13/5/15: Dublin Commercial Property Market 1Q: No Fireworks, yet...

CBRE's commercial property report for 1Q 2015 is worth reading. If only for the surprising sub-trends that go largely unnoticed in the overall frothy markets.

Let's start with the summary: "Office take-up in Dublin during Q1 2015 reached 38,359m2 in 64 individual lettings." And, "the highest number of lettings in a quarter since Q1 2008".

So we have a handy chart:

Do tell me this is somehow a sign of 'strong' performance - 1Q 2015 lettings are lower than 1Q 2013 and 1Q 2014.

"15 of the 64 transactions signed in Q1 were to US companies with a further 39 lettings to Irish companies"

Which is good, because up until recently, main new signees were MNCs and Irish public sector. But… "There were no large lettings of over 4,645m2 (50,000 sq. ft.) completed in Q1." Wait, there were no large lettings completed in 4Q 2015 either, as I recall. Which means no large lettings in at least 6 months.

"62% of office take-up in Q1 occurred in Dublin City Centre" which is lower than in 1Q 2014, but higher than in 1Q 2013. Which suggests no clear trend in terms of pick up outside Dublin City Centre. Actually, ex-Dublin City Centre, lettings completed are the lowest for 1Q period compared to 2013 and 2014.

"The overall rate of vacancy fell to 11.27% down from 11.84% at the end of 2014. The Grade A vacancy rate in Dublin 2/4 at the end of Q1 2015 was 1.78%." And "prime office yields now 4.75%". Which suggests that while the prime market is clearly over-heating, secondary market is not.

"2 of the ten largest lettings completed in Dublin during Q1 were expansions, while 5 were relocations and 3 were lettings to new entrants." Which is an improvement on 4Q 2014 when there were no new entrants at all.

So I dare say there is not that much of a 'revival' going on, compared to where we are relative to the pre-crisis activity. It is probably more accurate to describe 1Q 2015 as steady, gradual and potentially risky recovery. Cautious, except when it comes to pricing Grade A prime location properties - the trophy treasure of MNCs and Public Sector and Semi-States.

5/6/2014: Irish Commercial Property Values Forward...

Lost decade in Irish non-residential property? 

Based on IPD quarterly index, here is an exercise in basic forecasting (take it as just a stab in the dark - things can go all over the shop in a small economy, like Ireland) for capital values returns for 4 asset classes of Irish non-residential property.

The forecast is based on 'better case' scenario that assumes rates of growth from Q2 2014 on that reflect:

• Last 3 quarters growth rates in Retail, Office and All Property indices, which are respectively: Retail 1.9% q/q (4 quarters growth rate is less benign at 1.0%); Office 4.3% (4 quarters rate is 3.5%); All Property 3.1% (4 quarters rate is 2.3%); and
• Last 4 quarters growth rate of 2.3% for All Property taken as growth rate for Industrial class (own Industrial Class 3 quarters growth rate is 0% and own 4 quarters growth rate is negative - 0.2%).

And the 'lost decade' in capital values is:

• For Retail sector: 19 years
• For Office sector: 13 years
• For Industrial sector: 23 years
• For All Property sector: 16 years 

Some 'decade' that is… and the numbers are not out to the peak-to-peak levels, as peak valuations took place around Q3 2007 and the exercise is from Q4 2006, when all above asset classes capital valuations were below the peak by between 9.2 and 10.5 percent. The exercise does not cover explicit outlook for interest rates or credit flows associated with it. Nor does it account for the overhang of land held by Nama. The key point here is really to show three things:

1. It will take a long, very long time for the markets to come around; and
2. So far, turnaround was not miraculous or dramatic, as some agents would led you to believe...
3. Finally, in one segment - Offices - we do have some rays of hope - both uplift and dynamics of that uplift are supportive of the stronger case than what I expected back in the days of 2010, when Nama was unloading properties off the banks balancesheets.