Major recovery for industrial and development land in 2016
The ripple effect of the recovery in the property market saw increased prices for industrial property and development land at Allsop's auctions in 2016, according to the agent's analysis of Irish sales.
The auctioneer also predicts that demand will grow further this year as residential buy-to-let investors switch to commercial and development plays following the introduction of the 4pc cap on residential rent increases.
So says Richard O'Neill, head of commercial auctions at Allsop Ireland. He points out that commercial investment will look increasingly attractive as it offers greater scope for rental growth and has the advantage that tenants also pay for insurance, local authority rates and fit-outs.
"In contrast, investors in apartments have to pay service charges and other taxes," he adds.
Dublin commercial investment property values increased by an average of 5.7pc, as reflected in a drop on average net initial yields from 8.06pc in 2015 to 7.6pc last year.
In contrast to the big-ticket deals being achieved by the major investors in prime Dublin offices and retail, it was the traditional 'Cinderella' sector of industrials that saw some of the strongest price growth.
Net industrial yields fell from 9.69pc to 8.5pc, suggesting a 12.28pc jump in the value of Dublin industrial investments.
"While this is a very significant yield compression, there is still potential for further gains, especially considering an average yield of 6.66pc in the office sector," Mr O'Neill says.
Outside of Dublin, an average compression of 45 basis points (bps) was achieved, with average net initial yields for Grade A covenants (blue-chip companies and state agencies) now standing at 9pc," he adds.
Vacant industrial units saw a slower rate of price increase. Consequently across both vacant and investment Grade A stock comprising good quality modern units in prime Dublin locations, the price per sq m rose by 6.5pc from an average of €751 per sq m in 2015 to €800 per sq m in 2016. That lower figure also follows a very strong 34.3pc jump in the capital value of industrial stock in 2014.
Regional locations are benefiting from a similar supply/demand dynamic for industrials, with the volume of demand resulting in price increases in excess of 30pc in each of the Grade B and C markets. Grade A industrial prices rose 6.1pc to €417 per sq m on average for all regions outside Dublin.
Leinster was, as expected, the strongest, with average prices of €275 per sq m excluding Dublin; capital values were €159 per sq m in Munster and €264 per sq m in Connacht. The difference between the Munster and Connacht prices is attributed to the quality and location of the stock. Of the 13 units sold in Connacht generating more than €1.97m, almost all were in or convenient to Galway City. In contrast, the 15 Munster units generating €2.67m were dispersed and included a number in rural areas.
Outside of Munster, average percentage success rates are running at 93pc. "Coupled with sale prices averaging 33pc above reserve price, this demonstrates considerable depth to the market," O'Neill says.
"We believe that the scant supply of good quality units, coupled with an upturn in occupier demand, are pushing the dramatic price rises, as well as yield compressions. This is forcing owner-occupiers to compete for tenanted industrial stock with lease irregularities or short unexpired terms, with a view to taking short- to medium-term occupation."
With 136 transactions last year, industrial sales made up the largest proportion of Allsop commercial sales by volume and this sector also represents a significant portion of the overall commercial market.
Suburban Dublin retail prices also achieved growth as investors and occupiers took an increasingly optimistic view on both capital and rental returns. This is reflected in yields, which contracted from 7.81pc in 2015 to 7.65pc, suggesting a 2pc rise for investment retail properties. But even stronger growth in the sector is suggested by another indicator as retail sales prices were on average 34pc above the guide prices in 2016, as to being 19pc above in 2015.
Average regional retail values in major towns now stand at €1,201 per sq m, up slightly from €1,126 in 2015. In less populous urban areas, this average falls to €690 per sq m, only marginally ahead of the 2015 average at €680 per sq m.
"Despite reports of increasing retail sales, the regional retail market is still proving to be incredibly location-sensitive - this is reflected in a relatively flat success as 78pc of lots sold. From an investment perspective, relatively weak covenants and lengthy void periods remain a concern. Appetite is stronger for A-grade covenants, and main-street locations," he adds.
Urban development land was the most liquid market in 2016, with 100pc of these lots sold. On top of this, the average lot is more than doubling its reserve price.
"The depth of competition is forcing developers to look at secondary options, such as lands zoned 'open space'. We understand that some developers are taking a pragmatic medium-term view on rezoning, given the acute housing shortage and political sensitivities to the subject," the auctioneer says.
He also points out that a number of secondary quality office buildings in areas such as parts of Dublin 3 and 8 were bought by developers who hoped to get planning permission for residential re-development.
He also reports strong demand for commercial land holdings.
"We have seen particularly strong demand for industrial land, in part driven by short supply for occupiers seeking ready-made stock, but also investors seeking further capital gains in land values due to the rapidly appreciating capital and rental markets. Given that development land at €15m, forms a relatively small portion of our annual sales total, there is potential for vendors to benefit from this clear market appetite."
The multi-family investment market remained popular with both domestic and international investors throughout 2016, with the average percentage achieved over reserve price jumping by 9pc over the 2015 figure, and 11pc over 2014.
New entrants in 2016 included the non-profit sector, which was buying vacant developments.
"The performance of the multi-family residential market this year will depend on the effect and interpretation of the rent cap changes - the lack of rental growth prospects may negatively impact on the yields investors are prepared to pay for tenanted investments," O'Neill says.
Vacant properties will not be affected by such caps in the first year. He reckons there is potential for growth in demand for vacant stock, "given the likelihood of continued interest from the non-profit sector and the fact that these developments can provide the investor with market-value rents".
Referring to the possible switch of residential investors to commercial investment, O'Neill notes that a similar move was seen in the UK after the increase in stamp duty on buy-to-let purchases. "There, traditional residential buy-to-let investors turned their backs on the sector and moved into commercial property to avoid crippling stamp duty levies.
"On foot of this, our London Commercial Auctions have just recorded one of their strongest years in a decade with £610m raised - a significant figure when compared against a 10-year annual average of £450m. It will be interesting to see if there is a similar reaction here, especially in the €200,000-€500,000 value band, for example."
Further demand is likely to be boosted by a nu mber of auction and commercial finance products that are likely to be brought to market during 2017.
dUBLIN PRICE TRENDS PER SQ M 2014-2016
AVERAGE DUBLIN NET INITIAL YIELD 2013-2016
AVERAGE REGIONAL NET INITIAL YIELD 2013-2016