Following a quiet start to the year with very few deals completing, Q2 saw the upturn in activity that started after the December 2011 budget become reality. The Budget removed a lot of the barriers to activity. A number of trophy deals have completed this quarter including One Warrington Place, Plaza 4 Custom House Plaza, The Alliance building on Barrow Street, United Drug in Citywest and Riverside 2 on Sir John Rogerson’s Quay.
Turnover this quarter totaled approximately €155m, which is the largest quarterly total since Q3 2008. In reality, the bulk of activity in the Q3 2008 period had been pre-sold in 2006 and 2007 and completed following construction. This quarter’s performance is the best performance in almost five years in terms of deals agreed and completed. Total turnover for the year to date is now close to €180m.
Not only does this level of activity give the market some useful benchmarks, it clearly demonstrates the dominance of overseas capital in the Irish Investment market. Four of the five trophy deals above were purchased by overseas investors.
The other clear trend is the length of time transactions are typically taking to complete. Agreements are being struck up to six months before deals are completing. The legal process in 2012 Irish conveyancing is difficult at best with little or no trust apparent. If debt is added to the process, the underwriting is taking significant time and resources to complete.
Supply
As reported last quarter, supply has improved and now that a lot of that stock is sold the market is clearly hungry for more. Since April, we have seen more supply coming to the market including Stack B in the IFSC, Brooklawn House in Ballsbridge, St Martin’s House in Dublin 4, Edward Square in Galway and the Forum in the IFSC.
There is over €350m of investment property now publicly for sale with more expected to come to the market in the autumn. There is good interest in the majority of the stock on the market, particularly that in Dublin.
Demand
The deals mentioned above display a solid level of demand. Demand for the larger ticket investments is dominated by overseas buyers. There is a healthy level of demand from domestic investors for investments up to about €5m. Lisney has four investment transactions under €5m with solicitors as the quarter draws to a close.
Having multiple bidders for well-priced Dublin assets is now commonplace. What is less clear is the demand for anything other than prime assets in the regional cities and towns. Demand remains focused on Dublin and on prime assets with growing demand for more challenged assets in Dublin provided they are priced appropriately.
The existence of tax efficient structures like Qualifying Investment Funds appears to be giving overseas investors an effective advantage over Irish resident capital. Their prevalence is likely to grow.
Pricing
With greater liquidity in the market and evidence accumulating property owners, their banks, advisors and potential investors can move forward with more clarity on likely pricing. Prices being achieved are now more predictable.
The uncertainty in the global financial markets seems to be holding back pricing for the moment. We predict that, with greater certainty in relation to the future of the euro, there will be some yield compression, particularly for prime stock.
While prices have stabilised for prime rack-rented property held under long leases, capital values continued to slip for over-rented property close to lease expiry. Property indices such as IPD are likely to show negative falls again this quarter.
We are of the opinion that prime yields have held steady over the quarter and are outlined in the table.
Outlook
There is some evidence of the beginnings of yield compression in the improving occupational office sector in Dublin city centre and this is likely to become a trend before year-end. This forecast is dependent on the wheels staying on the international economy.
We have not seen the emergence of two-tier pricing driven by old ‘upward only’ leases and newer ‘upward & downward’ leases which we expect will play out.
In the more homogenous office and industrial markets we expect pricing to remain driven by rates per sqft. Prime Dublin offices appear to be stable at close to €500 per sqft.
There has been some refinancing of loans by the couple of actively lending banks. New lending is rare and many investors are taking the view to buy with cash and introduce debt later. Staple finance is becoming a factor in the market with NAMA-related sales notably having it as a selling feature. Ultimately, the market needs a new financial player to drive it forward.
Loan sales are becoming a feature of the market and a sale of over €400m of loans by Lloyds Bank of Scotland was reportedly agreed at about €60m. The press also reported the sale of a portfolio of about €675m of loans originated by EBS, which is in the market at present.
Summary
