RENTS HAVE fallen by about half while yields have doubled and stand above their long-term averages. In simple terms values have fallen through the floor. Values of many investments are back to mid-1990 levels, equity markets are volatile and deposit rates are relatively low. Conventional thinking would say commercial property is an obvious investment choice.
The reality is the commercial investment market has been paralysed for almost three years. The level of turnover this year in the commercial market in Ireland could have been completed in a single month in the boom years. Whilst activity levels in those boom years were not sustainable, activity levels at four or five times the current level should be. The reasons for the current paralysis are well documented, including a lack of debt, negative equity and changes to rent review legislation. In order to get the market going there are a number of things that can be done.
There is a rumour that stamp duty will be reduced for commercial transactions in the upcoming budget. This started following comments made by the Minister for Finance in response to a question at the Global Irish Economic Forum in October. This will be clarified in the coming weeks and certainty on it one way or another would be welcome.
Clearly a reduction would be positive news for the market. The amount of any drop in stamp duty should feed through to owners in extra value. Given the effective level of ownership of commercial property by NAMA and State controlled banks, it may be close to cost neutral for the State coffers but will bring other benefits. It might also allow NAMA recover some of the falls in value since the strike date for their loan acquisitions in 2009. The relatively high costs of trading commercial property, typically assumed to be 8.42 per cent in Ireland, is a common comment made to me by international investors. Stamp duty for large commercial investment in the UK is 4 per cent. There is no doubt the reduction in residential stamp duty has allowed the residential market, particularly in Dublin, resume trading.
Another tax issue that is restricting market activity is the uncertainty regarding the treatment of property-related tax allowances. The measures set out in the Finance Act 2011 for Transitional Provisions for Property Incentive Schemes have not been implemented.
Clarification of their treatment is essential for owners to be able to consider the value of holding against the value they could generate from a sale.
The level of activity in the letting markets, particularly the Dublin office market, is very encouraging. While statistics of 1.7 million sq ft of take-up mean nothing to most people, the fact that enough office space to accommodate over 10,000 workers has been let in Dublin this year is a powerful statistic.
As advisors and market participants, it’s incumbent on chartered surveyors to encourage more accurate reporting of letting and sales activity. That should allow occupiers and owners operate with greater confidence.
Letting go of the past in terms of values is essential to be able to move forward. When I worked in the City of London in the early part of the last decade there were buildings being let and sold at rents and prices significantly lower than they had achieved in the 1980s.
In what is a trader’s market there was no hanging on to the past. Property was re-priced at what the market would pay and while there were casualties, the market carried on. The spike in values here was as much driven by cheap easily available debt as it was by rents. There was no sense in us having the lowest yields in the world. Our market needs more transactions to provide benchmarks and to stop the continual price slippage that we are seeing at the moment.
Rent reviews are a central pillar of our lease structures. The uncertainty that continues around the changes that may be made to existing lease contracts is the largest single barrier to the market functioning as it means that owners and potential investors cannot value properties with any certainty. Most potential investors can deal with the issues around debt, future rental forecasts and transaction costs. Without a rule book on the rent review issue, investors will continue to sit on the side lines and wait in relation to most investment properties. Whatever proposal the Government produces, it must be done at once as the market needs clarity. I fear that the proposal, when we finally see it, may be less than clear which could serve to extend the period of paralysis, perhaps requiring some legal test cases to play right through the courts to give real certainty.
Debt is essential to the proper functioning of any modern investment market. The wholesale money markets are in a state that can reasonably be described as chaotic. Some stability has to come in to these markets before banks can be expected to lend long-term.
While this is a gargantuan task, the authorities need to generate some stability in money markets. With the medium-term interest rate outlook pretty benign, one would hope that markets will calm down. The level of margin being charged currently for lending at low loan-to-value percentages is not attractive to purchasers. The feedback from international investors that have sufficient capital to invest ungeared is that the pricing and conditionality on debt offers are not attractive.
Vendor finance or staple finance where the vendor provides a debt package for purchasers would help enormously. The offer of staple finance has been extended by NAMA as part of the offering of One Warrington Place and has generated significant interest from investors.
None of these issues dealt with in isolation will fix the market but progress on as many of them as possible will help the market back on to its feet. A functioning investment market is essential to ensure the quality of our building stock is maintained and improved.
The quality of the stock impacts on our ability to retain and attract leading domestic and international businesses, which is central to an economic recovery.
