Rental increases can affect demand for Dublin offices
Dublin office occupiers are much more price conscious than those in London and rent increases could impact on demand among international companies which are considering locating here.
These are the views of economist Dr John McCartney who says that characteristics of the Dublin market could delay its ability to recover as quickly as other property markets.
A 1pc increase in Dublin rents knocks about 1.13pc off demand for office space according to his research just published in the Journal of Property Research.
"In comparison, a similar rental increase would only reduce office demand in London by between 0.20-0.54pc," he says.
He attributes this difference to the different status of Dublin and London in a league of global business locations. While Dublin may offer a 12.5pc corporation tax rate as well as a young, English-speaking workforce, nevertheless it is a less compelling business location. "Therefore, if rents rise too sharply occupiers will find other suitable locations," he says.
In addition, office demand appears to be more sensitive to overall economic growth in Dublin than in other markets around the world. His paper finds that a 1pc increase in economic activity brings about a 1.7pc increase in the demand for commercial space in Dublin. In contrast the average response in other European, American and Asian markets is just 0.89pc.
This makes Dublin the most sensitive market among the group of cities that have been studied in this way to changes in overall economic activity. A key lesson is that the performance of the Dublin office market is joined at the hip with Ireland's macro economic performance.
Dr McCartney's paper Short and Long-Run Rent Adjustment in the Dublin Office Market says that there is less rental sensitivity in London because it is a major world city and a global financial services centre in which many corporations simply feel compelled to have a market presence -- irrespective of rents.
The article also reveals that office rents are more sensitive to supply-side shocks in Dublin than in many other markets, with increases in the total office stock having a significant negative impact on rental growth.
McCartney argues that this may reflect a high ratio of speculative to pre-let development in Dublin which in turn is attributable to the small size of the average office occupier which makes pre-letting difficult.
"Until relatively recently, tax incentives also encouraged speculative construction in locations such as the IFSC," he adds.
In relation to recovery prospects, the research indicates that office rents in Dublin adjust more slowly than those in other cities after an economic shock. This may derive from institutional factors such as long leases which impede the fluid functioning of the market.