MORE than £200 million has been invested by private individuals in the Dublin commercial property market this year, far out-spending the institutional investors for the first time.
The flow of private funds into this sector of the property market was more than four times that invested by the pension funds and insurance companies. With turnover likely to run close to £300 million for the year, the funds have managed to acquire only about £60 million worth of properties. The lion's share has gone to individual investors and private syndicates who have bought not only small investments but a range or large-scale properties, which were once the preserve of the institutions.
In several instances, the private investors outsmarted the funds by moving quickly to gain exclusive negotiating rights on investments.
The two most expensive properties, Stillorgan Shopping Centre with a value of over £38 million, and George's Dock II in the International Financial Services Centre with a price tag of £18.5 million, were bought by private investors at yields that would not have been attainable a few years ago.
The Stillorgan centre is producing an initial yield of 7.3 per cent and the return at George's Dock will be under 6 per cent before tax breaks are taken into account.
Some observers fear that if the downward movement in yields is sustained it will inevitably precipitate an overheating in some sectors of the market. One agent warns that once Georgian houses hit record prices - as has happened in recent months - it is time to watch out.
This scenario is not countenanced by the main players, even in a market which has been notoriously cyclical. Agents are forecasting that with interest rates set to fall further in the months ahead, the demand for property investments is unlikely to slow down. Moreover, as there have been scarcely any speculative office developments this time round, there is no danger of an oversupply of offices triggering a downturn in the investment market.
A new factor in recent months has been the intervention of the State in the investment market. Private investors are now in direct competition with the Office of Public Works for office investments where State agencies are tenants. Healthy public finances is allowing the State to buy buildings occupied by civil service departments where leases have a long time to run.
The private investors who are now the dominant force in the investment sector are mainly professionals, housebuilders and businessmen who have reaped good profits in a buoyant economy.
Their interest in property has been fuelled mainly by the availability of finance at historically low interest rates. They have also been encouraged by the high level of business confidence which ultimately drives up commercial-rents and values. A third ingredient in many of the acquisitions is that property in designated areas offers one of the few available tax shelters - in the past year, private investors spent £75 million on tax driven projects.
Private investors have acquired at least £15 million worth of investments in East Point, a new high-tech business park in the Dublin docklands which is aimed primarily at overseas electronic computer and healthcare companies involved in research and development. The buildings qualify for tax breaks because the park is located in an "enterprise zone". East Point will eventually have more than 600,000 square feet of accommodation and its own DART station.
Most of the high value investments were bought by business syndicates but properties costing up to £1 million were acquired mainly by individual investors who are banking on long leases and the security of income from good tenants to ensure that mortgages are repaid.
The combination of a vibrant economy and an inflation rate of about 1.5 per cent has created an ideal environment for property investment. So too have the returns from the property market. The Irish Property Index has shown overall returns of 16.2 per cent for the year up to the end of September. Because of the continuing strength of the market, that figure is expected to edge up towards the 20 per cent mark by the end of the year.
Rental values have continued to grow, rising by 4.6 per cent over the 12 months up to the end of September. This, in turn, contributed to a 7.4 per cent increase in capital values.
The most significant rent increases over the next year will be seen in the office sector where more than one million square feet has been taken up in each of the last two years. Most of the space this year has gone to Irish companies but an increasing share is being taken by foreign companies in tele-marketing and the technology areas which have located in Ireland because of the low cost structures.
The erosion of office space - the vacancy rate is now about 4 per cent of the total - is forcing rents up, particularly at the upper end of the market. But most leases now include a break option after five or 10 years at the expense of a rental penalty.
While the office developers are holding back in the expectation of securing commitments from tenants before moving on to building sites, retail developers have completed and let almost one million square feet of new space in the past year.
The three biggest developments, Blanchardstown Town Centre, the Jervis Centre and the extension to The Square in Tallaght, have increased the overall volume of retail space in the Dublin area by 25 per cent. A large proportion of the new space in the shopping centres has been taken by UK multiples, which in the past would have settled only for stores in prime retail streets.
The expansion of the Dublin retail facilities is scheduled to continue until the end of the century. The Duke of Westminster has taken a majority stake in the 250,000-square-foot shopping centre planned for Quariyvale in west Dublin; a similar sized complex is also proposed for the Pye lands in Dundrum; Swords is also to get a new 230,000-square-foot shopping and leisure complex, and the Bloomfields centre, with 140,000 square feet, opens for business in Dun Laoghaire next Easter.
