O'Brien's Davos declaration timely

An artist’s impression of the Dublin Docklands as seen from the top floor of Capital Dock, which is currently being developed by Kennedy Wilson.

Ronald Quinlan, Commercial Property Editor

He may be right, he may be wrong. But when billionaire businessman Denis O'Brien says he thinks Irish commercial property, and more particularly Dublin's booming office market, is a bubble, it's hardly surprising that people sit up and take notice.

O'Brien's recent Davos declaration has certainly proved to be unsettling, but it should also serve as a timely reminder to all those involved in the funding and delivery of new office space in the capital that the property market has, since time immemorial, been cyclical by nature.

So while the businessman may not be right today, he could well be proved right tomorrow, or at least some day sooner than those with boots on the ground in Dublin's Docklands and Central Business District and nascent suburban market would like.

Looking at the reaction to O'Brien's observation that the capital's office market is now in the grip of over-building driven by expectations that the city would benefit from an influx of banks relocating from London as a result of Brexit, it is worth noting the distinction between the view expressed by those at the coalface within the property industry itself and that of the politicians, namely Taoiseach Leo Varadkar and Finance Minister Paschal Donohoe.

HWBC managing director Tony Waters

While CBRE's executive director and head of research, Marie Hunt, was the first to disagree with the businessman's view, her response on Twitter still acknowledged that when it came to the amount of new office space being delivered in Dublin that "we need to keep an eye on it".

Responding to O'Brien's argument that "we're over-building offices and there won't be enough people to put in them...", she tweeted: "Have to disagree - 240,000 sq m due for delivery in 2018 (following a year in which more than 330,000 sq m was taken up) of which almost 40pc is already accounted for and strong pipleline of demand."

"Office supply is well controlled in this cycle but I agree we need to keep an eye on it," Ms Hunt added.

And while HWBC managing director Tony Waters sought last Friday to downplay O'Brien's concerns in the relation to the Dublin office market, he conceded it would be "sensible to be prudent".

Commenting on the publication of HWBC's Dublin office market review for 2017, Waters said: "We heard comments in Davos last week that there is a bubble in the Dublin office market, with the building of new supply running ahead of demand for new space. Given our recent history, it is sensible to be prudent after five years of gains which have seen city centre office rents more than double, but all the indicators are that there is ample demand for space as it is completed, and close to 40pc of the space planned for 2018 is already pre-let."

Notwithstanding that optimism, HWBC refers in its report to the downside risks represented by the market's reliance on foreign direct investment, changes in the US corporate tax code, and uncertainty around the wider economic impact of Brexit.

Office rents in Dublin

CBRE's Marie Hunt struck a cautionary note too in CBRE's Outlook 2018 report, which it issued on January 16 last.

While reporting that occupier activity remained "robust" and that development was "controlled", Ms Hunt said that the "Irish commercial real estate market is now approaching late cycle in many respects".

An examination of the political reaction to Denis O'Brien's take on the Dublin office market is more troubling, revealing as it does a less than convincing level of engagement with an issue, the handling of which has major ramifications for the economy.

"I don't think there is a bubble. But we have to be wise to these things," Taoiseach Leo Varadkar said when asked for his view by reporters in Davos. Had the Taoiseach gone on to offer any evidence to support his contention, one might be willing to give him the benefit of the doubt. But he didn't.

What he did do however, was somewhat worrying. Rather than address the specific concern raised by Denis O'Brien the day before, the Taoiseach proceeded with a needless political attack on the Opposition, saying he was "concerned" when he hears call for "more public spending [and] tax breaks for developers" as Ireland was only now recovering from a "lost decade". Finance Minister Paschal Donohoe, to be fair, stuck to the point in responding to the question of whether Dublin's office market is already in, or veering towards, 'bubble' territory.

He said: "The Government and I as Minister for Finance believe that the supply of office space that's going on in Dublin and elsewhere is needed and will be justified."

Addressing O'Brien's view that Dublin would not see the major influx of banks relocating from London which had been anticipated as a result of Brexit, he said that demand for office space was being driven by growing economic activity in Ireland and the fact that Ireland expects, and was seeing, an "expansion in commercial activity, post-Brexit".

Having made those straightforward points, Donohoe then sought to advance an argument, that was debatable, to say the least.

Referring to his and the Government's decision in the recent Budget to increase the rate of stamp duty on commercial property transactions from 2pc to 6pc, the minister stated that this would "ensure that pricing that can happen in the future would be more justified, more impacted by tax policy and also to begin the process of moving human and economic capital out of commercial property into building homes for our people".

Quite apart from the glaring fact that he has already missed the proverbial boat in raising the stamp duty rate at a time when the commercial property market has returned to a normalised level of activity with far fewer transactions to be levied with the charge, the minister fails to acknowledge the difference between delivering new offices and new homes, both in terms of financing and the skillsets required by the developer.

On the matter of funding alone, one can only hope the hedge funds Denis O'Brien referred to in Davos who are currently providing finance at interest rates of 12pc to 14pc to developers to build offices don't switch their focus to the housing market.