With the Irish property market about to report its sixth successive year of exceptional growth, there are some signs that investment opportunities may become more readily available in the coming months. A range of properties have already been offered for sale in recent weeks as owners moved to cash in on the substantial gains that have been achieved.
The most interesting seller so far is Royal Liver Assurance Company, one of the most astute players in the Irish market, which is expected to get in excess of £15 million for an attractive portfolio that includes two buildings on Grafton Street in Dublin. Because this particular assurance company rarely sells its Irish investments, its decision to offload half a dozen prime properties at this stage has raised the question of whether the market may be close to its peak - or indeed past it.
With institutions generally noted for exhibiting the herd instinct, the industry will be watching to see if other funds also decide to trade older stock, now that this year's returns have failed to match the spectacular growth of 1998.
Irrespective of how the others react, no one is expecting a rush of investments on to the market given that pension funds, unit linked funds and unit trusts are continuing to accumulate substantial amounts of liquid cash. All of them need to find a home in the property market for at least some of this money.
In the meantime, Royal Liver and other vendors stand to make extremely handsome profits on the buildings they are selling. Both private and institutional buyers will be pitching hard for all these investments in the light of the relatively low interest rates and the abysmal performances this year by both gilts and equities. Even with property returns fading slightly in 1999, they are still expected to come in at 28 or 29 per cent by the year's end. Compare this with equities, which have fallen by three percentage points since January, and gilts, which have dropped by 2.2 points over the same period. There seems to be no consensus in the property industry on whether market yields can fall any further at a time when interest rates are slowly edging up.
Retail yields for prime properties are now around 4 per cent; offices are varying from 4.5 to 5 per cent while industrials are between 6 to 7 per cent. The more adventurous investors are apparently prepared to settle for even lower initial yields in the belief that significant rent increases can be achieved at review time.
For this reason, capital growth over the coming year will be dependant on the continuing upward movement in rents.
Royal Liver is not the only major player getting ready to cash in some of its chips. Findlater House, the six-storey office and retail block in O'Connell Street, Dublin, is also in the process of being sold along with Lisle House, an 18,000 sq ft office building in Molesworth Street, and Wilson House, a third-generation office investment in Fenian Street. The country's largest pension fund, IPFPUT, has just paid around £13 million for a newly developed 41,500 sq ft building at East Point in Dublin, which has been leased to Conduit at a rent of £16 per sq ft.
The 28 or 29 per cent returns due to be reported by the property market, compared with about 12 per cent in the UK, are still considerably down on the 38 per cent recorded in 1998. Yet, this has been the longest sustained boom in living memory, starting in 1993 with returns of 7 per cent and building up to last year's incredible figure of 38 per cent. Though the buoyant market cannot last forever - the last one ran for four years - no one is predicting a significant slippage at this stage. This is only likely to happen if the economy suddenly slows down or if interest rates harden considerably.
After all, the underlying reason for the strong property market is the thriving economy, the high level of inward investment and the huge demand by overseas and indigenous companies for all kinds of premises.
There have been few blips along the way because after the disastrous experiences of the past, office developers this time round have managed to match supply with demand. Six years ago, it was a different story when the office vacancy rate in Dublin stood at 11 per cent, equating to 1.5 million sq ft of empty space. At present, the vacancy rate is well under 2 per cent, leaving no more than 200,000 sq ft available.
However, a whole range of speculative office developments are due to get under way next year, despite fears that it could easily lead to a massive oversupply. The financiers are taking a different approach to new office blocks in the city centre simply because there are relatively few of them in the pipeline. The shortage of new space has greatly helped Hardwicke to set a new benchmark rent of £33 per sq ft in the latest phase of the office complex it is completing at Adelaide Road.
THE accelerating rate of rental growth in the city centre also helped 10 private investors to pick up a profit of £14 million within three years on their investment in Lansdowne House, beside Jurys Hotel, in Ballsbridge. Well aware that the Exchequer was awash with money, the consortium took the noble step of selling their 31-year-old, 70,000 sq ft building to the State for £23.5 million last summer. It was undoubtedly the deal of the year . . . for the consortium.
For those who could not find property investments in Ireland, the UK became a strong alternative during the year, as ever increasing numbers of private investors and institutions bought commercial buildings there at higher yields than those available in Dublin. There was particularly strong interest among private investors in a string of bank branches in English provincial towns - a type of investment that never surfaces in Ireland. At the end of the day, these investments may not prove to be such a good buy because it seems that some of the banks involved could be planning to pull out of these towns when their leases run out. If this happens, these "gilt edged investments" could turn out to be white elephants.
