What effects will Brexit and the proposed tax changes have on the commercial property market?
From an economic perspective Brexit is not good news for Ireland. It will certainly have a negative impact on our gross domestic product (GDP) forecasts for 2017 and beyond. The commercial real estate sector is closely interlinked with economic performance and the risk of a general market slowdown is a concern. However, the commercial property market is one sector of the economy that may benefit to some extent from Brexit relocations from London in due course. We expect to see a number of requirements for office accommodation being activated over the coming months, which will ultimately boost demand for office accommodation, particularly in Dublin, before feeding into other cities at a later stage. This may prove to be the catalyst to enable some planned schemes to obtain funding and commence on site, if pre-lettings are signed.
The tax changes announced in the Finance Act have already affected the price that some investors will pay for assets. There is the potential for a two-tier market for assets, depending on the tax treatment of buyers. The other impact these unexpected tax changes have had has been the damage it has done to Ireland’s reputation as an investment location and it remains to be seen if and how this might affect investor appetite in 2017.
Is there sufficient bank funding available to allow the owners of large portfolios to offload individual properties next year?
There has been a notable improvement in the availability of bank funding for commercial real estate in the Irish market from the pillar and international banks over the past 12-18 months albeit from an extremely low base. The limited number of lenders has resulted in new alternative funders, principally non-bank lenders emerging in the market and we expect this will continue into 2017. However, funders are primarily focused on large transactions with the availability of debt for smaller properties and in particular land still proving extremely difficult to source at a reasonable cost. The funding market is still not working efficiently in this respect. This affects the liquidity of smaller and mid-sized assets due the requirement for significant amounts of equity to acquire these assets.
Where are the best investment opportunities at this stage?
With rents for prime offices in Dublin having recovered strongly and now close to previous peaks, we are not expecting to see significant rental growth at the prime end of the office market in 2017. Prime yields are also likely to remain static next year. The best investment opportunities in the office sector will therefore be in the development and refurbishment side of the equation and particularly in the forward-funding space. There is potential for rental growth in secondary and suburban offices, however, so we expect to see investors focussing on this.
Some investors will focus on the retail and industrial sectors on the basis that there is still very attractive rental growth potential in these sectors in 2017.
However, one area we expect to see considerable shift in investor appetite towards is “alternative” sectors in 2017, namely investment in multi-family apartment complexes, student accommodation and healthcare. These sectors are seen to have less volatile income characteristics and provide diversification for property investors.
One thing to watch out for in 2017?
Investors need to be mindful of upward pressures on interest rates globally with a particular focus on the United States as the trajectory of bonds and interest rates will ultimately dictate the shape of the real estate cycle in 2017.
Johnny Horgan is executive director and head of capital markets at CBRE
