Turnover in first half of 2008 shows dramatic fall to €200m

Properties for sale off market struggling to find buyers says DTZ .

ESTATE AGENT DTZ Sherry FitzGerald is predicting that most institutions are likely to be sellers rather than buyers of commercial property later this year because of pressure for redemptions and rebalancing caused by the disproportionate loss of equity values.

The agency says that although there is a limited stock of investment product actively on the open market, there are a number of properties available on an off-market basis which have been struggling to find buyers.

The level of turnover in the first half of 2008 is estimated to be in the order of €200 million, around 10 per cent of the €1.9 billion turnover in 2007 and under 7 per cent of the €3 billion in 2006. "Although we expect a pickup in availability and transaction levels in the second half of 2008, it is highly unlikely that the ground lost in the first half of the year will be regained," says Marian Finnegan, head of research at DTZ. She adds that while illiquidity in the Irish market leaves it more insulated from kneejerk value movements, the significant adjustment in UK commercial property values at the end of 2007/start of 2008 is beginning to be seen in the Irish market.

The low level of property held by foreign investors, whose capital flows are generally more fluid than domestic investors, and the relatively low proportion of ownership by institutions who can be forced to sell in order to rebalance portfolios, contribute to the slower pace of market adjustment. The relatively high proportion of property held by private investors and syndicates in the Irish market is likely to decrease the exposure to a glut of property coming to the market in the current environment.

She said that this, combined with the illiquidity in the market and high transaction costs, are likely to keep transaction levels and turnover low, thus creating less transactional evidence than would be the case in the UK market to justify dramatic short term changes in value. Nonetheless the sentiment in the market along with the limited transaction evidence emerging is undoubtgedly leading to a downward adjustment in values.

"The adjustment is now under way as illustrated by the first IPD results which show a 2.3 per cent drop in overall returns over this period, the first negative returns in the Irish market since 2002."

DTZ says that following the exceptional turnover in the retail investment market in 2007, which exceeded €1.15 billion, the first half of 2008 has seen only a handful of deals which have generally been in the smaller lot size. Properties available on an off market basis on Grafton Street and Henry Street have been very slow to secure purchasers, marking a sea change in the market. Over recent years opportunities arising on the prime streets in Dublin have attracted massive interest, with record prices being achieved. Transactions in recent years saw headline net initial yields as low as 1.5 per cent with the sale of the River Island and Wallis properties in the middle of 2007 for a price of €115 million, recording a net equivalent yield of around 2.5 per cent. The DTZ report says that evidence in the market would suggest that these record yields are much more difficult to attain, certainly for the foreseeable future. For medium to larger lots it is now likely that yields over 3 per cent will be required even by equity based private investors and developers who have driven the market in prime retail investment in recent years.

Smaller prime retail lots remain sought after by private investors as witnessed by the strong interest recorded for a retail property just off Grafton Street which has recently been agreed at a price close to the asking level of €4.5 million, reflecting a net initial yield of just over 2 per cent.

DTZ forecasts that the more challenging trading conditions for retailers will suppress rental growth and create occupancy issues particularly in secondary retail locations. The move towards turnover rents in many locations will become stronger, creating an opportunity for well-managed shopping centres but may cause problems for rental growth in areas of oversupply. The agency says that as well as the predicted shift in prime retail yields it also expected secondary retail yields to move to a range of 4 to 5 per cent with retail warehousing shifting to between 4.5 and 5 per cent.