What would you like to see happening in the commercial property market next year? More construction in key urban areas. There are shortages in certain housing and office markets. In Dublin and other cities new construction is viable and I hope developers and their funders move early to avoid a greater spike in rents. Rent spikes ultimately are not a good thing for the market. In 2016 I would like to see the first of what I expect to be a number of high-profile rent reviews. These will see prevailing rental evidence, from leases that have upwards and downward rent review clauses, used in the rent review of leases that allow only for upwards movement of rent. We will not see the end of that story next year.
Where are the best investment opportunities at this stage? Investment market pricing has matured over the past 24 months and the best investment opportunities now involve taking greater risk. People can forget that the returns from property are higher than cash or gilts because of the associated risks. Investors with an ability to develop, refurbish, extend, lease and asset manage properties can make strong double-digit returns. The strengthening of the occupational markets mean that vacancy is an opportunity in many cases. As shortages become more acute, the landlord's position strengthens. This creates opportunities to lengthen lease commitments and look to fix out future rents to insulate owners from the increased volatility the upward and downward rent review regime will have on rents. This should have a positive impact on valuation and potential to secure efficient debt.
How long more do you expect the sales boom to continue? We have seen investment activity levels falling on a rolling 12-month basis since the first quarter of 2015. It will be a very good year in terms of volume of transactions at close to €3 billion. Prophets of doom might express it as a fall of more than 30 per cent on the previous year but 2014 needs to be recognised as an all-time record year. I expect that investment turnover in the market will continue to fall to a normal level that will be in the order of €2 billion per annum. 2013-2015 will be seen as the high point in terms of activity although I do not expect any issue with liquidity in 2016.
What changes are we likely to see in the market over the next 24 months? The next 24 months will see a growing number of new developments completed and being sold by developers. This will give core investors the first opportunities for many years to buy new, high-quality assets with the benefit of collateral warranties. It is likely we will see a new record office rent in the next two years as supply falls further behind demand. This has a knock-on effect with suburban office markets becoming more interesting as cost sensitive occupiers look beyond the CBD. As housing completions step up, the retail warehousing market is likely to see an improvement which investors will look to capitalise on.
Duncan Lyster is investment director at Lisney
