Investors are waiting to enter the investment market but there’s very little suitable product for them to buy

THE IRISH commercial property investment market has come to a virtual standstill because of a range of problems including the sharp fall in values, the banking freeze, the transfer of toxic loans to Nama and the uncertainty created by the ending of upwards-only rent reviews in future lettings.

In spite of the general absence of liquidity, investment agents say there is a build-up of funds aimed at properties offering yields of over 7 per cent and let to strong covenants with a reasonable period to run on the leases.

Most of the finance available is understood to have been pledged by overseas funds, though significant sums are also available from a small number of wealthy Irish investors. Some of these are known to have unloaded real estate at the peak of the market and are now in a strong position to re-enter the fray on much enhanced terms.

In the meantime a small number of investments, which have been on the market since 2009, have still not been wrapped up because of continuing uncertainty about future rents and values, and the increasing difficulties in sourcing funding.

John Moran, managing director of Jones Lang LaSalle, says that at the start of this year his agency carried out a survey of potential investment demand for the Irish market. Relying on the fact that yields were at significant discounts to their long term averages, they felt that there were the beginnings of signs of value returning to the market.

Taking this message to the investor base, they identified about €1.5 billion of potential buying power. Interestingly, this was spread across a variety of sectors, including the German open-ended funds, private UK property companies, private high net worth individuals and also the first signs of some domestic institutions returning to the fray.

“We have, however, run into a road block,” says Moran. “There is quite simply an extreme scarcity of suitable investment product. Investors are currently targeting 7 per cent-plus yields on buildings which are let to strong covenants with a reasonable duration of cash flow – 10 years-plus. It is here where the problem arises. These opportunities are few and far between. The main reason for this is that this stock is generally held by the developer/investors who are Nama-bound.”

He says that nobody in the city appeared to want to undertake any domestic transactions while the operation of Nama was still being contemplated. Everybody wanted to see how the new asset management agency would work and what impact this would have on liquidity in the marketplace.

“I am of the view that once there is a degree of certainty around the ground rules that Nama will operate on, the current liquidity crisis in the investment market will be eased slightly. But until PNP (pre-Nama paralysis) finishes, we will have to live with only a trickle of transactions.”

Peter Stapleton, managing director of Lisney, said it was unlikely there would be any increase in the supply of freehold product on the market in the next six months, other than perhaps a few sale and leaseback properties. During this period those with cash would be “unable or indeed too cautious to purchase”.

Stapleton says that, given the unwelcome action taken by the Minister for Justice on upwards-only rent reviews, investors had become increasingly cautious and concerned about further intervention. Clearly, the action taken so far has proved to be completely unnecessary as the market has already reacted by introducing more flexible rent review clauses and lease lengths. Yields appear to have stabilised but rents may have further to fall, he said. Vendors would continue to be those with no debt while sales by Nama would, no doubt, be brought to the market in a managed and orderly way – “no flood expected”.

As the Government had set up two separate groups to consider, firstly, rent reviews and, secondly, the effects of leases on employment, purchasers would remain cautious until such time as these matters were dealt with. “Purchasers are out there but they are waiting in the long grass,” he says.

Stapleton said the Minister’s interference would affect the supply of product to the market and, in the short term, would force more professionals in the market into asset management of one sort or another dealing with shorter leases and considerably more landlord and tenant engagement.

While the status quo remained, it could well reduce the incentive for landlords to invest further in their buildings and the building stock may deteriorate, something which was not to anyone’s advantage.