Reasons to be cheerful, even about the property business

Tuesday, August 17, 2010

Interest rates set to rise; unemployment rife across all sectors; wages falling; companies going out of business; fears of a double-dip recession in the US; crippling losses. Reading the newspapers and watching the news has become a struggle for most people. How much bad news can we take?

It's very difficult to see through the fog and even more difficult to be positive about our economy in general and our property market in particular.

Property is, however an optimistic industry by nature and we are beginning to see some faint threads of light. I think it may be the end of the tunnel (albeit a long way away) rather than an oncoming train.

We anticipate an increase in activity in the second half of the year, with both Nama and the banks likely to initiate sales. An increase in activity will be good for the market, setting a benchmark for prices and encouraging some of the domestic investors back. With values improving, there are likely to be increased inflows into property funds, particularly given the strong income returns on offer. The development land market has been non-existent for the past 18 months. Several factors contributed to this, namely lack of consumer demand, unavailability of finance and uncertainty about the impact of Nama.

Now that Nama has begun to take over the first tranches of loans from the participating banks, we are finally witnessing some activity in the marketplace. Also, many of the non-Nama banks have become more proactive in a bid to limit their exposure to longer-term speculative assets and some of these are being offered to the market.

Current market activity is mainly confined to agricultural land, where the perceived "hope value" has long since been dimished and its realisable value is now in its existing use. Receivers are being put in place by many of the banks and assets being sold by this means are keenly sought after as prospective purchasers feel that real value is on offer. The lack of bank funding is still the major stumbling block and the old adage of "cash is king" has never been more pertinent.

In the office market, while the vacancy levels are very high at 23% take-up this year should reach one million square feet, 20% better than last year. Rents have dropped very significantly - over 50% in some cases - but there is a view that they are now beginning to stabilise.

There is demand from occupiers with enquiries in the market for over two million square feet. Occupiers are capitalising on the weak market to secure deals at levels below which it is economic to develop the buildings. They are getting lease flexibility and inducement packages that they could only have dreamed of 24 months ago.

Optimism must be cautiously judged and scrutinised but we must accept the realities. Life moves on, buyers get married, have children, split up or trade down, and these are fundamental requirements for property acquisitions.

In summary, while all markets will remain under pressure for the rest of the year and interest rates and unemployment will both continue to rise, the acceptance by vendors and banks of new value levels will encourage those with cash to look for bargains that will be offered over the next six to 12 months.

Extract of article by Declan O'Reilly in the Business Section of the Sunday Tribune, 15th August 2010