CHANGES in the commercial property environment have recently caused concern and a degree of nervousness among some investors. However an analysis of the sector's strengths and weaknesses along with its threats and opportunities indicates that the market is in good health with excellent prospects for continued activity and strong returns into the future.
Strengths Despite lower return prospects there is still a huge weight of money chasing property as an asset class.
Our booming economy is fuelling demand for investment and property is still the most favoured asset class.
For several years now, the Irish market has produced the strongest commercial property returns in Europe.
This fact is encouraging further investment.
The ability to borrow against property and essentially leverage your investment means that the potential to considerably outperform other asset classes remains.
The strength of the underlying occupational markets is particularly robust with a good balance between supply and demand, and with rental growth anticipated in most sectors.
Despite recent hikes, a benign interest-rate environment is anticipated in the short to medium term. With bond yields expected to remain relatively stable, investors are buying property on the basis that underlying rental growth prospects will essentially cover the liquidity and risk premiums they require over the return from government bonds to justify property investment.
Weaknesses Ill-informed commentary and unfounded negativity can influence confidence and can actually end up impacting significantly on propertymarket performance. The way negative sentiment has been affecting stock markets worldwide of late demonstrates how powerful and influential sentiment can actually be.
Yield compression, the primary driver of the double-digit returns experienced for the last number of years, has now slowed considerably and is expected to plateau out over the course of 2007.
Investors will have to be increasingly mindful of rental-growth prospects as this will now be the primary driver of returns. In Ireland this year, returns are likely to be between 12% and 15% on an un-geared basis - a big comedown from the 27%+ returns achieved in 2006.
Threats As people take on opportunistic investment strategies in order to drive returns, there is a threat that supply on the occupational side could become influenced by capital markets as opposed to being demand-led. This in turn could impact on the relative balance that has been maintained between supply and demand in most sectors.
Prime yields on property in some sub-sectors or in secondary locations could see yields move out again over the course of the next year, as yields for prime product essentially stabilise.
Political interference regarding possible stamp duty reform has the potential to impact negatively on the natural regulation of the housing market. This could dent confidence in property generally and could, by default, have a negative affect on activity levels in the commercial occupier markets.
An increase in ECB rates to more than 4.5% could impact negatively on confidence, and in turn encourage some occupiers to put their expansion/re-location decisions on hold. This would affect takeup levels in the occupier markets and could, in turn curb investment activity.
Some of the extraordinary yields quoted can conceal an inherent development angle.
This can discourage some investors on the basis that Ireland looks very expensive in comparison with other locations. Some interpretations of yield fail to take into account how cost of investing simply reflects the risks an investor takes on board.
The biggest threat to the commercial property market at present is that developers fail to keep a close eye on the balance between supply and demand in specific sectors. With the exception of the new homes market, there would appear to be good balance between supply and demand but this needs to be monitored carefully in the current environment.
Opportunities Opportunities exist for Irish investors to broaden their horizons if they consider the income-producing qualities of new sectors and sub-sectors of the market which they may previously have dismissed in favour of traditional office and retail investments.
Many corporate occupiers and organisations (for whom property is not their core business) will increasingly consider the merits of undertaking joint ventures or sale and leasebacks to generate income.
With Real Estate Investment Trusts coming to the fore in the UK, there will be opportunities to launch indirect property investment products in the Irish market over the next few years.
Marie Hunt is head of research, CB Richard Ellis Ireland
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