Returns to stay negative till 2010 says estate agency

OVERALL RETURNS from the commercial property market are continuing to fall and are likely to remain in negative territory until 2010, according to a mid-year market briefing by property consultants CB Richard Ellis. Jack Faganreports.

A recovery from the cyclical downturn will depend on when liquidity improves but, according to the agency, there have been no general signs so far of "distressed selling" apart from a small number of sales in the hotel and bar markets.

Marie Hunt, director of research at CBRE, said that while the occupier markets continue to perform relatively well, it was the investment and development sectors where transactional activity had contracted most sharply in recent months. A number of investment assets offered for sale this year were still available.

The agency does not expect investment activity to pick up until the money supply is restored and asking prices are reduced to a more realistic level.

CBRE has suggested that, despite the lack of transactional evidence, prime yields for office and shopping centre properties are now in the order of 4.75 per cent while retail warehouses and industrial investments have drifted out to 5.75 per cent.

Demand for properties in all sectors, including the high streets, is extremely weak with high street yields now around 3.75 per cent "and likely to trend weaker over the coming months if the cost of finance and liquidity does not improve". Despite the re-pricing that has taken place in recent months, the agency says it is difficult to foresee a significant pick up in sales until the cost and availability of finance stabilises.

CBRE says that while the investment market is essentially illiquid at present, property defaults and forced sales, which characterised previous downturns, are unlikely to manifest in this cycle.

The report forecasts that, even if liquidity improves in the autumn, the banks will increasingly focus their attention on income-producing assets and are unlikely to consider funding development sites or projects that have no immediate income-generating potential.

CBRE estimates that Irish investors spent €392 million in the first six months though some of these transactions were agreed late last year but not completed until 2008. In 2007, the overall spend was €2.2 billion.

Dealing with the office market, Marie Hunt says that sentiment has deteriorated in recent months as a direct result of weakening economic conditions, both global and domestic. A number of potential office occupiers had now started to put future expansion and relocation decisions on hold until such time as economic prospects are clearer, suggesting that take-up in the next six months will be weaker. Other office occupiers are considering locating to more cost-effective locations.