Tuesday 20 August 2019

Commercial real estate sector thrives in the face of a year of turbulence

The right moves...

Dublin city
Dublin city

Paul McNeive

It has been a very good year for the commercial property markets, despite a series of tumultuous events. It is a real sign of ingrained confidence that the market has kept moving forward, when it would have been very easy to take cover under the shelter of 'uncertainty' after any of Brexit, 'Trumpet', an inconclusive general election and some political messing.

It was an interesting exercise to go through my columns from this year and, not surprisingly, the biggest single issue has been the question of supply. There were concerns, as late as last year, about the lack of supply of office space, but, driven by rising rents, 2016 has seen a burst of development.

The hotel sector has been the other rapid turnaround of 2016. Hotel sales will total approximately €1bn this year and a slew of new developments and extensions is contributing to the 60 or so cranes on Dublin's skyline.

Unfortunately, an insufficient proportion of those cranes are on new apartment sites and the shortage of supply in our cities and suburbs is an ongoing problem. Despite strong demand, the market is not functioning properly and supply is being killed by high taxes and levies, which make development unviable. This lack of supply is driving the increases in rents and homelessness.

At the time of writing, early news is appearing of Minister Coveney's plan to tackle the rental crisis by designating Dublin and Cork as 'Rent Pressure Zones'. The Residential Tenancies Board is to advise on creating further zones elsewhere. In these zones, rent increases will be capped at 4pc per annum for the next three years. While these measures may prove to be the final straw for some private landlords, who will exit the market and thus reduce supply further, it appears the minister will be exempting new supply from the measures. Such an exemption is crucial if we are to have any hope of the large-scale new development that will solve the problem.

An important question is whether or not the rent cap applies to a re-letting of a property, say one year from now. If it doesn't, and market rents keep increasing, then landlords will have an economic incentive to get their tenants out and re-let.

I'm also predicting that constitutional issues may arise. Firstly, rent control measures are usually announced as temporary, but inevitably become permanent. Thus a two-tier market develops with protected tenants and unprotected tenants. The measure might be unconstitutional if it arbitrarily and unfairly benefits one group of people over another. For example, why should an elderly landlord, who bought a property to provide for his pension, suffer a loss because his wealthy tenant has their rent capped at below market rates?

Otherwise the new homes market should have a great year in 2017, albeit off a low base. Increasing employment, low interest rates, and now a help-to-buy scheme will combine to increase prices. Disappointingly though, most of the new developments are in the 20- to 40-unit range, so the total numbers built will be insufficient. This feature, in itself, is clear evidence of a sector that is testing the water, and is not prepared to commit to the large-scale development we need, under the current high tax regime.

One of the most commented-on columns was the Dun & Bradstreet analysis of the accounts of a sample of Ireland's construction companies. This showed a pattern of strong recovery, with firms increasing turnover by up to 200pc from 2013. A stark finding, though, was that the average profit margin was just 1.47pc - clear evidence that firms were tendering at cost, while waiting for an upturn. That upturn arrived this year with output up 20pc and building costs up nationally by about 7pc.

The agents are working hard to get the last few deals of the year closed, and I'm predicting that investment property sales this year will exceed €4bn. The benchmarks for calculating returns from property were changed this year, but ahead of the figures, I suspect we'll see total returns exceed 10pc - a strong performance in a turbulent year.

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