, across the country, has not.

Consumer confidence is at a low ebb and further declines in consumer spending, not to mention increasing online competition, mean there is likely to be little improvement for regional and secondary retail units, which are already discounted by well over 70 per cent.

In Cork and Limerick retail values continued to fall, by 5.3 per cent and 5.6 per cent respectively, in the past 12 months, and even the prime Dublin shopping area of Grafton Street lost 2.8 per cent in the past 12 months. On Dublin’s northside, Henry Street and Mary Street fared considerably worse, losing 6.7 per cent off capital values.

Further friction between landlords and retailers continues to fester due to heavily discounted rental values, now over 45 per cent, while struggling occupiers are tied into “boom-time rents”.

However, this has attracted new occupiers into the market, keen to take advantage of the discounted trading conditions. A number of international brands have taken space in Dublin in the past year, Abercrombie Fitch and Jamie’s Italian amongst others. Their strong covenants and business plans will encourage new investment – especially as the economy starts to improve.

Indeed, the value of Irish retail units is starting to stir investor interest. Yields on Grafton Street are now in excess of 7 per cent – triple pre-crash levels, making an attractive prospect if a secure tenant can be found.

Some positives

The Government would have hoped for more impact from property reforms in last year’s budget, but in the risk-averse investment environment recovery will be hard fought.

Nevertheless, this has masked some of the positives accrued over the past year, because the Minister for Finance removed much of the uncertainty that had paralysed the market. We have already seen transaction activity rise, which looks set to top €500 million in 2012, a fourfold increase on the €120 million traded last year.

Strong income streams from well-located and heavily-discounted assets will draw investors to Ireland over time, but the difficult economic and monetary climate that has continued to engulf the euro zone has further deterred investors.

Amidst the clamour to be heard at last year’s budget, the Government focused on tax incentives and stabilising policies.

This has not been unsuccessful, but should the Government wish to assist the market next year, more should be done to promote transparency and openness, because this remains one of Ireland’s strengths.

Irish Real Estate Investment trusts (REITs), whose formation continues to be mooted, remain one option to promote this further. Given their structure, they would allow up-to-the-minute pricing and allow shareholders to immediately price for perceived risks.

REITs are just one avenue, the commercial lease register another, but to promote Ireland one must promote transparency, legitimacy, and openness – that will avoid the mistakes that brought the Irish market to this low, and will be the key to ensuring a tangible recovery.

Colm Lauder is a senior researcher at the IPD (Investment Property Databank) in London specialising in Irish commercial property analysis