What would you like to see happening in the commercial property market next year? With an election likely to be called in the early part of the New Year, the market will be looking for stability and a continuation of the existing policies in 2016. Although appearing less likely, a shift to the left or an unstable coalition of independents could see greater interference in the property market and a loss of investor confidence. As already evidenced by the new Central Bank mortgage regulations, any change can have a significant knock-on effect on development. With the IDA expressing concern that the current low level of office vacancy will result in a loss of potential jobs, some level of bank lending to speculative office schemes would also be welcome.
Where are the best investment opportunities at this stage? There are opportunities in both the retail and distribution sectors, with improved consumer confidence providing a significant boost for retail spend and tenant demand. Forward funding of office development is however likely to provide the most attractive returns in the short term. With limited traditional bank finance for speculative development, institutions willing to commit to pre-funding are able to secure prime developments at attractive yields. With vacancy rates at historic lows, and the likelihood that well-located developments will let during construction, the higher returns available from forward funding and joint ventures more than compensate for the level of development risk.
How long more do you expect the sales boom to continue? The level of transactions is likely to scale down over the next 12 months, with both Nama and the commercial banks likely to have completed their large scale de-leveraging by the end of 2016. Although we are likely to see recycling of stock acquired over the past three years, particularly by the loan buyers, this will be at a much lower scale than we have become accustomed to. Our expectation is that turnover will reach €3 billion this year but fall to closer to €1 billion by 2017.
What changes are we likely to see in the market over the next 24 months? As the market has recovered, the nature of the buyers has changed, with short-term high-risk investors being replaced with longer-term capital. Although private equity investors are still active, they now largely concentrate on significant portfolio and loan sales. The market for single property investments in the past 12 months has been dominated by the institutional market. Looking forward, the next wave of investors, particularly for very prime assets, are likely to be the European institutions with investors including GLL, Credit Suisse, Patrizia, Union and Real IS already active. Although growth is likely to be less stellar than in previous years, for institutional buyers, prime yields in Dublin still compare favourably to other major European markets, particularly when rental growth is factored in.
Adrian Trueick is investment property director with Knight Frank
