In this article we review the dramatic changes in the Irish Commercial Property Market (ICPM) – (shops, offices, industrial units, hotels, development land) over the last 5 years and the opportunities arising therein.
The ICPM collapsed between 2007 and 2011 with values falling from between 50% (select offices) and 95% + (development land). In 2007, total turnover in the ICPM was c. €2.5bn with this reducing by c.99% to c. €25m in 2011. The 2011 figure excludes the Google and Penny’s transactions with NAMA.
There are a number of reasons behind the dramatic fall in the ICPM including:
- Lack of domestic and international confidence
- Reluctance to buy in a falling market
- Illiquid banking market
- Debate on upward only rent reviews (UORR).
Properties are essentially sold on a multiple of rents. An annual rent agreed in Celtic Tiger years is likely to be significantly higher than current market values for comparable properties. If you buy a property on 10 times Celtic Tiger rent and the rent falls owing to the abolition of UORR, then this would have a significant impact on the value of your property. UORR clauses are prohibited in leases taken out after February 2010, but are in place in most leases before then. The current government were threatening to implement retrospective changes to the UORR clause in leases prior to February 2010.
In his December 2011 budget the Minister for Finance made 3 significant changes to try and reinvigorate the ICPM. They were:
- Stamp duty reduced from a max of 6% to 2%
- Introduced capital gains tax relief on properties purchased before the end of 2013 and held for 7 years.
- He indicated that the government would not be proceeding with legislation to abolish UORR clauses. He said “it has not proved possible to develop a targeted scheme to tackle this issue that would not be vulnerable to legal challenge”.
Since these changes there has been significant movement in the Dublin property market with 8/10 large sales having been completed to foreign buyers including Grand Canal Hotel & Gas Work (Alliance) complex of 210 apartments.
Interestingly the latter transaction was completed by one of the parties who invested in Bank of Ireland last year & who have indicated they intend to spend €500m on Irish property over next 18 months. Foreign buyers have not been active in the Irish Market for nearly 10 years.
At present another factor affecting the ICPM is the excessive savings culture that has been built up over the last few years in response to the various crises. This culture has been strengthened by the premium interest rates on offer in the main banks. It is estimated that Irish personal savings currently amount to c. €90bn. I note from media reports over the last few months that the banks have started to reduce the premium rates on offer. As confidence in our economy improves and saving rates reduce towards the ECB rate of 1% it is likely that investors will start to look for other investments and once again consider property for a portion of their investment portfolios.
We believe that the c.60% fall from peak values coupled with the changes in the budget and renewed foreign interest, signal the beginning of the recovery in the ICPM. Over the last 6 months, here in Quintas we have reviewed a variety of property transactions from partly finished residential blocks, to hotels, to offices and have evaluated each in terms of risk and potential returns.
We have recently launched an investment opportunity for pension clients (click her for a detailed brochure ), where we are purchasing a tenanted bank branch at a purchase price of 40% of its peak price & with 19.5 years left on the lease.
If you would like further details or indeed discuss any of the points raised in this article please contact me on kkane@qwm.ie.
by Kenny Kane
Kenny is a Director at Quintas Wealth Management
“The views expressed in this article is not reflective of the views or opinions held by Quintas. The material contained herein includes facts, opinions and recommendations which we neither guarantee the accuracy, completeness or timeliness of, nor do we endorse. We do not accept any liability for any act, or decision
Tags: Google, Irish Property Crisis, Property Investment in Ireland, Upward only Rent Reviews
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