What effects will Brexit and the proposed tax changes have on the commercial property market?
For 2017, we have to look at the wider geopolitical position of Europe and the US, as well as Brexit and the proposed tax changes for investment funds - which have created a level of uncertainty. There are elections in Italy, Germany and France which have the potential to further undermine the wider EU project.
Markets are of course very adaptable, they will settle as they did post Brexit, and post the election of Donald Trump. However, market resilience will be tested by these events and their combined effect uncertainty which investors do not like.
In principle, the proposal to reduce US corporation tax rates could also affect us by dampening US investment here. However any changes are likely to occur on a phased basis over years, and given the deep roots that many US multinational already have in Ireland, any impact is more likely to be a slowdown of the capital inflow rather than an outflow per se.
Changes to the domestic tax regime pose a different issue. First is the potential effect on pricing. Second is the retrospective nature of the tax, which has negatively affected our position as an investment location to a number of international investors.
We need time to see how this effects the market.
Is there sufficient bank funding available to allow the owners of large portfolios to offload individual properties next year?
In the current cycle, the availability of finance is probably at its most liquid. Domestic based banks have been very active in the last year and we expect that to continue into 2017. At the larger prime end or portfolio end, there is still healthy activity from the major international lenders which has led to a significant compression in margins from where we were 2 years ago. This latter trend is a good barometer for competition in the sector.
We do not see a large scale disposal by portfolio buyers who have acquired assets over the last 5 years. There is still rental growth to be obtained in all sectors of the market, therefore some selective price appreciation is anticipated in certain subsectors of the market.
We believe there will be some profit taking on a selective and opportunistic basis and therefore there is sufficient funding available to meet this.
Where are the best investment opportunities at this stage?
The best investment opportunities really depend on the individual investor’s requirements. The prime core office and retail market, though at yields in the 4%’s still looks attractive relative to other major European cities and prevailing bond yields.
The shortage of supply in the office and residential sectors, combined with the shortage of development finance, means there are still very good opportunities for those who can find solid long income investments. We believe from our office research for example, that the pipeline of CBD offices, though high on a headline basis, will not be delivered due to constraints in speculative development finance. Also looking at the pipeline for delivery by 2018, 47% of this has already been pre-let. Therefore I would still be very positive on city centre offices.
One thing to watch out for in 2017?
I think 2017 will be a defining year for Europe. The moves to the far right and far left - which have come from years of austerity and a perceived widening of the class divide - has the potential to destabilise world economies at a time when a sustained period of growth could be achieved following one of the deepest recessions this generation will have lived through. The market has proved very resilient in the face of these political disturbances to date. The question is how much more uncertainly can it take.
Fergus O’Farrell is director of investments at Savills
