INVESTMENT MARKET:ASK ANY property advisor what will revive Ireland's moribund investment market and the reply will invariably be: banks need to start lending again, writes Gretchen Friemann.
Almost all of the major agencies identify this as a key problem and anecdotes abound in the industry of financial institutions pulling down the shutters on investors as a rigid conservatism replaces the liberal lending policy of the boom years.
Worst hit is the development land sector where liquidity has virtually evaporated. Last weekend developer Owen O'Callaghan described this corner of the market as "dead" and added his voice to a growing chorus of doomsayers with the prediction that several developers and builders will go to the wall over the coming months.
In an interview with the Sunday Tribune, he attributed the coming mayhem to years of indiscriminate lending by banks.
O'Callaghan's comments were preceded by a warning from Jones Lang LaSalle's company director, John Moran, that forced sales are on the cards unless there is a significant adjustment in prices or an improvement in the availability and cost of credit.
Although his stark assessment last week articulated what has been casual talk within the industry for some time, few at that level have, up until now, been willing to speak openly about the grim prospects confronting many over-leveraged investors and their financiers.
Yet the banking community continues to remain tight-lipped. Publicly all the institutions insist they are very much open for business. But in private, or off-the-record conversations, the story is rather different. As the head of lending at one major bank acknowledged: "We are pulling down the shutters by stealth," referring to the prohibitively high borrowing costs now on the table.
He pointed out that interbank lending rates have risen by 25 to 50 basis points leading to an equivalent move upwards in banking margins. "That means investors are now borrowing at 1 per cent more than they were at this time last year, which is a substantial increase."
He also predicted the downward spiral would continue for at least another 18 months. "This is a three-year problem. In my view it started around 18 months ago and I think it's got another 18 months to run, which would take us until the end of 2009."
He added that even for "very high quality transactions" the margins and loan-to-value rates "are no longer there. Confidence is shot, basically, and the economic situation looks like it's deteriorating. We're seeing a lot of job losses and there seems to be a constant stream of bad news. Look at the collapse of Habitat and the poor results recently from Grafton Group. We need to see an improvement in the business environment; that's what matters. The banks just puff around the edges."
Yet while the number of transactions continues to reduce in the domestic market, the appetite from investors and financiers for the UK market appears to be on the increase.
Last week Irish investors, backed by Davy Private Clients and its UK investment partners Draco, bought an office and retail block in London's Covent Garden for £56.55 million (€71.438 million) at an initial yield of 5.75 per cent. The 5,574sq m (60,000sq ft) block, known as the Seven Dials Warehouse, houses 3,437sq m (37,000sq ft) of offices as well as the restaurant chain Belgo and the men and womens' clothing company, Urban Outfitters.
The belief that UK property has over-corrected in some areas has attracted a swarm of bargain hunters in recent months. And one investment specialist pointed out that "Irish banks are willing to finance deals in the UK market because they think there is value there. They're not funding domestic deals because they believe the market is still over-priced."
But that view doesn't square with Bank of Ireland Private Banking's more upbeat assessment. According to the division's director of lending, Andrew Fitzpatrick, Irish commercial property remains in strong health and he claimed any problems are chiefly confined to the development land sector and provincial retailing.
Rather than focus on tighter funding conditions, he singled out investor confidence as the root of the market malaise. "Investors are sitting on their hands at the moment. It's not the case that we are turning customers away. We are very much open for business. The problem is confidence. Investors don't believe there are opportunities in the current market."
Although he acknowledged the sector has "slowed down" he insisted that asset quality is still strong in prime areas.
However many in the industry are increasingly worried that if there is no let-up in the stalemate that has gripped the market in recent months, even values on prime located properties may become vulnerable.
As one expert pointed out: "At some point investment activity will return. But the longer the market stays in this state, with buyers and vendors at a standoff, the more likely it is that prices will fall significantly."
