Property deal total to hit €2bn by end of 2017
Between €1.75bn and €2bn worth of investment property deals could be completed in the current year. This follows a surge in both the value of commercial property as well as the turnover in deals seen during the three months leading up to the Budget.
Nevertheless, the amount looks set to be less than half the near-record €4.5bn seen last year - this year's figures are likely to be closer to normal levels of deals despite the effects of the hike in stamp duty to 6pc.
The rise in commercial values was reflected in the latest SCSI/IPD Ireland Quarterly Property Index, which showed that Irish commercial property returned 2.7pc in the three months to September 2017. This was a step up from the 2.1pc recorded in the second quarter of 2017, although still behind returns seen in 2016, which averaged around 3pc per quarter.
Year-on-year, the Irish index returned 10.7pc to end-September 2017, which was higher than the 10.4pc attained by the IPD UK Monthly Property Index.
Ken O'Brien, executive director of MSCI, which compiles the index, says that growth in the value of properties took over as the main driver. Growth of 1.5pc was boosted by a 1.1pc yield impact and supported by 0.6pc rental value growth. Income return remained strong, however, at 1.2pc for the quarter.
Marian Finnegan, chief economist at Cushman & Wakefield, says just over €200m was sale agreed at end-September, with a further €360m available on the Irish investment market.
"It is anticipated that investment totals at year-end will reach in excess of €1.75bn. This has the potential to be higher, if any big ticket assets were to close before year end," he says.
Duncan Lyster, managing director of Lisney, is more optimistic despite the increase in stamp duty, saying: "With the level of supply available for sale at the end of September, Q4 is likely to be a busy quarter. This should drive 2017 annual turnover to between €1.8bn and €2bn.
"The most high-profile asset for sale at the end of Q2 was the majority interest in The Square, Tallaght at €233m. This is likely to conclude before the year-end and will significantly assist in reaching the €1.8bn/€2bn year-end target."
The MSCI commentary says that yield impact, a proxy for investor sentiment, was driven by offices, at least in part due to Dublin's emergence as second-favourite to Frankfurt for financial services firms planning to relocate staff post-Brexit.
However, it found that investor sentiment for retail waned in Q3, although rental value growth remained positive, driven by prime Grafton Street shops.
Lisney's Q3 report adds: "The strength of the bull market in the last four years has created an assumption that all stock that goes on the market will sell.
"This has been exposed in recent months with a number of high-profile sales failing to complete, including shopping centres in Cork (Blackpool), Navan and Mullingar. Ultimately, these failures come down to pricing mismatches between vendors and the market as there is demand for opportunities in all sectors and across the spectrum of lot sizes.
"What is notable is a growing divergence between prime and secondary product, which had become too narrow in recent years."
Nevertheless retail accounted for 42pc of the value of all transactions in Q3, according to Lisney, and retail yields hardened by five basis points (bps) in the quarter to 3.2pc, also reflecting a reduction of 55 bps over 12 months. This contrasts with the office sector, where yields have remained unchanged over the 12 months at 4.5pc.
The most high-profile sale was GLL's disposal of the AIB branch building at 100/101 Grafton Street to Irish Life for a reported €50.11m or a net initial yield of 3.4pc.
Furthermore three retail transactions accounted for €46.75m of the off-market sales.
Ms Finnegan points to a recent upsurge in off-market deals, saying: "It represents a two-fold increase on the same period last year.
"In the year to date, approximately €272m, or 21pc of total investment turnover, comprised off-market deals… Furthermore, it is also reasonable to assume, that due to the nature of off-market deals, the share of such transactions could in fact be higher."
Interestingly at a time when some commentators have raised concerns that the stamp duty increase may dampen investor demand, at least two experts say the market may face a shortage of supply.
"Lack of supply over the past 12 months has been a key catalyst (for off market deals) ... Purchasers are now looking beyond what is available on the market and are actively approaching possible vendors in order to acquire product," says Ms Finnegan.
Mr Lyster suggests that the shortage may lead to "further forward-funding and off-market deals in the coming quarters".
This shortage is seen in the office and residential sectors, where demand is outstripping the supply of investment assets coming to the market.
"Given the depth of this demand, investors are being pushed to maintain and even harden yields," Mr Lyster says.
He also says that a feature of the market in the last 12 months has been the resale of assets sold post-crash by the early buyers who purchased between 2010 and 2014.
A notable example of this in September was the return to the market of the Crampton Buildings, a multi-let retail block in Temple Bar that includes the Elephant & Castle restaurant.
In 2014 it sold for a reported €8.26m to Ardstone, and if it sells for its asking price of €11.75m this suggests a €3.49m or 42pc increase over three years. It also suggests a net initial yield of almost 5.5pc after the stamp duty increase.
Another resale expected soon is for the Department of Justice building on Stephens Green. Dublin-based investment group SW3 Capital bought it in October 2014 for €16.5m. It was recently reported that US investment group Kennedy Wilson may be about to buy it for close to its €20m asking price.