Activity
Q3 is typically the quietest quarter in the year with July and August often experiencing limited activity even in a normal investment market. Debt remains very difficult to secure and is only available at very conservative gearing levels on what could be described as very onerous amortisation arrangements for the investors.
One investment transaction of note was completed in the quarter. This was the sale of Parkway Retail Park in Limerick. The park adjoins the partly built Parkway Shopping Centre in suburban Limerick, which was being developed by one of Liam Carroll’s companies. The retail park, in addition to the part developed shopping centre, are reported to have been sold to a Northern Ireland based developer. We estimate that this brings the total volume of transactions to €175m for the year to date.
Elsewhere, a sale has been agreed on an investment property in Navan, which is leased to Generali for 15 years.
Rent Reviews
It was hoped that the government would clarify the future of upward only rent reviews just before or shortly after the parliamentary summer recess, as indicated by the Minister for Justice Alan Shatter earlier in the year. Unfortunately no clarity has as yet been provided. This rent review matter is the single biggest issue that has faced the investment market in a generation. We believe that the government needs to set out the new arrangements on how rents on existing leases will be determined in the future in order to remove the current uncertainty.
This delay is causing difficulties on many fronts. The tenant lobby that has been calling for help with historic rents continue to struggle with more retail businesses failing. On the other side of the debate, landlords and their banks are unable to sell assets which might otherwise be sold. The lack of activity is damaging the government finances through limited stamp duty and VAT receipts that normally arise from investment sales. In addition, the uncertainty it creates is having a negative effect on capital values with values down by about 10% since the proposal was first mentioned.
It is hoped that matters will be clarified shortly, which will allow tenants, building owners, banks and prospective buyers to operate with some certainty and investors to price income producing assets. Due to the lack of clarity, buyers are afraid to pay for income that could be undermined if the government proceed as they said they would in the programme for Government. Conversely, long-term property investors and institutional funds are holding tightly to their existing assets as they cannot replace them with similar or better quality investments due to the current legislation.
Supply
The amount of investment product coming to the market is very limited. There is a significant amount of stock that could come to the market shortly, but it is unlikely to be offered until the position on future rent reviews is clarified.
Demand
There has been an increase in investor interest this year with both domestic and international investors running the rule over the market. Potential investors are a diverse group, from private domestic investors who may have up to €2m to spend to overseas funds who could invest hundreds of millions in the market for the right product. Their interest is encouraging and signifies wide recognition that there is now value in Irish property. However, the lack of actual commitment by them is largely down to the government intervention mentioned above. Regrettably, Ireland is developing a reputation internationally as a difficult place to invest.
Outlook
With IPD recording values down 63.25% since 2007, the correction in the market may have over-shot the mark. Strangely, the market should be showing some signs of moving. There are a number of reasons for this. Firstly, letting markets have performed quite well in the last 12 months with vacancy reducing, particularly for grade A Dublin city centre accommodation. While rental growth is still someway off, there are indications that some balance is returning to prime markets. In more normal times, investors would move to position themselves to capitalise on the improving occupational markets. Secondly, the interest rate outlook looks increasingly benign in to the medium-term, which should encourage investors to take the strong income returns available. Thirdly, recent turbulence in equity markets typically sees investors consider property as a stable safe haven.
It is probable that €200m of investment turnover will be achieved this year. However, the level of pent-up demand around at present is hard to quantify accurately. We believe that the current levels of turnover could be doubled in 12 months, but only once the rent review issue is clarified. The market needs transactions to occur in order to underpin values and prevent further yield softening and price slippage.
We are of the opinion that prime yields have weakened over the quarter and are as follow:
| Sector |
Q2 2011 |
Q3 2011 |
| Retail |
6.65% |
6.75% |
| Office |
7.65% |
7.75% |
| Industrial |
8.75% |
8.85% |
Summary
• The market remains largely paralysed with no clarity provided on the proposed retrospective ban on “upward only” rent reviews.
• Some pent up demand becoming evident.
• One significant transaction in Limerick.
• Yields weakening in anticipation of rent review measures.
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