Slowdown on way after seven years of boom for investment market

 

Commercial property has produced phenomenal returns over the last seven years, ranging from 13.2 per cent to a high of 38.2 per cent, out-performing the other main investment categories. Total returns for this year are set to be around 26 per cent, once again beating equities and bonds.

Can the property market repeat this performance again in 2001? The consensus among analysts is that it will not, that the performance next year will show a slowing down. But double figure gains - more likely to be under 20 per cent rather than over it - are still in prospect, ensuring that property holds its place in the investment world.

The expected slowdown is attributed to a number of factors. They include higher interest rates and the effects on the overall economy of inflation, shortages of staff, and the bottlenecks in infrastructure. They also include the increase in building costs, a tougher attitude by banks to funding development, and nervousness about the amount of office space planned for the suburbs over the next few years.

Overall, there are plans for over 11 million square feet of office space in the greater Dublin area, compared to a present total of 19 million square feet. While office space in central Dublin is at a premium at present, some fear that the explosion in suburban developments could be at risk if there are any economic shocks or a downturn.

While there is some uncertainty over the immediate future of the out-of-town office market, the prospects for retail and industrial property appear to be stronger. Retail investments are expected to benefit from the increased spending power of consumers. Industrial property also has a strong underlying trend with the demand for warehousing to feed the economic boom and the back-up requirements of new technology.

The pent-up demand for prime retail investments has been underlined by the recent sale to Canada Life of a shop on Henry Street for £4 million. The sale set a new benchmark yield of 3.93 per cent for the street, well down on the 5.6 per cent recorded in July 1996. Zone A rents in Henry Street and Grafton Street are set to rise sharply over the coming year.

The continuing success of out-of-town shopping centres like Blanchardstown and Tallaght in the Dublin suburbs will encourage most of the big institutions to pitch for part of the £200 million shopping centre currently under construction in Dun drum. Castlethorn Developments is expected to retain a majority interest in the complex, which will have more than 300,000 sq ft of retail space.

The institutions are also keen to fund a new round of retail warehousing in Dublin and other cities and towns. Three months ago the Irish Pension Fund Property Unit Trust and Irish Life Assurance agreed to provide £50 million in funding for a retail park near Swords in north Dublin.

With interest rates around 1.5 per cent higher than a year ago, it was hardly surprising that the institutions dominated the investment market over the past year. They accounted for 63 per cent of the £500 million turnover compared to 49 per cent in the previous year, according to Hamilton Osborne King. Private investors accounted for 27 per cent of the turnover, down from 32 per cent in 1999. Property companies trailed the field at 9 per cent, down 1 per cent from the previous year. The remaining 1 per cent went mainly to tenants.

Although the overall turnover was down by about £200 million last year, the shortfall was due more to a scarcity of retail and industrial investment opportunities than a fall-off in interest. Even if private investors are put off by interest rates, the flow of money into pension funds will put institutions under pressure to find a home for it.