Commerical Property Outlook 2010




Property consultants CB Richard Ellis today launched their annual Outlook report – a comprehensive research document outlining predictions for all sectors of the property market in 2010.  The report examines the potential for performance in each sector of the commercial property market in Ireland as well as commenting on the prospects for the UK investment market over the next 12 months.

The report is cautious about prospects in many sectors of the Irish property market, stating that while 2009 marked the low point for the commercial property market in Ireland, it is premature to expect a rebound in activity in the market and 2010 will be another challenging year for the sector.  In fact, the property consultants say that with sentiment and economic conditions weak and bank funding remaining severely restricted, it will likely be 2011 before conditions in the Irish property market improve to any noticeable degree.

There was very little transactional activity recorded in the Irish investment market last year according to CB Richard Ellis.  However, in the latter part of 2009, investor sentiment started to improve as prime yields showed signs of stabilising and a small number of transactions began to be negotiated.  In total, the value of open-market investment transactions in the Irish market during 2009 was approximately €92 million compared to the peak in 2006 when €3.3 billion was invested domestically by Irish investors. CB Richard Ellis says that investment property values have declined 60% from peak.  According to Marie Hunt, Director of Research at CB Richard Ellis, “Although we do not expect any notable improvement in liquidity over the next 12 months, investor sentiment has improved and investment turnover in 2010 should show an improvement on last year as a result of overseas interest and the emergence of some cash buyers.  However, the volume of transactions will continue to be constrained by the lack of quality assets being offered for sale and fears around the legislative change on upward only rent reviews, which will undoubtedly deter some investors”.

In relation to the ban on upward only rent reviews (which is due to be enacted by Government on February 28th 2010) and the 80% windfall tax on land rezoning, CB Richard Ellis say that these initiatives have not been fully thought through and will have huge negative implications for the property market.

CB Richard Ellis is confident that 2010 will see the UK property market building on the momentum which emerged in the latter half of 2009.  Although economic fundamentals in the UK remain weak, they say that UK property is now attractively priced relative to the long-term and the returns achievable are favourable compared to other asset classes. Sterling is expected to remain weak over the course of 2010 which will further enhance the attractiveness of UK property to overseas buyers.  They point out that the current rally in the UK investment market is driven by the weight of money chasing prime assets as opposed to a recovery in the economy or occupier markets and that it remains to be seen what impact the forthcoming election is likely to have on economic activity in the UK. CBRE say that they expect Irish investors to be net sellers of real estate outside of Ireland during 2010. Over the next 12 months, they expect to see some Irish investors taking advantage of current pricing and selling assets they purchased over the last number of years in markets such as the UK, Germany, France and Belgium in order to realise gains which are primarily driven through debt amortisation, a favourable rent review or indexation uplifts over the last five years.

According to the new report, while some sectors of the Irish commercial property market were effectively paralysed as a result of the scarcity of bank funding in the run-up to the rollout of NAMA last year, activity continued, albeit at a lesser pace, in the office occupier market.  In total, approximately 78,500m2 of office accommodation was let in Dublin during 2009, equating to more than 50% of the long-run average in the city. CB Richard Ellis expects similar levels of take-up to occur in Dublin during 2010.  Potential occupiers are aware that the next 12 months will afford them a limited ‘window of opportunity’ to move premises or restructure leases to take advantage of the attractive terms and conditions that are now on offer, with rents having declined approximately 45% from peak and landlords being increasingly flexible in negotiating break options, incentives and fit-out packages in order to generate and secure income. While there are some outstanding international requirements for office accommodation, CBRE expect a large proportion of transactional activity in the office sector this year to emerge from opportunistic indigenous occupiers looking to relocate to new premises. They say that prospects for provincial office markets remain weak.

In commenting on the retail sector, CB Richard Ellis say that although an improvement in the Irish economy is widely expected to materialise in the second half of 2010, it is difficult to foresee any notable improvement in the retail sector until such time as the rate of unemployment stabilises and consumer sentiment improves. The low interest rate environment is currently cushioning consumers to some extent and the fear is that consumer spending has the potential to contract further when interest rates ultimately start to increase.  Following a spate of retail development in Ireland over the last decade, development activity has now essentially ground to a halt. While a number of retail schemes have ambitious expansion plans, none of these are likely to secure funding or to break ground in 2010. Most of the take-up in the retail sector this year is likely to comprise re-lettings of vacated space as opposed to lettings in new schemes.  The general consensus is that there is unlikely to be significantly more liquidity in the banking system in 2010, despite the formal adoption of NAMA.  CB Richard Ellis says that this is a concern in an industry where retailers are reliant on working capital being available to enable them to invest in their businesses and ensure their survival until such time as consumer sentiment improves.   CB Richard Ellis says that retail rents have declined by approximately 30% from peak.

The property consultants are least confident about prospects for the development land and hotels & licensed sectors of the property market in 2010. Indeed, they say that only two hotels sold in Ireland in 2009.  The value of these sales equated to €6.5 million compared to the peak of the market in 2006 when the value of the hotel sector was over €1 billion. Similarly only four pubs sold in Dublin in 2009. While waiting for NAMA and in an effort not to crystallise further losses, there has been a general reluctance to make strategic decisions on insolvent hotels. A number of stop-gap measures have been put in place to enable hotels to continue trading despite the fact that some of these properties have no realistic prospect of recovery. However, CB Richard Ellis says that we are fast approaching a critical juncture where, for the good of the sector generally, difficult decisions will have to be made. The property consultants say that there is unfortunately going to be more consolidation in the licensed market in 2010. Many of the pubs that got into difficulty in 2009 had paid large premiums for their premises or key money for leases in recent years. While CB Richard Ellis believes that there will be an increased focus on leasing in 2010, this will mainly comprise short-term lettings at sustainable rents based on the current turnover and business potential of licensed premises.

With regard to development land, the property consultants say that it is difficult to quantify the deterioration in pricing that has occurred although they say that land values in the Dublin region have declined by at least 50% from peak. In some provincial locations they say that the value of development sites has declined by as much as 90% from peak.  According to the report, development land will be the last sector of the Irish property market to emerge from the current downturn. A recovery in land will be led by a reduction in the over-supply of stock and rising capital values in various sectors which is some time away for most parts of the country.

Conditions in the Northern Ireland property market are also difficult according to CB Richard Ellis. Although the weakness of Sterling remains a major attraction, with the rate of VAT having reverted to 17.5% this year and excise duties on alcohol reduced in the Republic in Budget 2010, there is likely to be some deterioration in retail sales activity in the North this year.

According to Patrick Koucheravy, Property Economist at CB Richard Ellis,  “Although Ireland has a long way to go to recover fully from this recession, the ongoing restoration of competitiveness and Ireland’s position as an English-speaking, low-tax location for business is still attractive to expanding foreign business and international investors.  While it will be a slow and incremental process, we believe we’ll see the first signs of economic recovery in Ireland during 2010”.

Speaking at the launch of the Outlook 2009 report, Guy Hollis, Managing Director at CB Richard Ellis said, It would be premature to say that the Irish property market is likely to experience a rebound in 2010 but there are certainly signs that sentiment is slowly improving.  We firmly believe that from the perspective of the commercial property market north and south, 2010 will be better than 2009. However, the next 12 months are going to be extremely challenging from both a global and domestic perspective. The reality is that it is going to be 2011 before we see any discernable turnaround in performance. Ireland has improved its competitive position in the last year as a result of wage adjustments in both the public and private sectors and reductions in the cost of rent and other overheads.  This coupled with the favourable corporate tax regime should boost our attractiveness as an inward investment destination in 2010 which will ultimately benefit the property market”.