by Ian French
The Irish property market has staged a major comeback in the last 12 months, while the economy is now in better shape than it has been for many years. Inflation is the lowest in Europe at 3%, there is currently a balance of payments surplus of I£600m and interest rates are 4% to 5% below UK levels.
Investment in property has increased dramatically and the value of commercial investments sold in 1988 increased from I£34m to I£90m. There has been a large inflow of funds, both from Europe and the UK and about 50% of the commercial investments sold last year were to UK investors, while a number of key commercial development sites have been purchased by UK developers.
Trafalgar House, for example, purchased a 3-acre site in Dublin’s prime retail pitch, Henry Street/Mary Street, which they intend to develop as a I£35m shopping centre.
Apart from the return of confidence in the economy generally the resurgence of interest in property has been aided by a number of factors. Property values are at a low base compared with the UK and other parts of Europe and look attractive against other forms of investment. Within the market itself very little new development is taking place and the stock of prime unoccupied space is at a low level. Rents and values in the office and industrial sectors were below replacement cost and, with shortages developing, values are rising to a level where redevelopment is viable.
The impact of all this on the property market was a strong upward movement in the price of investments, particularly secondary investments, which increased by about 20%; prime development sites, which rose by 50% to 100%; and top-of-the-market houses in the fashionable areas of Dublin, which increased by 30% to 50%.
In the office sector rents are in the process of taking a quantum leap from I£10 to I£15 per sq ft, the latter figure reflecting the economic cost of development. Opportunities are now presenting themselves for office development to satisfy an increased demand that will occur as the economy continues to move forward.
On the retail front there has been a steady growth over the years in retail rents in Dublin’s two prime retail streets, Grafton Street and Henry Street, where rents now stand at I£100 per sq ft (on a 20 ft zone A). Provincial shops and good shopping centres have also performed well, with rents in the best Dublin centres starting at around £30 per sq ft. With the improvement in the economy and an increase in retail sales volume, there is likely to be a continued improvement in rental levels.
The industrial market has been the last to recover, but, with the available stock of good premises now virtually eliminated, rents are moving up from the historic level of I£2.50 per sq ft to I£3.50 to I£4 per sq ft and development of new space is about to commence. Again, with the recovery in the economy, continued growth in the future is likely.
As I have said, investment yields are attractive compared with UK and many other EC countries. With rental growth ranging from 10% to 20% this year and total returns varying from 20% to 30%, investors will continue to be drawn into the market with the result that yields are likely to harden further. Shops, currently at 5.25% to 5.5%, are likely to fall this year to 5%, with offices hardening from 6.5% to 6% and industrial from 9.25%/9.5% to 8.5%.
