SOME STABILISATION EMERGING IN THE IRISH COMMERCIAL PROPERTY MARKET
March 1st, 2010 Property consultants CB Richard Ellis today launched their latest bi-monthly assessment of conditions in the Irish commercial property market. The March 2010 update states that while conditions remain challenging in the property market, there are some encouraging signs of stabilisation emerging both in terms of rents and yields.
According to Marie Hunt, Director of Research at CB Richard Ellis, “Like many markets across Europe, prime office rents appear to be stabilising at current levels. This is the first quarter since Q3 2008 where we have not adjusted our office rental series downwards and hopefully this is indicative of a trend, for prime office properties at least. In the investment sector, prime yields are now stable in all sectors with prime retail, office and industrial yields potentially trending a little stronger over the coming months. All of this is encouraging”.
According to the report, prime headline office quoting rents in Dublin city centre are now stablising at approximately €376 per square metre while prime headline rents in the suburbs of the capital are now stabilising at approximately €215 per square metre. CB Richard Ellis say that considering the competive terms and conditions on offer, office leasing activity is continuing on a steady basis despite the economic backdrop. However, the property consultants say that with the vacancy rate in Dublin remaining high at approximately 23%, continued inward investment and significant indigenous requirements will be required to absorb the current overhang of office accommodation. They say that a decline in vacancy will be particularly slow to materialise in this cycle due to the high proportion of older properties and floors of otherwise occupied buildings that are currently being marketed to let. Proactive landlords continue to approach tenants regarding restucturing their existing leases. This trend includes negotiating the removal of break options or extending the length of the existing lease in return for rental reductions.
Many retail tenants are also being proactive in the current climate and looking at restructuring their lease commitments. According to CB Richard Ellis, in many cases, tenants are negotiating rental reductions. They say that it is difficult to determine rental values although they believe that prime headline quoting rents are down approximately 30% from peak.
With regard to the industrial sector, CB Richard Ellis say that there is some momentum in terms of letting activity but that the market continues to perform below trend and is likely to do so until economic conditions improve and job creation re-emerges.
The new report says that the recovery in property values which is starting to emerge in some European property investment markets and most notably in the UK has not yet materialised in the Irish investment market. However, CB Richard Ellis says that there has been a marked improvement in sentiment and investor interest in the Irish investment market since the beginning of 2010. The property consultants point towards the growing trend of international investor interest in a market that has heretofore been dominated by local purchasers. They say that none of the larger investment transactions that are currently being negotiated in the Irish market are being pursued by domestic investors and few are likely to be funded by domestic banks.
CB Richard Ellis is unsurprisingly upbeat about the UK market. They say that interest in the UK investment property market has continued to improve in recent months, with retail funds, (who have witnessed major inflows in the last two quarters) and overseas investors leading the charge for prime office and retail properties, particularly in Central London. Values in the UK stabilised in August 2009 and have appreciated in most sectors since then, driven to a large extent by the weight of equity chasing a limited volume of prime investment product and buoyed by the weakness of sterling. The recovery in the investment market has been supported by the fact that conditions at the prime end of the occupier markets in the UK are now also showing some signs of improvement with encouraging rental growth forecasts for Central London now starting to emerge say CB Richard Ellis. They say that there has been a notable improvement in the volume of stock being offered for sale in the UK since the beginning of 2010 with a number of opportunistic sellers taking advantage of the strength of demand for investment opportunities. Interestingly, according to the new report, a number of those selling properties in the UK at present are trading assets they purchased only 12 or 18 months ago. The UK investment market has certainly been one of the first markets internationally to witness a correction and return prospects now look very encouraging. However, CB Richard Ellis say that it remains to be seen if this momentum can be maintained against a backdrop of an economy that remains weak and with a general election looming later this year.
With attention still firmly focussed on transferring land and development loans over to the NAMA vehicle, transactions in the development land market remain few and far between according to CBRE. The property consultants believe that the 300,000 figure which has been discussed in recent weeks with regard to vacant unsold housing around the country overstates the quantum of vacancy and that the true figure is closer to the Department of Environment estimate of approximately 120,000 units.
An issue that is causing huge concern in the development sector at the moment according to the report is the Government proposal to increase the rate of capital gains tax to 80% for disposals of land that have been rezoned for alternative uses, which is due to be enacted in the forthcoming Finance Act. CB Richard Ellis says that this will have huge value implications for the development land sector and will compromise brownfield development. The property consultants strongly advocate that the increased tax rate be limited to zonings of previously unzoned land as they say that this will prove a more workable solution.
With everyone waiting for NAMA to get up and running, there have been very few hotels brought to market in recent months. However, that is about to change with the launch of marketing campaigns for the Ostan na Rosann in Donegal and the Kenmare Manor hotel in Kerry. Outside of Ireland, the London hotel market continues to buck the trend and remains very strong with a number of significant sales concluded in recent months. CB Richard Ellis Hotels recently won the mandate to bring the prestigious 5-star Grosvenor House Hotel in London, which is operated by Marriott, to the market.
This is a real ‘trophy’ asset which has already attracted huge international interest, with some reports suggesting it could command in the region of €600 million to £700 million. According to the March bi-monthly report from CB Richard Ellis, there might be some good news for the Dublin pub market shortly with CBRE agreeing a deal on The Globe/RiRa premises in Dublin city centre.
Conditions in the Northern Ireland property market are also covered in the new report. While activity is continuing in various sectors of the property market in the region, CB Richard Ellis say that the big unknowns at this juncture include what is likely to happen in the forthcoming general election and what the possible knock-on effect of cost-cutting in the public sector will be. Pressure groups have again raised the question in recent weeks about reducing the rate of corporation tax in the region. CB Richard Ellis says that this would clearly give a massive boost to the Northern Ireland economy and in turn the property market in the region, particularly considering the competitive rents and labour costs relative to the Republic. Prime yields in the Northern Ireland market remain stable although transactional activity remains limited to very small lot sizes in provincial towns in the region. Much attention will be focussed on NAMA over the coming months, with the due diligence process now firmly underway for the loans on Northern Ireland properties that are ultimately due to move over to the entity.
Guy Hollis, Managing Director at CB Richard Ellis said, “While conditions in the commercial property market for the most part remain challenging, it is encouraging that sentiment is improving now that rents in many sectors are showing signs of stabilising and that prime yields in the investment sector are stable with the potential to trend stronger over the coming months. While it is still early in the year, there has been a notable increase in activity in the last few months, which we believe will translate into higher volumes of transactional activity in the property sector in 2010”.
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CB Richard Ellis
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About CB Richard Ellis
CB Richard Ellis Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services firm (in terms of 2009 revenue). The Company has approximately 29,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CB Richard Ellis offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. CB Richard Ellis has been named a BusinessWeek 50 “best in class” company for three years in a row. Please visit our website at www.cbre.com.
In Ireland, CB Richard Ellis is the country’s largest commercial real estate services company, now employing over 100 employees and offering a full range of property services including property sales and acquisitions, leasing and management, investment, corporate services, project management, consultancy, valuations and research. CB Richard Ellis Ireland has bee