RentalMarket:Rents rose sharply, then levelled off in a record year, says Edel Morgan

ALL eyes were on the rental market this year which experienced a mini-renaissance against a backdrop of slowing house prices.

Rents rose by 8-10 per cent in Dublin with some agents claiming that the most desirable properties in sought-after locations increased by as much as 12-20 per cent. A number of estate agents have adapted to a changing market by moving staff from their quiet sales areas into their buzzing rental divisions to cope with demand.

By the summer the supply of properties available to rent fell by around 20 per cent, pushing rents skywards and rent inflation to its highest level since 2002. There were anecdotal reports of busy viewings and even queues outside properties in some cases.

But a number of factors saw rents level off in the second half of the year. With the gap between rents and mortgage repayments narrowing, some believe tenants are reaching the limit they are prepared to pay.

Agents are giving different pictures of rental demand depending on location. Geoff Tucker, economist with Hooke & MacDonald , says that while parts of the north and west suburbs are experiencing an oversupply "you are less likely to see it in the city centre or on the southside and certainly in the Stillorgan and Sandyford area, where rental demand continues to be strong".

He predicts that the real impact of the supply constraints won't be felt until the latter half of next year. Other industry sources believe it is more likely to happen in 2009.

John Powell of Champion Lettings based in Swords, Co Dublin, says the market quietened down in recent months to the extent that landlords are prepared to reduce rents. He says that while earlier in the year it was "crazy" people can now afford to be choosy and landlords will negotiate on price to get the tenants they want.

"Six months ago a landlord could afford to be more picky but now there has to be flexibility with regard to price and tenant. If it's a two-bed asking €1,350 for example, they might give it for €1,300 to a couple rather than three or four sharers."

He knows of a case in Balbriggan in north Co Dublin where there were six or seven one-beds in one area, which led to rents being dropped from €975 to €875 a month.

His agency deals mainly with north Co Dublin, Santry and north-west Dublin and he says that demand is strong in Santry and Swords because they are close to the airport, and in Castleknock and parts of Blanchardstown near the shopping centre. Some areas further out, such as Balbriggan, old Kinsealy, Oldtown, Clonee and Dunboyne in Co Meath are less active. He says the abundant supply in some areas is partly down to people deciding to rent out properties that have been languishing on the market.

While it was a good year for one and two-beds, Kathrina Cahill of Home Locators says the corporate market never really took off. "Companies no longer have large relocation packages and are clamping down on expenditure."

While two and three-bed penthouses and apartments in Hanover Quay, Gallery Quay and Spencer Dock in the docklands, that rent from €1,600 to €3,000, are moving well, large suburban properties are taking longer to shift. One estate agent said that landlords looking for corporate tenants need to be realistic. They pointed to a two-bed apartment in Sandymount asking €2,500 rent, and commented that it was "too high and not moving".

They also gave an example of a two-bed apartment in Milltown looking for €2,000 and said "if it were priced at €1,600-€1,800 it would move".

John Powell is seeing a similar trend on the north and west sides of the city, where he says the corporate market is generally slow. Here the main clients are the airlines and multinationals such as IBM. While his agency has let the occasional large property, for instance a five-bed house in Howth for €5,000 and a large house in Castleknock for €3,500, he says companies are generally looking for smaller two-beds on short term leases and some companies have their own rental property portfolio.

Cahill says areas without really good transport links are feeling the pinch. She says a four-bed in Templeogue, seeking just under €2,000, has had no takers yet.

While the Daft.ie report says that investors all but disappeared from the market in 2007, 93 per cent intend to maintain their portfolio over the next five years.

Most of the agents I spoke to claim there has been low level investor activity in the last four months. The consensus seems to be that they are serial investors that are in it for the long haul. "They see a cycle and they think it's a good time to buy and get a good price," says Barry Finnegan of Sherry FitzGerald lettings. "They are acting now before interest rates pull back next year." He says yields have slowly improved, and claims it is possible to achieve yields as high as 4.75 per cent in parts of west Dublin.

Geoff Tucker says there has been a reasonable appetite for Section 23 property among investors with larger portfolios "who intend to take advantage of prices when they can. They won't be there in 12 months' time when there will be less completions and supply constraints."

Daft.ie reported yields of 3.5-4 per cent but these are "slowly edging up", says Tucker, "but yields were never the major consideration for most investors; most focus on capital appreciation and these are people looking at a 10-year time horizon".

Finnegan thinks 2008 will be a year of steady but not spectacular growth with perhaps a slight uplift in rents when supply dwindles. He reckons that people who have resorted to the rental market after failing to sell their property this year will have another stab at selling again next year.

Tucker foresees that high rents will prompt more tenants to try and buy property in the New Year. "I expect some increase in rents in 2008, albeit at a more moderate pace. It's fair to say the supply is going to be a bit tighter and we are not going to see as much new investor property becoming available."