Warning signs aplenty but forecast good for 2008

THE well documented difficulties afflicting the residential property market for some time now might reasonably be interpreted as evidence that the entire sector is in a downward spiral. Not necessarily so, say experts in the commercial field, who, while they acknowledge the new realities of a more austere market, can still cite evidence of another buoyant 12-month period in several areas including the retail, office and industrial divisions. There are real concerns now over the possibility of further interest rate rises, the current restrictions on credit are a worry and turbulence in equity markets is always a warning sign. But the fundamentals are still strong and the outlook remains positive.

Strong activity Transactional activity in the key office, industrial and retail occupier sectors remains extremely strong, reflecting the fact that the Irish economy continues to perform well in European terms. Office takeup of 250,000sq m (2.7m sq ft) was recorded in the Dublin market in 2007, a market where the 10-year average take-up has been 150,000sq m (1.6m sq ft) per annum. Today, many key industrial locations, particularly in the capital, are suffering from an undersupply of quality accommodation.

And the high number of prestigious retailers attracted to new developments like Johnston Court in Sligo and MacDonagh Junction in Kilkenny is a significant indicator of buoyancy in that particular market.

Demand for offices "Despite the economic uncertainties in our market, there is still and always will be a demand for well located office buildings, " says Nick Coveney director of Colliers, JacksonStops. "The decision for occupiers to locate to a specific location is due to a number of factors, the principal one being the transport links. With planners tightening up on the number of car parking spaces in any given development, public transport is one of the key drivers for attracting and retaining staff. Sandyford has been looked at seriously as an out of town option by many occupiers due mainly to the introduction of the Luas."

According to Jones Lang LaSalle director, Deirdre Costello, "Landlords will have to be competitive in terms of the overall packages they are offering, particularly in cases where tenants are in a position to choose from a selection of different buildings."

Slowing down in retail After another boom year some slowdown in retail expansion is almost inevitable. However a substantial volume of accommodation is due to come on stream next year. A number of major shopping schemes are in the pipeline, including the second phases of the Dundrum and Liffey Valley centres, Bray Town Centre, Adamstown, Opera Avenue in Cork, Opera Limerick and Parkway Valley in Limerick.

"The main change our team has observed over the past 12 months is that most of the key fashion retailers now have national representation, and there are therefore very few remaining locations where they must have a presence, " says Lisa McGrane, of Jones Lang LaSalle's retail department. "Up to five years ago, landlords would frequently offer retailers a quantum reduction in rent as an enticement to lease larger stores.

Now, however, retailers are prepared to pay full market rents for larger stores in prime locations, due to a scarcity of this commodity.

Land values down If negative sentiment in the residential market has impacted on the commercial scene it is probably most keenly felt in the development land sector.

"Demand for development land is primarily driven by the demand for the end product, " says Laura Somers, director of development land with DTZ Sherry FitzGerald. "Slow new home sales caused developers to shift their attention towards commercial sites or sites which offer the opportunity to add value in the medium to long term. One of the main factors which will continue to impact site acquisitions in 2008 is the stricter lending policies adopted by the banks that require a greater input of equity from developers to fund projects.

"It's clear that vendors and landowners will have to become more realistic in their price expectations in order for activity levels to improve in the year ahead. In general, vendors are beginning to accept that prices achieved in 2006 will not be repeated in the short term. However, many of the large scale Irish developers have focused their attention on overseas residential opportunities within European markets, particularly in London.

Despite this foreign outward investment, there is a continued appetite for longer term opportunities which add value over time. In addition, strong demand currently exists for strategically located commercial sites in the Irish market."

Caution in investment A degree of caution has been detectable in the investment sector in recent weeks on the back of slowing economic conditions, high interest rates and the current lending environment. "Lending margins have increased and loan-to-value rates have eased, so investors now need a greater equity input to support most investment transactions, " says Marie Hunt, head of research with CB Richard Ellis. "Some assets are therefore being re-priced as investors re-evaluate risk.

Cautiousness began to sweep in towards the end of 2007 . . . although Irish investors remain on course to have invested 2bn in Ireland and 10bn on commercial property opportunities overseas.

"I expect that sentiment will remain weak in the early part of 2008 but am confident that investors will come back out in force in the second half to avail of good buying opportunities in Ireland and overseas, particularly if interest rates ease. It is a missed opportunity that the government did not act to reduce capital gains tax in this area in the recent budget."

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