Fergus O’Farrell: Commercial property prospects for 2016

What would you like to see happening in the commercial property market next year? It is important for the general commercial investment market that we maintain a reasonable level of stock turnover in order to display to large international investors, who have been very important to the recovery of the property sector worldwide, that this market continues to have significant liquidity.

The ability to enter and exit properties of scale, which has been the case in the last three years, is an important determining factor for investment into Ireland. With some of the biggest vendors over the last two to three years coming close to completing their exit from the market – for example Nama and various banks – we see a contraction in turnover for 2016. However, with the likelihood of re-sales from a number of the early investors into the cycle, turnover levels should still reach a healthy €2.5 billion.

Where are the best investment opportunities at this stage? Opportunities continue to exist in all sectors of the market. For example, in the multi-family and office sectors, we see rental growth on foot of the demand /supply imbalance on the occupational side. There is significant recovery in the retail sector on the back of employment growth, which, from our research, is the single, most important factor determining an improvement in retail rents. The retail investment market has probably lagged somewhat the recovery of the office and residential sectors, because the rental growth recovery has been a little slower. However, we have seen an acceleration of this in 2015 and we believe this will continue into 2016 – buoyed by continued employment growth and strong GNP performance.

How long more do you expect the sales boom to continue? I would probably classify it more as a trading boom rather than a sales boom. We have long moved away from distressed sales, hence vendors are benefitting from increased prices and purchasers from excellent opportunities. We see the trading boom continuing into 2016 buoyed by several factors: rental growth across all sectors, the continued availability of capital looking to access real estate, and that Ireland is now firmly on the international landscape for a cross section of core and value add investors. There will be tapering off in turnover levels in 2016; we expect turnover to reach around the €2.5 billion mark, down from €3.5 billion forecasted for 2015.

What changes are we likely to see in the market over the next 24 months? The most significant change is going to be the profile of vendors. We see the vendor profile changing from bank deleveraging to resales from the private equity sector, which was most prolific during this cycle. This will require an increase in activity from the international and domestic core, and core plus sector, which is quite healthy at present. There is a significant level of stock sitting with the private equity sector. In some cases they will be hitting their 5-year exit time-frames over the next couple of years. These are not the only exit options for those investors who will look at various types of stock listings as an alternative exit mechanism. Fergus O'Farrell is director of investments at Savills