Investment ReviewThe inevitable push to complete transactions in the domestic market by year-end could see turnover rise to close to €2 billion but that is still less than 20 per cent of what Irish investors spent overseas, writes Jack Fagan
A global credit crunch was not in the script for this year. But since it struck last August, sentiment in the commercial property market has gradually changed and overall turnover in the investment area has slipped from a record €3.6 billion in 2006 to about €1.7 billion this year. By year end that figure is expected to rise to €2 billion.
Tighter funding by the banks has left a large number of development sites unsold and forced vendors to accept the reality that many of the landbanks are overvalued by as much as 20 to 30 per cent. By autumn, most of the traditional lenders were only prepared to fund well located sites close to Dublin city centre for their top clients. Even then there were few takers because, after eight successive increases in interest rates and a new homes market virtually stagnant (despite falling prices), the overall perception was that development site values would slide even further. A new set of market dynamics comes into play on site values when house prices are falling.
The overdue readjustment in site values has obviously left a few players somewhat exposed, particularly in the Dublin suburbs. The best examples are in Sandyford - the hottest out-of-town development area - where land was readily fetching at least €20 million an acre in the past three years.
The most recent sale earlier this month of one of the best located sites in Sandyford clearly illustrated how values have taken a hit. Morgan Stanley Real Estate, who could have expected to fetch anything from €110 million to €120 million even a year ago for its site of 5.06 acres, was happy to do business at a figure "in the late €70 millions".
With most of the leading developers now comfortably wealthy after more than a decade of rising prices, they will obviously bide their time until site values fall even further. They can then be expected to pounce when the right sites hit the market.
In recent years they have had to compete head-to-head with investment syndicates but, with the credit squeeze likely to persist, these players are not expected to make a reappearance for a considerable time. At times like this serious money can be made and lost as a general repricing gets under way.
In other times private investors were easily rounded up to provide mezzanine finance for the Davys, the Goodbodys and the AIBs but, with increasing uncertainty about the time scale for many of the planned commercial and residential developments they invested in, that source of finance has virtually dried up. Small investors with cash and access to additional funding will be looking for the bargains that inevitably surface in a slowdown.
The chorus of gloom in the housing market does not run through the commercial sector, even though they are intrinsically linked. However, the decision by corporate finance firm CFI to shelve plans to buy the new Athlone Town Centre for €345 million underlines the new credit restrictions because of the turmoil in the finance markets. Even the promise of generous tax breaks to bring overall yields up to 4 per cent did not pull in a sufficient number of private investors within the allocated timeframe and the promoters had no option but to abandon the plan for the moment. Other developers will be hoping that this does not signal difficult times ahead.
Already, the changing environment has seen overall turnover in the investment market fall from €3.6 billion in 2006 to around €1.7 billion so far this year. The inevitable push to complete transactions by year-end could see that figure rise to close to €2 billion but, the fact that it will still be less than 20 per cent of what Irish investors spent overseas, illustrates how small the domestic market remains.
Retail once again emerged as the dominant investor sector, accounting for more than 75 per cent of the total turnover. Noel Smyth's acquisition of The Square in Tallaght, Co Dublin, for €320 million was easily the largest transaction. A few short years ago, sales of this magnitude could only have been funded by the institutions but, with private equity now accounting for the vast majority of investment deals, ownership of the commercial property market is rapidly slipping into private hands.
Property developer David Daly maintained the trend by buying the River Island shop on Dublin's Grafton Street for around €115 million in what was easily the most interesting investment deal this year. Daly has enjoyed enormous success with his housebuilding and commercial property developments since leaving Manor Park about 10 years ago. He is in the happy position of being able to put some of his profits into the River Island investment given that the net initial yield is a mere 2.05 per cent. Now the owner of one of the finest buildings on Dublin's principal thoroughfare, he is expected to acquire more on the street in due course. His move came just before Grafton Street marked up yet another record rent. Tommy Hilfiger agreed to pay €12,000 per sq m (€1,115 per sq ft) for a new outlet to be developed on the site of the former Grafton Street Arcade. With many international brands also chasing scarce space on the street, the rents can only go one way unless these big name traders settle for the huge volume of extra space due to come on stream in the Henry Street area.
The heavy focus on the retail sector looks set to continue with developers planning to build more than 464,515sq m (5 million sq ft) of additional shopping centre space in the Dublin area alone. More than 147,996sq m (almost 1.6 million sq ft) is due to come on stream within two years. The already spacious centres in Blanchardstown, The Square, Dundrum, Liffey Valley and The Pavilions in Swords - not forgetting Arnotts in Henry Street - are all to be greatly enlarged. And that is only half of the picture because there are also plans for further shopping facilities in Swords (courtesy of Tom and Michael Bailey), the Carlton site on O'Connell Street (Joe O'Reilly), Tallaght's Glasshaus (Liam Carroll), Adamstown (Joe O'Reilly), Charlestown (Tom and Michael Bailey) and Donaghmede (Brian Farrell).
The retail building boom will not be confined to the Dublin area. A whole range of provincial cities and towns have plans for more shopping centres (Limerick is getting three more) in the expectation that the anchor tenants will continue to expand and shoppers will keep coming back.
The incentives for the big multiples are getting more generous all the time - in some cases rent-free periods run for several years and developers are also prepared to make a contribution to fit-out. No matter how many goodies the developers are prepared to hand out to attract an anchor tenant, they are unlikely to be tempted if the threatened slowdown in the economy begins to bite.
Already we are seeing the effects of too many retail parks in some areas and, though there are many further schemes in the pipeline, promoters are quickly realising that the range of high profile anchors that can pull in the crowds is exceptionally limited.
Dublin's office market has also been growing rapidly to cater for a range of professional firms, finance and insurance companies which have expanded in the boom conditions of the past few years. A great many of them have moved to both the south and north docklands and more are likely to follow them rather than run the risks of the ever increasing traffic congestion is Sandyford and Cherrywood.
With most of the sites in the south docklands already committed, the roll out of a new generation of developments on the opposite side of the Liffey (offices, a national conference centre, shopping centre, hotels and apartments) has only just begun. The north docklands is likely to cater for much of the future needs of the city.
Overall, the take-up of office space this year is likely to reach 278,700sq m (3 million sq ft) by the end of December and, with several major firms still looking for new headquarters (including Bank of Ireland, KPMG, Arthur Cox and Depfa), the overall vacancy rate of 15 per cent seems set to drop significantly over the coming 12 months.
In spite of the buoyant letting market, Jones Lang LaSalle tracked only 16 office investment sales during 2007 - compared to 39 in the previous year. The largest was the sale of the new Eircom headquarters at Heuston South Quarter to Quinlan Private for about €190 million. Although the deal included stamp duty savings and capital allowances which disguise the yield analysis, it is thought to be around 4 per cent.
