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Yet again the question of the extent of the supply of vacant unsold properties has resurfaced. The kernel of the problem is that an accurate assessment is difficult due to the lack of quality data. This leaves a reliance on a series of ‘estimates’ that are based on assumptions whose validity is wide open to debate.

Census 2006 does not give accurate level of stock overhang

The starting point for most estimates of the current level of surplus stock is the 2006 Census. This showed that in April 2006 there were 266,322 vacant properties in the State of which just 49,789 were holiday homes. However, we believe that it is erroneous to conclude that this means that there was already a balance of 216,533 vacant properties overhanging the property market in 2006.Market dynamics do not suggest large level of overhang of excess stock in 2006The important point is that ‘vacancy’ does not equate to ‘excess stock’. The latter is a measure of only those vacant properties that could be considered to be on the market - i.e. whose owners would like to sell the property if they could. Given the state of the housing market in April 2006, with prices still increasing strongly (see accompanying chart), it seems fair to conclude that the excess stock in 2006 was likely to have been relatively small.

Underestimation of holiday homes and no account for a ‘normal’ level of vacancy

Estimates that put the size of the stock overhang (rather than the number of vacant properties) currently at somewhere around 300,000 make no adjustment for any Census underestimation of the number of holiday homes. While it would have been easy for the enumerators to identify as holiday homes any vacant properties in a holiday complex, determining the usage of any other vacant property would be far more difficult. Also, and importantly, these estimates ignore the fact that there is a ‘normal’ level of vacancy in the market. Indeed, Euroconstruct data highlight the fact that the overall vacancy rate in Ireland in 2006 (at 15%) was not that dissimilar to other European countries, even if the major holiday destinations of Spain, Italy and Portugal are excluded. It is the low level of 2nd/holiday homes vis-à-vis other vacant properties that is at odds with other European countries (as the above chart shows). This substantiates our view that Census 2006 significantly underestimated the number of holiday type homes.

Undoubted significant build in vacant stock since 2006

There has undoubtedly been a build up in unsold stock in recent years. The number of new properties completed has been considerably in excess of demand from household formation over the period. It is possible to make some stab at the extent of this using mortgage data and we estimate it at possibly some 70,000 properties. Furthermore, some of the owners of second homes no doubt now wish to sell these properties due to changed market and economic conditions. However, even allowing for a significant amount of existing stock coming on to the market, it is difficult to see the overall total of excess stock being anywhere near the 300,000 level.Click here for full report >>> housing-market-bulletin-february-2010.pdf

• While office take-up in Dublin during Q4 2009 was down on a quarterly basis at 19,812m2, letting activity for the year as a whole proved relatively healthy given the severity of the ongoing recession.
• The office development pipeline will see further falls in completions in 2010 and no new office buildings are due to complete in 2011 or 2012.
• Vacancy in the Dublin office market continued to rise, reaching 23% in Q4, but the pace of growth in availability and vacancy appears to have slowed from earlier in the year.
• A significant proportion of vacant space in the city centre is not made up of “empty office blocks”, but rather is comprised of a large portion of floors and parts-of-floors of office buildings which are being offered to let.
• There were no office investment transactions signed in Q4.
• Prime headline office rents appear to be stabilising at current levels, having declined 45% from peak.

According to the Dublin Office Market View Q4 2009 from property consultants CB Richard Ellis, take-up of 19,812m2 in the last three months of the year pushed overall Dublin office take-up for 2009 to 78,230m2.  This represents around 50% of the average annual take-up seen over the last several years. Letting activity, in terms of total square metres, fell on a quarterly basis by 20% in Q4 and fell by almost 40% compared to the same quarter of the previous year.   For the year as a whole, the 78,230m2 of take-up achieved in 2009 represents a fall in annual take-up of 54% from the nearly 169,000m2 of take-up achieved in 2008. There were 53 individual lettings in Dublin during Q4 2009, bringing the year end transaction count to 185.Patrick Koucheravy, Property Economist at CB Richard Ellis Ireland, said: “While take-up in 2009 was down by a significant level compared to previous years and the long-term average, we’re encouraged by the fact that over half of the take-up in the fourth quarter of last year – about 34,000m2 – was new take-up. That is, half of the take-up recorded in Q4 was either new entrants to the Dublin office market or expansions by occupiers already with a presence in Ireland, not relocations.  We’re also encouraged by the fact that demand is on the rise, as international occupiers looking at Dublin are taking notice of the reduced rental levels on offer.”The new report highlights that prime office rents in the capital have at this point fallen by 45% from peak and they say that the rental falls, while difficult for some in the property industry, are helping increase competitiveness for Dublin as a location for international occupiers.CB Richard Ellis said their research indicates that overall vacancy for the Dublin market moved to 23% in Q4; the total vacant office stock in the Irish capital stood at over 820,00m2 as of the end of 2009.  The disparity in vacancy between sub-markets remained obvious, however.  Most notably, vacancy in the South Suburbs fell from 14.3% to 13.7%, while vacancy in Dublin 2/4 increased from 14.1% to 17.2% in the quarter, a direct result of the bulk of Q4 2009 development completions occurring there.CB Richard Ellis said their research indicates that just under half (47.4%) of the take-up in Q4 2009 was attributed to business services tenants, while a further 26% came from lettings to computers/hi-tech tenants.  Two of the largest office lettings signed in Q4 2009 occurred in the city centre district: the letting of 1,584m2 to Audi on Merrion Road, Dublin 4 and the letting of 1,858m2 to 3 Ireland at One Clarendon Row in Dublin 2.  Nineteen other smaller lettings signed in the Dublin city centre during Q4 2009.Click here for the full report >>>offices-bulletin-q4-09.pdf

2009 was a difficult year of re-adjustment for the Dublin Office Market with a significant drop in rental and capital values and increased supply across all sectors. Weak tenant demand particularly in the first 6 months meant few deals completed and rental terms fell rapidly as tenants took advantage of the softer market conditions. By the end of 2009 the vacancy rate increased to 22.54% from 16.4% the previous year fuelled by over 100,000 sq.m of new office completions into a market that was already over supplied. There are still a number of speculative schemes under construction and due for completion in 2010 but from next year on, the supply of new space will virtually cease and the vacancy rate is expected to peak this year at around 25%.

There was a marked improvement in letting activity in the second half of the year with more transactions bringing the total take-up to 71,895 sq.m, 58% down on the previous 12 months. Prime headline rents fell consistently during the year with tougher competition for tenants and overall rents are down 40% from market highs. In certain city locations new space is available at headline rents of around €300 per sq.m with additional incentives available, which may represent an over correction as this level of return is not sustainable for prime space.

There has been a certain build up of occupier demand over the last 18 months as tenants waited for the bottom of the market before committing to space. There is a view emerging that we may be at or very close to the optimum time for tenants to acquire space in terms of value on offer and availability of high quality offices. This realisation should see a number of occupiers get active and commit to deals during 2010 to lock in value over the medium term. There were a number of domestic firms who moved in 2009 including Greencore, Irish Aviation Authority and 3 Ireland all of whom secured Grade A space on excellent terms.

Click here for the full report >>> hwbc_officereviewoutlook_jan10.pdf

According to CBRE’s latest Dublin Industrial Market View (download here >>cb-richard-ellis-q4-2009-industrial-bulletin.pdf), the Dublin industrial market made a quarterly rebound in overall take-up (sales and letting activity) during Q4 2009, with 53,000m2 of lettings and sales recorded in the capital.  This brings total take-up for 2009 to more than 133,000m2 during a year when business activity was at record lows.  The activity recorded in Q4 2009 marks not only a doubling of lettings and sales on a quarterly basis, but a doubling of letting and sales activity compared to Q4 2008.   

More than 23,000m2 of the take-up in the final three months of 2009 comprised a letting to Aer Lingus at Dublin Airport, but even if this transaction is stripped from the Q4 data transactional activity increased between the third and fourth quarters of 2009.  Lettings of industrial property accounted for 96% of overall take-up in Q4, with sales of 2,228m2 comprising the rest of industrial take-up.   Activity in both sales and lettings were focussed on the northern districts of the Dublin market, with the N2, N3 and M1/N1 transport corridors accounting for a total of 84% of transactional activity in Q4.According to Garrett McClean, Director of Industrial at CB Richard Ellis, “As we’d suspected earlier in 2009, although the N7 remains the transport corridor most in demand by industrial occupiers, a shortage of modern accomodation along that route has occupiers investigating other locations, most notably the northern districts of the Dublin market where the majority of take-up in Q4 occurred. Take-up in Q4, aided by the letting at Dublin Airport, was better than expected on both quarterly and annual bases, making 2009 as a whole a much healthier year of industrial activity that was expected a year ago.  The market remains a difficult one, but there are obviously great opportunities for tenants seeking to relocate or expand their operations.”In their annual Outlook 2010 report issued last week, CBRE said that it is difficult to envisage a strong improvement in transactional activity in the industrial sector.  The property agents said that economic indicators are improving which will ultimately stimulate demand for industrial premises but it is likely to be the latter end of 2010 before there is any discernible improvement in demand.  In the report, CB Richard Ellis said they expect demand to primarily emanate from the high-tech biopharmaceutical and R&D sectors and that over the course of the next 12 months, occupiers will continue to spend time consolidating their operations and attempting to renegotiate their leases in an effort to cut costs.

Property consultants CB Richard Ellis has just launched its annual Outlook report (which can be downloaded here cbre-outlook-2010.pdf) - a comprehensive research document outlining predictions for all sectors of the property market in 2010.The report examines the potential for performance in each sector of the commercial property market in Ireland as well as commenting on the prospects for the UK investment market over the next 12 months.The report is cautious about prospects in many sectors of the Irish property market, stating that while 2009 marked the low point for the commercial property market in Ireland, it is premature to expect a rebound in activity in the market and 2010 will be another challenging year for the sector.  In fact, the property consultants say that with sentiment and economic conditions weak and bank funding remaining severely restricted, it will likely be 2011 before conditions in the Irish property market improve to any noticeable degree.With regard to development land, the property consultants say that it is difficult to quantify the deterioration in pricing that has occurred although they say that land values in the Dublin region have declined by at least 50% from peak. In some provincial locations they say that the value of development sites has declined by as much as 90% from peak.  According to the report, development land will be the last sector of the Irish property market to emerge from the current downturn. A recovery in land will be led by a reduction in the over-supply of stock and rising capital values in various sectors which is some time away for most parts of the country.There was very little transactional activity recorded in the Irish investment market last year according to CB Richard Ellis.  However, in the latter part of 2009, investor sentiment started to improve as prime yields showed signs of stabilising and a small number of transactions began to be negotiated.  In total, the value of open-market investment transactions in the Irish market during 2009 was approximately €92 million compared to the peak in 2006 when €3.3 billion was invested domestically by Irish investors. CB Richard Ellis says that investment property values have declined 60% from peak.  According to Marie Hunt, Director of Research at CB Richard Ellis, “Although we do not expect any notable improvement in liquidity over the next 12 months, investor sentiment has improved and investment turnover in 2010 should show an improvement on last year as a result of overseas interest and the emergence of some cash buyers.  However, the volume of transactions will continue to be constrained by the lack of quality assets being offered for sale and fears around the legislative change on upward only rent reviews, which will undoubtedly deter some investors”.In relation to the ban on upward only rent reviews (which is due to be enacted by Government on February 28th 2010) and the 80% windfall tax on land rezoning, CB Richard Ellis say that these initiatives have not been fully thought through and will have huge negative implications for the property market.CB Richard Ellis is confident that 2010 will see the UK property market building on the momentum which emerged in the latter half of 2009.  Although economic fundamentals in the UK remain weak, they say that UK property is now attractively priced relative to the long-term and the returns achievable are favourable compared to other asset classes. Sterling is expected to remain weak over the course of 2010 which will further enhance the attractiveness of UK property to overseas buyers.  They point out that the current rally in the UK investment market is driven by the weight of money chasing prime assets as opposed to a recovery in the economy or occupier markets and that it remains to be seen what impact the forthcoming election is likely to have on economic activity in the UK. CBRE say that they expect Irish investors to be net sellers of real estate outside of Ireland during 2010. Over the next 12 months, they expect to see some Irish investors taking advantage of current pricing and selling assets they purchased over the last number of years in markets such as the UK, Germany, France and Belgium in order to realise gains which are primarily driven through debt amortisation, a favourable rent review or indexation uplifts over the last five years.According to the new report, while some sectors of the Irish commercial property market were effectively paralysed as a result of the scarcity of bank funding in the run-up to the rollout of NAMA last year, activity continued, albeit at a lesser pace, in the office occupier market.  In total, approximately 78,500m2 of office accommodation was let in Dublin during 2009, equating to more than 50% of the long-run average in the city. CB Richard Ellis expects similar levels of take-up to occur in Dublin during 2010.  Potential occupiers are aware that the next 12 months will afford them a limited ‘window of opportunity’ to move premises or restructure leases to take advantage of the attractive terms and conditions that are now on offer, with rents having declined approximately 45% from peak and landlords being increasingly flexible in negotiating break options, incentives and fit-out packages in order to generate and secure income. While there are some outstanding international requirements for office accommodation, CBRE expect a large proportion of transactional activity in the office sector this year to emerge from opportunistic indigenous occupiers looking to relocate to new premises. They say that prospects for provincial office markets remain weak.In commenting on the retail sector, CB Richard Ellis say that although an improvement in the Irish economy is widely expected to materialise in the second half of 2010, it is difficult to foresee any notable improvement in the retail sector until such time as the rate of unemployment stabilises and consumer sentiment improves. The low interest rate environment is currently cushioning consumers to some extent and the fear is that consumer spending has the potential to contract further when interest rates ultimately start to increase.  Following a spate of retail development in Ireland over the last decade, development activity has now essentially ground to a halt. While a number of retail schemes have ambitious expansion plans, none of these are likely to secure funding or to break ground in 2010. Most of the take-up in the retail sector this year is likely to comprise re-lettings of vacated space as opposed to lettings in new schemes.  The general consensus is that there is unlikely to be significantly more liquidity in the banking system in 2010, despite the formal adoption of NAMA.  CB Richard Ellis says that this is a concern in an industry where retailers are reliant on working capital being available to enable them to invest in their businesses and ensure their survival until such time as consumer sentiment improves. CB Richard Ellis says that retail rents have declined by approximately 30% from peak.The property consultants are least confident about prospects for the development land and hotels & licensed sectors of the property market in 2010. Indeed, they say that only two hotels sold in Ireland in 2009.  The value of these sales equated to €6.5 million compared to the peak of the market in 2006 when the value of the hotel sector was over €1 billion. Similarly only four pubs sold in Dublin in 2009. While waiting for NAMA and in an effort not to crystallise further losses, there has been a general reluctance to make strategic decisions on insolvent hotels. A number of stop-gap measures have been put in place to enable hotels to continue trading despite the fact that some of these properties have no realistic prospect of recovery. However, CB Richard Ellis says that we are fast approaching a critical juncture where, for the good of the sector generally, difficult decisions will have to be made. The property consultants say that there is unfortunately going to be more consolidation in the licensed market in 2010. Many of the pubs that got into difficulty in 2009 had paid large premiums for their premises or key money for leases in recent years. While CB Richard Ellis believes that there will be an increased focus on leasing in 2010, this will mainly comprise short-term lettings at sustainable rents based on the current turnover and business potential of licensed premises.Conditions in the Northern Ireland property market are also difficult according to CB Richard Ellis. Although the weakness of Sterling remains a major attraction, with the rate of VAT having reverted to 17.5% this year and excise duties on alcohol reduced in the Republic in Budget 2010, there is likely to be some deterioration in retail sales activity in the North this year.According to Patrick Koucheravy, Property Economist at CB Richard Ellis,  “Although Ireland has a long way to go to recover fully from this recession, the ongoing restoration of competitiveness and Ireland’s position as an English-speaking, low-tax location for business is still attractive to expanding foreign business and international investors.  While it will be a slow and incremental process, we believe we’ll see the first signs of economic recovery in Ireland during 2010”.Speaking at the launch of the Outlook 2009 report, Guy Hollis, Managing Director at CB Richard Ellis said, “It would be premature to say that the Irish property market is likely to experience a rebound in 2010 but there are certainly signs that sentiment is slowly improving.  We firmly believe that from the perspective of the commercial property market north and south, 2010 will be better than 2009. However, the next 12 months are going to be extremely challenging from both a global and domestic perspective. The reality is that it is going to be 2011 before we see any discernable turnaround in performance. Ireland has improved its competitive position in the last year as a result of wage adjustments in both the public and private sectors and reductions in the cost of rent and other overheads.  This coupled with the favourable corporate tax regime should boost our attractiveness as an inward investment destination in 2010 which will ultimately benefit the property market”.

Full report available to download as pdf here >>>  AIB Budget 2010 summary

Today, the Irish Finance Minister delivered another tough budget which should achieve his main aim of stabilising the rapidly rising fiscal deficit through budgetary savings of €4 billion next year. The budget targets look realistic as they are based on fairly downbeat economic forecasts, with GDP projected to contract by a further 1.3% in 2010.

The strong corrective measures in today’s budget include unpopular decisions to cut public sector pay and social welfare benefits. However, these are needed given the speed and scale of the deterioration in the public finances. While additional corrective measures will be required over the next few years, today’s budget is another key step towards restoring stability to the public finances.

Key Points

The main aim of the 2010 budget is to stabilise the rapidly rising budget deficit. This required budgetary savings of €4 billion, which are to be achieved via expenditure cuts. The budget also saw the introduction of a carbon tax, offset by cuts in other indirect taxes.

The main focus of the budget, then, is on spending cutbacks, with reductions in public sector pay, social welfare and capital spending. Overall, gross voted current spending will fall by 1.8% next year, with gross voted capital spending declining by 10.7%.

The budgetary savings of €4 billion announced today equate to some 2.5% of GDP. This follows the corrective fiscal measures implemented in 2009, totalling €8 billion or 4.7% of GDP. It implies a continuing, though less contractionary fiscal stance next year.

Nonetheless, the government is still facing a large general budget deficit of €18.7 billion in 2010, or 11.6% of GDP, below the level of €19.3 billion (11.7% of GDP) in 2009.

The economic backdrop remains difficult, with the Dept of Finance forecasting that GDP will decline by 1.3% in 2010 after falls of 7.5% and 3.0% in 2009 and 2008, respectively.

The Dept of Finance sees a return to growth thereafter, with GDP forecast to rise by an average of around 4% per annum in the 2011-2014 period.

The government has indicated that further corrective fiscal measures will be required post 2010 to reduce the budget deficit to below 3% of GDP by 2014. However, it is not expected that these will need to be anywhere near the same scale as in 2009 and 2010.

Ireland’s gross public debt/GDP ratio is forecast to climb to 78% next year from 65% in 2009 and 44% in 2008. It is seen as peaking in 2012 at 84% of GDP.

However, in net terms the debt ratio is significantly lower, at 39% in 2009 and 51% in 2010, allowing for the exceptionally large cash balances held by the authorities and the value of the National Pension Reserve Fund.

Click here for the full report >>> CBRE Q2 2009 Office Market View

According to the latest Dublin Office Market View publication from property consultants CB Richard Ellis for Q3 2009, it appears that Q1 2009 may have represented the low point in the current downturn for the Dublin office sector, with a mere 10,000m2 of office lettings completed in that three month period, which coincidentally also represented the worst quarterly performance for the Irish economy. In the last two quarters, CBRE say that activity in the Dublin office market has improved quarter-on-quarter and a large number of small lettings have been agreed, albeit at rental levels and terms and conditions that are vastly different to those achieved during the peak of the market in 2006 and 2007.  The latest research shows that a total of 23,242m2 of office lettings were completed in Dublin during Q2 and a slightly better 24,892m2 of office lettings were signed in Q3,  bringing total take-up in the first nine months of the year in the city to approximately 58,134m2. This compares to take-up of approximately 135,000m2 in the first nine months of 2008, demonstrating the sharp decline in take-up year-on-year with virtually no large transactions being completed during 2009. The almost 25,000m2 of lettings concluded in the last three month period comprised 57 separate transactions which CBRE say is encouraging.  However, over 60% of lettings signed during Q3 2009 extended to less than 929m2 in size.

The new report highlights that prime office rents in the capital have at this point fallen by as much as 40% from peak and while they say that the pace of rental decline in the Dublin market has now slowed considerably, the property consultants believe that further rental pressures still remain, particularly for secondary properties. The city centre accounted for almost half of the lettings concluded in the Dublin office market during Q3 2009. A further 22% of office lettings completed in the third quarter were located in the south suburbs while a further 12% were located in the north suburbs of the capital.

CB Richard Ellis says that there is understandably much discussion about the fact that almost 744,000m2 or just over one fifth of the office stock in Ireland’s capital city is vacant at present.  However, according to CBRE, while the vacancy rate in Dublin has certainly increased significantly year-on-year and now stands at approximately 22% compared to its previous 10 year average of 12%, it is important to point out that

•    the total size of the Dublin market at 3.45 million m2 is relatively small compared to some of the other international markets and
•    a large proportion of the office accommodation that is currently vacant in Dublin is poor quality or located in secondary or suburban locations that is unsuitable for many new requirements. In fact, CBRE research indicates that only 11% of the 744,000 m2 of office accommodation in the capital that is currently listed as available to rent, was built since 2000 with almost 90% of the vacant office stock built prior to that.
•    a large proportion of the new office stock that was originally envisaged to come on stream in Dublin in 2010 and 2011 has now been put on hold
•    approximately 34% of the 85,000m2 of new office buildings due to complete in Dublin in 2010 are already pre-let
•    the main contributor to rising vacancy is the quantum of companies putting excess or old office accommodation onto the market as opposed to new office buildings completing

According to CBRE, there was quite an even split between sectors signing office leases during Q3 2009 with the financial services and consumer services and leisure sectors accounting for the largest proportions of take-up in Dublin in the quarter, at 22% and 19% respectively.  Interestingly, the public sector signed no office lettings in the Dublin office market during Q3 2009. Despite the lack of transactional evidence for office investments, CBRE believe that prime office yields in Ireland have essentially now stabilised at approximately 7.5% over recent quarters. This level of yield is above the 15 year average yield for this sector which according to the Investment Property Databank (IPD) is 6.25%. When compared to current five year swap rates, there is a notable gap between the yield and the cost of funding, even when lending margins are taken into account. This yield gap is encouraging investors in the current climate, particularly international investors who are focussing attention on markets such as Dublin which have experienced very significant falls in property value from peak to trough.

Lisney’s autumn update on the development land market concludes that with activity in the development land market very slow, protecting the value of parcels of land is now critical for developers. Yet again, the hopes of some activity returning in Q4 have now receded and 2010 is the next focus of attention.

The other main points to note are:

• The Government legislation setting up NAMA will be voted on by Dail Eireann during the course of October. It is hoped that following adoption it will bring over time a return to bank lending in the development sector.
• There have been few publically advertised development land opportunities during 2009.
• Housing completion estimates for 2009 at less that 30,000 units.
• For market activity to improve, the market needs more favourable credit conditions.
• The review of many city & town development plans is currently underway and provides opportunities for owners to make submissions on the future uses of sites.

The full report can be downloaded here >>> lisney-development-land-update-autumn-2009.PDF

In the second quarter of 2009, planning permissions were granted for 12,831 dwelling units, compared with 19,942 units for the same period in 2008, a decrease of 35.7%.

The second quarter figures also show that:

• Planning Permissionswere granted for 7,739 houses in the second quarter of 2009 and 12,598 in the second quarter of 2008, a decrease of 38.6%.
• Planning permissions were granted for 5,092 apartment units, compared with 7,344 units for the same period in 2008, a decrease of 30.7%.
• One-off houses accounted for 17.4% of all new dwelling units granted planning permission in this quarter.
• The total number of planning permissions granted for all developments was 6,756. This compares with 11,215 in the second quarter of 2008, a decrease of 39.8%.
• Total floor area planned was 2.9 million square metres in the second quarter of 2009. Of this, 60.3% was for new dwellings, 30% for other new constructions and 9.7%for extensions. The total floor area planned decreased by 39.1% in comparison with the same quarter of 2008.
• Planning Permissions for new buildings for Agriculture decreased to 181 this quarter. This compares to 442 permissions in the same quarter of 2008.

Download full report in pdf by clicking here >>> planning-permissions-quarter-2-2009-cso.PDF