Institutions get back in the groove of the big spenders

As overall returns on investment property continue their strong run, the institutions have been busy on the acquisition trail. This year, transactions in properties with values in excess of £500,000 reached £114.4 million in the first four months, with institutional buyers accounting for 83 per cent of these transactions.

Strong domestic and overseas demand for prime commercial space has resulted in excellent overall returns to investors. Total returns from the commercial property market over the last five years have been in excess of 20 per cent per annum, taking into account capital growth and rental income.

Returns continue to run strongly ahead of other investment vehicles. They came in at 28.2 per cent for first quarter of the year, compared with equities and gilts at 7 per cent and -1.7 per cent respectively. While it is accepted that such high levels of returns are not sustainable indefinitely, the continued growth of the Irish economy is expected to produce attractive returns for the foreseeable future. The commercial property return for the first quarter of 2000 reached 5.1 per cent. A recent survey conducted by the Society of Chartered Surveyors underlines that corporate values and rents in the commercial property market are not unrealistic and that prices are likely to continue to rise.

Offices

Of the three main occupier markets, the office sector continues to be the best performing property sector with an overall return for the year ending 2000 of 31.9 per cent. It is no surprise therefore that 67 per cent of the overall spend on commercial property investments in the first four months of this year comprised office properties, while a further 23 per cent of the total spend comprised mixed investments, most of which had some office content.

The current vacancy rate in Dublin is 2 per cent, which is the lowest office vacancy rate in Europe. Prime city centre rents currently stand at £34 per sq ft. I estimate that tenant demand will remain strong for the next three years, with an average annual take-up of two million sq ft. The IT, e-commerce, telecommunications and call centre sectors, will lead demand. Gunne Research is confident that the office sector will see continued rental and capital growth in the years ahead.

Oversupply in the suburbs will not happen as long as development continues at its current pace of construction. There will be intense competition for prime buildings, and rents in excess of £40 per sq ft will be achievable on the open market.

Retail

The rise in consumer spending, overall thriving economy and strong demand have resulted in record returns for the retail sector. In the last four years, there has been a 50 per cent increase in retail sales. Inflation and interest rate rises in 2000 do not appear to have slowed growth. Investor demand for the retail sector is strong, particularly in the retail warehouse sector, where there is strong demand from tenants for space and where there is strong potential for rental and capital growth. Investors are also turning to well-located high street or shopping centre units in regional towns and cities let to good covenants on modern leases. We don't believe that the retail sector is under threat from the Internet, although retailers will certainly have to adapt their existing stores to cater for the technological age and develop shopping as a more leisure-based activity in order to be successful.

Industrial

The industrial market has performed extremely well in recent years, consistently achieving high levels of capital growth and rental value growth.

Quite a lot of current stock consists of older buildings, which are functionally obsolete. Therefore, a shortage of accommodation currently exists because a large proportion of proposed developments are not scheduled for completion until the end of the year.

As a result of the shortage of suitable accommodation in the market, the first quarter of this year saw a slight increase in prime rents for purpose-built high bay facilities, to approximately £7.75 per sq ft. Capital values rose to £100 per sq ft for prime units. This upward pressure looks set to continue for the rest of the year.

While we anticipate many changes in industry in the years ahead as a result of technological advancement, we predict that the industrial sector will continue to perform well, as logistics and distribution become increasingly important.

A major change that has occurred in the investment market in recent years is that the market is now dominated by larger deals, which are driven by institutions and private investment consortiums. Some 62 per cent of the total investment spend in the first four months of the year comprised deals of £10 million .

As second-hand product is slow to come to the market, demand is focused on new developments, many of which are prefunded, primarily, although not exclusively, by institutions. Some 31 per cent of all investment deals to the end of 2000 comprised forward-funding deals.

Both the tax and legal framework surrounding Irish property cannot be matched throughout Europe and these together with economic factors will continue to fuel occupier demand for commercial property in the years ahead. The outlook for Irish commercial property looks very bright indeed.

Marie Hunt is head of research at Gunne Commercial