Budget may kick-start investment market

The investment market is expected to come alive next year with the sale of a considerable number of distressed properties

YESTERDAY’S BUDGET has all the ingredients to kick-start investment activity in the commercial property market.

Clarification finally came on the issue of retrospective upwards-only rent reviews which has undermined the market for some time. The announcement by the Minister for Finance of a reduction in stamp duty from 6 to 2 per cent and changes in the capital gains tax regime have been warmly welcomed by an industry in decline for the past three years.

The Government’s intervention comes at a time when the investment sector is increasingly focusing on two Dublin office investments due to be sold before the end of the year.

Agents quoting €35 million for Riverside 2 in the south docklands and €28 million for One Warrington Place on Lower Mount Street are well aware that the yields to be agreed in both cases will finally set a benchmark for a large number of sales of distressed properties due to get under way early in the new year.

The absence of such evidence is hardly surprising given that the investment market virtually dried up in the past year. Total sales reached only €175 million – a long way from the €3 billion in transactions recorded at the peak in 2006.

The stagnation in 2011 was not entirely due to falling values or the broader economic difficulties but rather the Government’s dilly-dallying over the rent review legislation. .

Even with Nama, the State-controlled banks and the various receivers anxious to start offloading a large number of commercial and residential properties, it is by no means certain that these agencies have really realigned their expectations with the tough realities of the market up to now.

Nama will selectively release their properties in a measured way to get the best price but it is still unclear whether it will be willing to sell off distressed assets below the value at which the loans were bought in. The difficult task for the toxic loan agency will be to navigate through turbulent times without triggering a broad decline in capital values.

Apart from the considerable number of overseas investors who have already shown interest in Irish properties, many of Dublin’s estate agents have been touring Europe and the United States in recent months seeking instructions from property funds and wealthy individuals. One way or the other, foreign funds are badly needed to rescue the beleaguered market.

But it is not all bad news, as the office market has truly bucked the trend and had its best year since the downturn in 2008. The overall take-up of space in Dublin is expected to reach somewhere between 120,774 and 157,935sq m (1.3-1.7 million sq ft) – depending on which study you look at – and while that is an impressive performance, economist Marian Finnegan of DTZ Sherry Fitz- Gerald cautions that the potential for a global double dip may result in reduced activity for 2012.

In the meantime, Dublin’s stock of new office buildings is rapidly reducing and, according to James Nugent of Lisney, there are now only 11 blocks with over 4,645sq m (50,000sq ft) and four with more than 9,290sq m (100,000sq ft).

Once these buildings have been rented, companies looking for new space will have to embark on a design-and-build arrangement with developers and, to ensure that funding will be forthcoming, agree rents of at least €387-€398 per sq m (€36-€37 per sq ft) and a minimum occupancy contract of at least 10 years. Before that happens new buildings are still available at around €322 per sq m (€30 per sq ft) in the city centre.

The diminishing choice in the new office sector is also due to an increasing tendency by successful firms to avail of discounted rents and frequent break options to finally move out of often badly located older buildings. This, in turn, means that as soon as funding becomes available, an increasing number of redundant office buildings will have to be upgraded and refurbished before they can be relet.

IF RETAILERS ANDtheir landlords were hoping 2011 would provide a respite from the "perfect storm" of declining sales, falling prices and business closures they will have been sorely disappointed.

The economic downturn has had a devastating effect on the retail industry generally and, just as there are always winners and losers in a recession, this one has also seen a surge in demand from international brands, discount stores and fast food outlets ready to take advantage of the correction in rents and flexible leases.

Even Dublin’s Grafton Street, which had quite a few empty shops (most of them on the small side) in the early part of the year, is now almost fully occupied again, though it is clear that some of the new tenants are paying only a fraction of the original rent.

Traders who still have faith in the long-term sustainability of Grafton Street are keeping their fingers crossed that the American fashion trader Abercrombie Fitch will provide a major boost for the high street by finally opening its planned store next year opposite the Bank of Ireland on College Green. The famous fashion brand completed legal contracts as far back as last January but has not yet begun to fit out the 2,508sq m (27,000sq ft) store which was previously occupied by Habitat.

The Americans will have been encouraged that its cheaper brand, Hollister, has been a runaway success since it opened in Dundrum Town Centre last summer. No one knows whether Abercrombie is having second thoughts about opening in the city centre rather than in the country’s most buoyant shopping centre.

It is a different matter entirely in many of the provincial shopping centres where the harsh retail environment has left endless shops bolted up and others in limbo as they struggle to pay heavily discounted rents and service charges. In many cases budget shops and low-key UK fashion multiples are happy to fill empty spaces on turnover rents.

Chemist giant Boots has also been quick to spot good trading opportunities, often with rent-free periods of no less than 18 to 20 months. Even with its Irish operation running successfully, the company has asked its new agent to look again at some of its leases to ensure that it is getting value for money.

Marks & Spencer has also been noted for looking for its pound of flesh, sometimes seeking €2 million in “hello money” to open a new store in a shopping centre.

At a different level, Tesco is continuing to copperfasten its hold on the grocery market by rolling out ever more substantial 24-hour stores on the outskirts of provincial towns and smaller convenience outlets in city suburbs and smaller towns. Rival Dunnes Stores has been attracting more attention about its reluctance to proceed with planned openings than about further expansion of its chain of stores.

The two German discounters, Lidl and Aldi, are still trying to stay below the radar, quietly opening ever more stores up and down the country. Seldom a week passes without another store being unveiled. They don’t arrange opening ceremonies and they don’t invite along the parish priest to bless the premises.

In a recession even snobby shoppers know good value when they see it.