- Q3 saw improved levels of activity in the investment market with 13 transactions completing
- Domestic buyers continue to be the dominant players. Market activity is concentrated on prime assets
- The supply of new investment opportunities to the market remains restrained
- IPD show further quarterly falls in both 'Total Return' and 'Capital Value Growth' for all commercial sectors
- Yields in the quarter remained stable and largely un- changed
- €400m worth of transactions were agreed at the end of Q3
- Download Lisney Investment Market Update Autumn 2010
The third quarter of 2010 saw improved levels of activity in the investment market, particularly when compared to Q2. Between January and the end of September, total investment turnover was approaching €150m. Market activity was concentrated on prime assets and there is virtually no appetite for secondary properties. Yields during Q3 remained largely stable for prime investments.
Activity
At the end of Q2, it appeared that the investment market had stalled given the minimal transactional activity. However, Q3 has seen some life return to the market. While activity is still very limited, 13 transactions totalling approximately €90m did complete.
The largest single transaction was the sale-and- leaseback of AIB on Grafton Street to a German fund. The price is reported to be close to €27m, which equates to a net initial yield of 6%. The next largest transaction was the sale of the Eircom Management Centre in Citywest for €20m, which equates to a net initial yield of 8%. These two deals were the only transactions recorded in Q3 that were completed by overseas buyers.
With the exception of one industrial investment acquired by a domestic institution, the remainder of properties bought in Q3 were by private Irish investors. The purchase by the institution is to be welcomed given that such investors have been regarded as sellers as opposed to buyers in recent years. Domestic investors and overseas buyers each represented 50% of the quarter's turnover by investment volume.
Bank branch sale-and-lease backs have dominated investment market activity outside of Dublin for the past 12 months. Continuing with this trend, six of the thirteen transactions were bank sale & leasebacks, two prime retail investments sold in Cork in Q3, the first non sale & leaseback activity outside Dublin since Q1.
A common feature of most transactions is the property's prime location. For debt buyers, this flight to quality is driven by necessity as banks will not fund anything less than prime. This is due to their valid belief that rents will recover first in the prime-end of the market. Development pipelines in all commercial sectors are effectively shut- off. In the medium-term at least, this points to reducing vacancy and improved letting prospects.
Supply
The supply of new investment opportunities to the market remains restrained. There is significant demand for well-let offices in Dublin but there is virtually nothing on the market at present. The pricing of office investments is very difficult, mainly as a result of the massive rental declines experienced since 2007, particularly in the city centre. The weak office occupational market means that any new investments being created are not of institutional-grade. As such, the supply of opportunities is going to be constrained until leasing markets return to equilibrium.
Irish Life relaunched the marketing of Wilson House on Fenian Street, Dublin 2 in September. The asking price is €7.5m, which reflects a net initial yield of 10.8%. This yield appears high in terms of perceived prevailing yields for city centre office property and so the market will watch this sale with great interest.
Values
Q2 data from the Investment Property Databank (IPD) shows continuing quarterly falls in both 'Total Return' and 'Capital Value Growth' for all commercial sectors. These negative returns were largely down to the worsening leasing markets. As regards capital values, the 'All
Property' index was down 3.5% in the quarter and is now down 57.9% from peak in 2007.
In spite of this, there is increasing confidence that yields have stabilised for very prime properties. However, there are concerns that less prime and secondary properties, particularly those with leasing risk, may see further falls in value as the realities of the weak occupational markets take hold. There is a sense that occupational markets are beginning to stabilise but they will, as in the capital markets, stabilise first in the prime-end of the market with the secondary-end slower to find its true level.
Yields remained stable and largely unchanged in Q3. Prevailing yields on prime, rack-rented properties are set out below.
Debt remains difficult to secure and the quality of security is paramount. There are only two banks actively lending on property investments and the cost of this debt is very high relative to the ECB base rate. Cash-on-cash returns for investors are low due the high levels of amortisation demanded by the banks.
Outlook
The outlook remains unclear for many reasons. The activity of NAMA, the weak occupational markets, limited debt supply and the stance that the non-covered banks will take if NAMA starts to increase the supply of product onto the market.
There was over €400m worth of transactions agreed at the end of Q3. This is dominated by Liffey Valley Shopping Centre, which we understand is very close to completing. The sale of Boole House in Clonskeagh, is agreed and due to complete in October. We understand a forward sale of a new Tesco in Roscrea was signed and will complete in 2011. Additionally, the liquidator of the Belgard Motor Group, Tom Kavanagh of Kavanagh Fennell, has agreed the sale of the Topaz filling station off the Belgard Road in Tallaght.
There is a sense that NAMA and some of the non- covered banks will take control of some investment stock in the coming months in an effort to reduce debt levels. That should see supply improve but it is difficult to say how soon this will happen.
