Fears about overheating in the Irish commercial property market seem to be well wide of the mark - there are signs that long memories and a history of burnt fingers are managing to keep things on an even keel.
This was broadly the message to investors at the ICC Bank's "Boom or Bust" property conference. Delegates heard the industrial property market is showing signs it has finally "grown-up" and developers have learned from the mistakes of previous boom times, according to Bill Tuite, partner at Jones Lang Wootton.
Concerns about overheating in the commercial sector, he said, are currently unfounded and represent a view that is "too nervous by half".
Mr Tuite said he believed the market is neither under performing nor overheating because there is no justification for any more heat that currently exists. "What we are seeing is a very mature approach to the change in the economic scene - an informed and considered response without the building frenzy that was seen in earlier boom times." While this sector of the market has been the slowest to respond to the strong economic growth, the available supply is now more than adequate to meet demand, he said. In the office sector, long memories also seem to have restrained the level of speculative activity. Richard Barrett of Treasury Holdings said "previously burnt fingers" seemed to suggest there was unlikely to be any upsurge in speculative building until office rents are well over £20 per square foot. He predicted the industry will have to get used to longer term leases, with extended breaks, long notice periods and heavy penalties. "We could be on the threshold of 25-year leases, with 15thyear breaks, 12 months' notice and a month's rent penalty."
Mr Barrett warned that the combination of rental growth and capital growth could prove to be "lethal and irresistible" for investors. Given the tight office space supply, it seems inevitable rents will advance quite strongly which will allow office developers to outbid other developers for sites. In the retail sector, the biggest concern for traders and property investors is whether there will be sufficient opportunities for new development to meet demand. The growing number of British multiples entering the market is also likely to push up prices, according to Superquin chairman, Vincent O'Doherty.
The opportunities available are very limited, mainly because of the public planning policies, he said. "The focus of public planning policy and of most development plans on regenerating the town centre have been highly successful in recent years. Assisted by schemes of designation, it has led to substantial commercial and residential development in most Irish towns, and this task of rebuilding town centres is now largely complete, with the remaining opportunities being quite limited."
Mr O'Doherty believes there is now a need for a more "user-friendly" policy to expand retail outlets to meet consumer demand in locations that better suit car use and ease traffic congestion in town centres.
"This is not a criticism of present development plans; like almost every public and private policy document in Ireland, they have not adjusted to the extraordinary changes in Irish life in the last few years." Mr O'Doherty said the opportunity for new retail investment is not a matter of public demand by consumers or retailers but is almost entirely determined by planning policies that reflect the regeneration of town centres.
"We need a new understanding among local authority officials, local councillors, retailers and investors that planning policy, like so many other aspects of Irish life, needs to adjust to the new demands of the market."
Much investment will go into upgrading and expansion of existing space, he said. The effects of the British invasion on the market, are already clear, with demand for space well exceeding supply and site prices, lease premiums and rental levels are all rising sharply, he said. "This is already affecting Irish retailers, and while the long-term consequences for the Irish retailer are unclear, such weight of new competition must create some structural change".
He added that the Irish distribution system will be forced to undergo a radical change, a process long overdue but one which will also be very painful. Meanwhile, Leo Roche, ICC property lending manager, highlighted the emerging opportunities for Irish investors and developers in the British property market.
The British property market offers Irish investors higher returns, with property values still relatively low, he said. At the moment, opportunities in the British market suggest a differential of up to 2 per cent in terms of yields, he said. "For some, the current experience is a short-term phenomenon but for others, I suspect, it is a once and for all broadening of horizons" according to Mr Roche.
To date, most Irish investors have been focusing on the residential market, where returns have outperformed the Irish market, while activity in the industrial sector has been slow. Most of the investment focus has been confined to Britain's main cities, with the size of transactions ranging from between £10 million to £150 million. "Many commentators would feel that the cataclysmic property collapse in the UK created a property market offering exceptional value for money. If the knock-down bargains are now gone, I would hold to the view that there is still good value in the UK market place," he said.
