Finance Bill puts brakes on an already slowing market
The Government may be applying brakes to the Irish commercial property market at a time when it was already showing signs of a slowdown.
Tax changes announced in the latest Finance Bill may have the effect of further slowing the market. According to the IPD/SCSI index, the most authoritative guide to investment trends, returns fell from 3.1pc in the second quarter of the year to 2.1pc in quarter three.
"This is a significant fall from the 5.9pc recorded for the same period last year," says Helene Demay, vice president of MSCI, which produces the index. "The gradual moderation in Irish commercial property continues with capital value growth slowing and yields stabilising. While rental value growth is continuing, investor sentiment has begun to show signs of cooling," she adds.
In its latest bi-monthly report, consultants CBRE say "the likelihood is that investment spend will decline from this point forward … not least because of recent tax changes announced in the Finance Bill, which has done huge reputational damage for investment into Ireland … and will unfortunately negatively affect the price that certain funds will pay for Irish real estate assets going forward. It remains to be seen if the pricing of, or demand for loan portfolios including Project Gem and Project Tolka, which are currently on the market, will be negatively impacted by the uncertainty that these recent tax changes have unearthed."
The Finance Bill decrees that certain funds with 25pc or more of the market value of their assets related to Irish land will automatically become Irish Real Estate Funds (IREFs) and payments from these funds will be subject to a 20pc withholding tax. The new rules will affect different funds in different ways and CBRE says some investors may be able to avail of certain exemptions.
Claire Solon, president of the Society of Chartered Surveyors Ireland (SCSI), said the IREF tax move is likely to have some impact on property investment here.
"However, it is not expected to significantly dampen investment activity. Investment enquiries in Ireland continued to pick up across all sectors, with the retail segment seeing a resurgence in activity. However, foreign investment demand only increased fractionally for the second quarter in succession, with the indicator softening considerably relative to 12 months ago. So there is an element of uncertainty out there," she added.
Marie Hunt agrees that demand for core Irish investment opportunities remains strong, with particularly strong demand from European buyers who are encouraged by the continued strength of occupier markets and the potential for further rental growth in some sectors.
"Furthermore, prime yields, which are an indicator of prices, remain stable across all sectors with prime high street retail trending at 3.25pc, prime offices trending at 4.65pc and prime industrial trending at 5.5pc.
"With €3.18bn invested in income-producing investments with a value of more than €1m in the first nine months of 2016 alone and with a particularly busy autumn selling season, 2016 could prove to be a very strong year in terms of investment turnover if some of these transactions complete before year-end," she adds.
She also reckons that more than €600m of Irish investment assets were formally launched for sale since September and the vast majority of these lot sizes are between €20m and €50m.
"Considering that German investor BVK has been selected as the preferred bidder on Liffey Valley Shopping Centre, 2016 could prove to be a very strong year in terms of investment turnover if some of these transactions complete before year-end," said Hunt.
Only a few weeks before the publication of the Finance Bill, some agents including Patricia Ward of Cushman & Wakefield and Hannah Dwyer of JLL had been hoping that investment property sales this year could exceed €4bn. Not alone would that put 2016 ahead of the €3.4bn that was sold in 2015, but it would also see 2016 achieve the second highest ever annual level of sales after 2014's €4.5bn record.
Now that €4bn level may well serve as a gauge as to the impact of the Finance Bill. But some argue that it would not be the sole gauge because the complexity of the legislation means that not all buyers are on the same tax footing. For instance, REITs and some financial institutions will not be affected.
Hannah Dwyer says JLL is "still forecasting that total volumes for 2016 will achieve close to €4bn. This is largely dependent on the final outcome of Liffey Valley which is sale agreed for €610m, and would significantly alter final volumes if it did not close in Q4."
She also points to other large assets on the market: the €80m SV4 SuperValu-related retail investments: the majority stake in Navan Town Centre asking €62m; The Grafton Collection which has gone sale agreed at €55m; and the Park Portfolio of offices at Carrickmines guiding €40m, which we are expecting to close in Q4.
"However, this is dependent on the continued strong demand for Irish real estate. At the moment, interest in the Irish investment market remains robust and balanced between domestic and overseas buyers with a continuing number of new entrants to the market. However, the announcement of the change in tax legislation for non-Irish investment funds is likely to have some negative impact on demand from overseas investors. At this stage, we are not entirely clear what the new legislation entails and until this is clarified, there is still some uncertainty surrounding the property market in Ireland."
Other valuable properties currently being marketed include: The Magellan Portfolio, guiding €49.5m; Fairgreen Shopping Centre, Carlow, €36m; 160 apartments at St Edmunds, Liffey Valley, guiding €32.5m; Bord na Móna HQ, Dublin 2, guiding €37m; JP Morgan HQ building, IFSC, €36.5m; A 33pc interest in the Treasury Building, Dublin 2, €33m; Blocks A&B Joyce's Court, Talbot Street, Dublin 1, guiding €15m; Merchant's Quay Shopping Centre, Cork, guiding €12.5m and Killarney Outlet Centre, Co Kerry, guiding €11.5m.