Getting back to normal

NAMA has to engage with the market in 2012 and funding for buyers must improve, writes Peter O’Flynn

LAST year I predicted here that there would be opportunities in the market and NAMA would start disposing of its Irish portfolio: unfortunately my prediction was not fulfilled.

It may not be politically correct, and is certainly not a media friendly message to portray, but Ireland is in need of a functioning property market which will assist in the national economic recovery. We will never go back to the poorly managed position where such a high percentage of public funds was derived from the construction industry, but the pendulum has now swung in the opposite direction which is equally unhealthy from an economic stand point. The reality is a functioning property industry encourages construction and this generates employment.

Transactions in the commercial property sector have all been at a standstill since 2008 with the lack of confidence coinciding with the Government’s (two governments) lack of action towards the proposed changes to the retrospective upward only rent reviews.

The biggest challenge within the sector is that the property industry is now almost totally dependent on government and, by extension, NAMA. With a directive from government to continue the disposal of Irish property and slash €7.5 billion off its €13bn debt by the end of 2013, NAMA has to engage with the market in 2012. NAMA CEO Brendan McDonagh publicly stated they would not be disposing of any assets at more then a 10% discount on their purchase price in November 2009. Realistically, prices in real terms have fallen 20% since that date so we can see this as an obvious problem for the market place.

The Government in some of their budget decisions have obviously tried to add some stimulus to the market place and as an essential industry these have generally been welcomed.

The political games had to be played on the rent review issue, but the correct decision has finally been made. Any international investment funds looking at Ireland were never going to invest until this issue was off the table. The other measures introduced, including the reduction in stamp duty, capital gains tax incentives and mortgage interest reliefs, should assist in the re-engagement of the Irish property market.

We are now close, if not at the bottom of the market, with all property values down between 50%-60% across the board which, in addition to the other stimulus, should look attractive to investors.

The principal difficulty that will remain is funding. NAMA will assist in some of the larger acquisitions, but unless we have a healthy and active banking system in place, the funding will remain a problem going forward. Understanding that Irish bank balances are still over-invested in property, you can see their reluctance to reengage at any significant level.

The introduction of Real Estate Investment Trusts (REITS), part of the Fine Gael election manifesto, would certainly help in allowing investors getting involved at a lower level of investment and bring capital to the property market outside the standard banking system. These are common in many countries around Europe and the US and are professional managed funds which can form part of an investment portfolio, working in parallel with more traditional pension funds. Indeed many pension funds invest in REITS as part of their overall portfolios. Unless we can look at alternatives such as REITS, funding will remain one of the major obstacles.

The main ingredients for recovery of both the commercial and residential property sectors will continue to be affordability, funding, demand and continued population growth. For instance, in the 3rd generation office market in Cork city centre, we are already beginning to see a shortage in terms of supply, however, construction costs are now substantially higher then prevailing prices and this will inevitability lead to some price increases in the long term. The Foreign Direct Investment (FDI) remains critically important to Ireland in terms of the export market and attracting new employment driven industry. The Government, IDA, Enterprise Boards and local interests remain active in trying to attract new FDI to their specific regions.

One element of this that is starting to become a problem is the provision of good quality 3rd generation office space being available for these enquiries when they arise. The lead in period tends to be between 3-6 months and if product is not in place for viewing at the initial stage it is highly unlikely the location will remain on the list of possibilities. In an industry where effective development has all but ceased, this will become a real issue going forward for Ireland as an attractive FDI location. Construction activity has all but ceased in both the industrial and office markets in Cork, Galway and Limerick. The only active site in Cork is City Gate in Mahon where 200,000 sq ft of offices is currently under construction, with a third of this already accounted for by Quest Computing, the leading management information system specialists.

In the Cork market, levels of uptake in office space for 2011 will be in the region of 12,000 sq m. However, with a number of strong enquiries currently in the market we would expect this to increase to over 15,000 sq m for 2012.

The industrial market remains weak and although the uptake for 2011 will be in the region of 15,000 sq m, rents and capital values have plummeted sharply from their peak level. Unfortunately, 2012 will remain difficult, but there will certainly be opportunities in this market as any product for sale in this sector will inevitability be at competitive levels.

The retail market, the most vocal in terms of its opposite to the upward only rent reviews, has actually preformed reasonably well in the Cork market, and although there are vacancies in secondary areas, the prime locations have remained popular, albeit at much reduced rents. Although relationships between landlord and tenants will have been tested over the last few years, the reality is if landlords are not prepared to be reasonable in terms of their negotiations with tenants, they will end up having empty units, which is the last thing required in the current market. The German discounters, Aldi and Lidl, and Tesco have remained active throughout 2011 and the big story for the retail market for 2011 was the acquisition of Superquinn by the Musgrave Group.

A mood of cautious optimism is now prevailing in commercial property markets. The budget has certainly helped in terms of providing some stimulus to investors and NAMA have clearly directed their borrowers to place portions of their portfolios for sale on the market in 2012. The challenge to the industry will be to find the purchasers with the financial backing in place.

- Peter O’Flynn is a director of DTZ Sherry FitzGerald based in Cork

Picture: Grape of Wrath: Like Ireland, Greece has its own NAMA — only in its case, it is a sweet red wine, popular on the island of Santorini. Ironically, here in Ireland, the best blog on NAMA is called — of all things — nama wine lake Picture: Denis Scannell

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