Warning of commercial property sector bubble

Warning signals are “flashing” that the commercial property sector is nearing a “bubble stage” situation that could lead to a fresh crisis for the country in just two years.

A leading expert in the area made the claim to the Oireachtas banking inquiry hearing yesterday, saying it is imperative the concerns are listened to now if future problems are to be prevented.

Speaking to the cross-party committee in its final “context” stage discussion, John Moran, managing director of Jones Lang LaSalle Ireland, said it is clear the commercial property sector is in danger of overheating.

He said prime office rents are now at 2005 levels of €50 per square foot and will not peak until 2017, with the situation and the difficulty in finding “affordable residential accommodation” making it problematic to entice companies to Ireland.

When questioned by inquiry chair Ciarán Lynch about whether he is “saying a warning signal is flashing here at the moment”, Mr Moran said “yes”, before telling Fine Gael TD Kieran O’Donnell a “bubble stage” situation is “quite possibly” on the horizon.

“At the moment the occupier market support and the general economic fundamental support are reasonably performing for the property market. Should those change, should there be an economic shock, should there be significantly increased interest rates for example, values will decline.

“Are we at a bubble stage? Not just yet but am I concerned that we might be getting there? Quite possibly.”

Mr Moran outlined the rapid growth in commercial property during the Celtic Tiger, which saw almost €8bn pumped into the market between 2004 and 2008, including half in 2006 alone.

Mr Moran said his company encouraged its customers to sell as early as 2005 as there were signs the market was overheating, but that it expected a 5%-15% drop in prices not the 70% commercial and 90% development land falls which occurred.

He said among the reasons for the commercial retail boom years surge, when it accounted for 25% of GDP instead of a more sensible 8%-9%, was an “increase in personal guarantees” for developers in 2006 and 2007, which resulted in “lending based on presumed net worth, not underlying securities”.

He said “incoherent” town planning which saw communities attempting to “out- develop” each other and poorly thought through government tax incentives for developments in “obscure locations” also contributed to the subsequent crash.

“If you drive around parts of the midlands, parts of the west, there are developments there that have no reason to be there other than tax incentives. That’s a political question,” he said.

Mr Moran said a repeat of such problems could be prevented by setting up a national commercial property register so safe lending and sensible geographical spread on developments can be guaranteed.

However, when asked if retail agents like him, who he believes are needed for such a group, played a role in the Celtic Tiger commercial property bubble with specific reference to the €412m glass bottle site sale that Jones Lang LaSalle oversaw in 2006, Mr Moran disagreed, as retail agents do not have “a moral obligation to the buyer”.

The inquiry will meet with Nama and AIB officials on April 22 and 23.

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