Property buzz will generate €1bn for first time since 2007
THE flow of international funds to Irish commercial property has been the standout investment story of 2013. Investment activity this year is expected to exceed €1bn for the first time since 2007.
The successful launch of the Green REIT (or Real Estate Investment Trusts), and the expectation of further REIT launches taps into a new wave of institutional money entering a market already popular with several well-known US private equity names as well as the established Irish pension funds
Given the positive buzz surrounding the market, both private investors and wealth managers who have yet to dip their toes in would be forgiven for wondering whether the time has now come to call the 'bottom' of the market? Is now the right moment to increase exposure to Irish commercial property and benefit from the upswing?
I think the answer is yes, but caution still needs to be exercised as the recovery is still patchy and mainly restricted to core Dublin locations.
There is no doubt that the demand for the prime Dublin commercial districts has seen values stabilise, particularly where there is a strong tenant covenant and secure income flows.
Riskier assets, with less secure income streams, are gaining investor interest where the location is good. In 2013, yields have moved downward by as much as 1pc for core assets through the pure weight of international and indigenous investor money seeking a home.
Compared to other European cities, Dublin is being singled out by investors competing for assets where they now believe there will be rental growth prospects, especially in Dublin Offices.
Retail rents in prime locations are generally half what they were in 2007 which has attracted strong interest in our prime streets from existing retailers such as H&M to new entrants like Massimo Dutti.
Likewise, the lack of existing Grade A office space in Dublin 1, 2 and 4, coupled with the lack of speculative space being built, will see an increase in rents for space in the short to medium term, triggering a recovery in investment values.
The big question is whether this investment appetite (particularly from international money) will start to extend beyond prime Dublin locations to the retail and office sectors in provincial cities and towns across the country.
The story in residential property from the latest CSO data (surging prices in Dublin but continued weakness in the rest of the country) is true for the commercial sector, where the market performance outside Dublin could, at best, be described as mixed. The depth of investor appetite for provincial and non-core assets is about to be tested as banks, particularly non-Irish ones, start to deleverage their loan books at a faster rate and increase supply into the market.
Danske Bank, Ulster Bank and BOSI all have plans for sales and Danske have already launched a €100m-plus portfolio of assets on to the market containing provincial retail parks, industrial premises as well as mixed use assets.
This move could be timely, given that in the face of low prime supply in the core, investors are left running the rule over peripheral assets, which in turn if sold will inject more confidence and transparency into this particular market
The specific property skill sets needed to manage these asset types, that come with the risk of lying vacant or losing existing tenants, are in place.
Furthermore, a majority of the buyers at present in the market are cash-rich and are able to make medium to long-term property decisions rather than adopt the shorter term view of the banks, whose main aim is still to limit further writedowns on their retained portfolios.
For the better provincial assets, prices are unlikely to rise in the near term, but transaction flow should increase and provide a benchmark from which the market can build will emerge over the next 12 months. There remains a significant rump of commercial real estate (think ill-conceived retail parks and poorly located offices) that will continue to struggle to find buyers at current levels, and where prices may fall further to galvanise investor interest.
Whether investing directly, or via a fund, my advice is to ensure you are confident that the investment decisions are being made on a case-by-case basis. Sometimes the investment risk implied by the high returns or yields in prospect is not worth taking, and there remain areas of the commercial market that require a large leap of faith.
There are several factors that could help speed up the recovery, not least the ongoing requirement for better access to finance for deals. Sensible, long-term competitive financing is still not widely available to the average small to medium sized private investor and this is a drag on the market.
Debt financing may still be viewed with some scepticism in Ireland, but it will be the key to any recovery. In the same way the market overshot in the boom, the inertia to lend to credible and prudent property projects is slowing our trajectory out of the bust.
A second important consideration is the extension of incentives in the 2012 Finance Act that provided a capital gains tax holiday on certain property investments, and the leaving stamp duty at existing levels.
Continuation of these measures will help build confidence that is slowly being generated in the sector.
The international private equity "smart money" may have already feasted on some of the very best commercial property deals that Ireland's market bottom was likely to offer, but I am confident that investors taking a long-term strategic view will find plenty of further opportunities as we prepare for the busy final quarter of the investment year.
Jonathan Hillyer is managing partner with independent property firm HWBC