MARKET ANALYSIS:THE IRISH PROPERTY market is coping well with the current downturn in activity, according to a surprisingly upbeat assessment from CB Richard Ellis.
Its March bi-monthly report sees signs of improvement in nearly all sectors, despite widespread concern about the current slowdown.
The assessment claims the market is "weathering the storm well", although it acknowledges activity in each sector is performing differently.
The availability of finance was central to the challenges facing the Irish market, says Marie Hunt, the company's director of research.
"While economic and property market fundamentals are still basically sound, the big issue in most sectors is the scarcity and cost of debt-funding. Despite the fact that total returns are easing in line with yield movements and lower rental growth potential, investor appetite for property remains strong but there is no doubt but that transaction levels in all sectors would be higher if funding was more readily available."
The report argues that there was "no evidence" that the global financial downturn has had any "negative impact on demand for office accommodation" in Dublin, although it indicates there will be no significant rental growth during 2008.
It points to the fact that 50,000sq m (538,195sq ft) of office requirements had been activated since the start of the year as an indication of underlying market strength.
The report says that despite many "doom and gloom" predictions, the retail sector remains "in good health", buoyed by steady consumer spending. The current relatively slow delivery of new developments should also serve to sustain rent levels, it suggests.
The CB Richard Ellis assessment also sees signs for optimism in the industrial sector, highlighting a number of "significant lettings" during January and February. It says the value of prime industrial zoned land has "remained stable" despite the general fall in development land values over recent months.
It acknowledges "a notable decline in transactional activity in recent months" on the Irish investment market, pointing towards the tight control over bank lending arising from the credit crunch. The study argues that despite this prime yields in the Irish market "have moved out by 25 basis points since Christmas". It puts yields at about 4 per cent for prime office investments and at 2.75 per cent for prime high street retail investments.
With rental growth beginning to stabilise, "it is inevitable that total returns will be lower in 2008", yet the report flatly rejects the "flawed analysis" in recent reports that suggests total returns on the Irish commercial property market could see a decline approaching 30 per cent. The availability of finance is also dragging back the development land market, the assessment believes. This squeeze is particularly problematic for large scale development projects, it says.
Yet "there is a strong appetite for good development sites in prime locations, particularly where prices have fallen since last year", it adds.
Frustration is building in the marketplace where developers "are seeing opportunities to purchase land at value in the current market", yet funding these deals "will undoubtedly remain difficult for some time", the report adds.
The UK investment scene remains even more cautious than it has been in recent months, the report notes. Again taking the view that the glass is half full, the company suggests that the pace of decline in UK property values was showing signs of easing and prime yields are stabilising, particularly in London's city and West End office markets.
A lack of investment opportunities was hampering buying activity more than a decline in value, the report says, adding: "Despite reports to the contrary, there is little evidence of forced selling in the UK market at the present."
Irish investors spent €4.7 billion on the UK property market last year, half of this in central London. "It is inevitable that total Irish spend in the UK in 2008 will be less," it concludes. It sees no respite from this while the real estate and the financial markets remain out of step and liquidity remains a difficulty.
Controversially, the company argues that "there has been somewhat of a recovery in the new homes sector" over the past two months, in Dublin in particular. The assessment points to strong viewing numbers at show houses since Christmas, with visitors tempted by price reductions of 10 to 20 per cent as developers attempt to get unsold homes off their books. "Not all developers have had to adopt this strategy to generate sales however," the report adds.
It says buyers are starting to take advantage of the lower prices, encouraged by indications that interest rates may decline during 2008.
It does acknowledge, however, that despite what it sees as a slight recovery, housing completions will be down this year to about 50,000 units.
BUYING OVERSEAS: private investors pile in to UK for bargains
JOHN MULCAHY
No sooner had the ink dried on a Jones Lang LaSalle report which showed that Irish investors were responsible for the second highest proportion of the €244.1 billion spent on property across Europe last year, when into my Blackberry popped news of yet more extravagant spending. This time, the good news emanated from the commercial property market across the pond where we've had nothing but bad news since the middle of last year.
The latest report was one about private investors going on a frenzied spending spree. The particular spree in question took place at a Jones Lang LaSalle commercial property auction where some 93 per cent of the available lots were sold at an average all-property yield of 5.32 per cent and an average retail yield of 5.09 per cent.
Significantly, that particular auction was not the only evidence of major success: it was the third such auction this year where sale rates topped 85 per cent. Now that should gladden the hearts of each and every one of the Irish investors who between them sank €5.7 billion into the UK property market last year.
Between them, a number of Jones Lang LaSalle's clients - including Irish Life Investment Managers, Barclays Bank Plc, Morley Fund Management, Network Rail, and the Carphone Warehouse - netted €40 million from that one auction. On that occasion, bidding was buoyant for good long-term income, such as the Barclays Bank sale and leasebacks, all of which sold for an average yield of 4.63 per cent.
The largest lot of the day was the T-Mobile unit on Princes Street, Edinburgh. It was sold for €4.39 million, representing a yield of 5.12 per cent.
What all of this activity indicates is that for shorter income or poorer covenants, sellers' expectations are now more realistic, with investors finding buying opportunities at yields that are generally between 0.50 and 0.75 per cent off the yields achieved a year ago. Let's hope this light at the end of the tunnel is not an oncoming train!
John Mulcahy is managing director of Jones Lang LaSalle
