Office market oversupply is unlikely to happen - Davy
Published 20/10/2015 | 02:30
Fears that the Dublin office market may see a glut of supply in three years' time that could send rents plummeting have been dismissed by Davy Stockbrokers.
In a note to clients, Davy said that planning applications for about 6.6 million sq ft are currently lodged.
That is the equivalent to nearly a fifth of the current supply in Dublin.
Last month Green Reit claimed that if all that supply came on to the market in 2017 or 2018, it could drive down rents very quickly, and potentially leave property investors nursing heavy losses.
Davy, however, believes that scenario is now unlikely.
The firm says that in a survey it carried out, there is a "low risk of oversupply by end-2018", even though the vacancy rate in Dublin is now below 10pc for the first time in 15 years.
In the top parts of the city - locations like Dublin 2 and Dublin 4 the shortage is even more acute, with vacancy levels now seen as being effectively zero in large parts of the capital.
"This office development cycle is different," said analysts Flor O'Donoghue and Ray Crowley.
"It is characterised by a transition from retail to a more institutionalised capital market," they said.
"In a Davy Research survey conducted over the past week, we found that public Reits and PLCs, pension funds and private equity are dominant.
"Although limited in numbers, these are among the few that can fund development today.
"Project capital stacks are skewed towards equity, with debt viable only to those with robust balance sheets or with pre-lets in place, of which there are precious few," they said.
"Our survey indicates that new supply will be delivered in a measured fashion over the coming years; however, participants voiced a preference to complete pre-2018.
"Our view is that fears of an oversupply of new office stock by end-2018 now appear overdone. This is a positive for Green Reit, Hibernia Reit and Kennedy Wilson Europe," they said. The big issue, as Davy sees it, is the lack of finance available in the market.
What lending is available comes at expensive prices, they said.
"What is termed and priced as senior debt in other markets for speculative development is being advanced and priced at mezzanine levels in Ireland.
"While loan-to-cost ratios in excess of 75pc can be achieved, the blended cost ranged from 12pc to 15pc. "Because of this debt environment, some said that the threat of oversupply is far more remote, particularly given that the market is only 36 months out of crisis mode and that the appetite of equity funders is targeted at only a handful of the best projects," the analysts found.
As a result of those factors, the broker has pulled back on its previous forecast for office rents to hit €70 per sq ft when the current cycle hits its peak.
Over half of those who took part in the survey do not believe rents will go that high. Prime office space in Dublin can be had for about €52.50 per sq ft at present.
The Davy view matches the likes of Hibernia Reit chief executive Kevin Nowlan who has long insisted that the supply glut will not happen because of financing restrictions.