Forensic Due Diligence’ Slowing Transactions Down In The Commercial Property Market
Property consultants CBRE today released their May 2012 bi-monthly report commenting comprehensively on the latest trends and transactions in the occupier and investment sectors of the commercial property market in Ireland.
According to the new report, there has been a notable improvement in the volume of commercial properties being offered for sale in all sectors in recent months. Where pricing is realistic, the property consultants say that sales are occurring. There is continued activity in the occupier sectors of the market also. However, according to CBRE, the biggest frustration in the current market is the length of time it is taking to get transactions closed and signed, a factor they attribute to the ‘forensic due diligence’ being undertaken at present.
CBRE say that prime rents and yields in all sectors of the Irish market are now clearly showing signs of stabilising. Key Highlights
OCCUPIER MARKETS There is more than 180,000m2 of outstanding requirements for office accommodation in the capital at present with a number of new large requirements emerging in recent weeks alone. These include a large requirement for more than 37,000m2 from Microsoft and a requirement from Arthur Cox Solicitors for more than 12,000m2 in Dublin city centre.
Rents for prime office buildings in Dublin 2/4 are now showing signs of stabilising although tenants continue to negotiate favourable letting terms and conditions, particularly for older buildings in need of some refurbishment or upgrading. Landlords are willing to negotiate on rent in order to generate income to cover service charge and rates costs.
With funding for development projects likely to continue to remain scarce for the foreseeable future, any new office schemes will have to be completed in conjunction with equity partners.
Recent research from CBRE shows that just over 26% of international retailers have a presence in the Irish market. Considering the extent to which rental values have declined from peak and the relatively attractive deals that can be negotiated in the current market, there is clearly further potential for more international brands to establish a presence in the Irish retail market over the next few years.
Regardless of the relative affordability of industrial facilities in the current climate, some potential occupiers such as data centre operators and pharmaceutical companies are now exploring the possibility of buying sites to facilitate the bespoke development of the very specialised facilities they require as opposed to upgrading some of the existing facilities that are being offered for sale or to let around the country.
INVESTMENT MARKET There has been some improvement in activity in the investment market in recent months albeit this has yet to be evidenced in investment spend numbers considering the forensic due diligence that is currently delaying the completion of transactions in all sectors of the market.
Although there is an increasing volume of investment product coming to the market, investors remain frustrated by the scarcity of prime office and retail opportuntiies being publicly offered for sale. Demand from overseas investors remains strong and there is no doubt that confirmation from the Investment Property Databank (IPD) that total returns in the Irish investment market increased by 0.6% in Q1 2012 will reinforce their interest in the Irish market.
There has been increased activity with regard to the disposal of loan books in recent months.
Values in the UK property market declined for the fifth consecutive month in March 2012. Central London continues to buck the trend however, with positive returns continuing to be delivered and strong pricing being achieved for prime assets that are being offered for sale. Although yields in all sectors have weakened in recent months and are expected to weaken further, yields for prime Central London office and retail properties remain stable. Irish investors remain net sellers of real estate in the UK.
DEVELOPMENT LAND MARKET There has been a steady supply of development sites being brought to the market for sale around the country in recent months. Most of these site sales are coming about on the instructions of banks and receivers. Where pricing is realistic, sales are being achieved but as in every other sector of the market at present, negotiations are protracted.
With funding for development land remaining particularly difficult to source, the vast majority of buyers are cash purchasers. However, some developers are now considering alternative structures to facilitate the purchase of large land banks for future development.
A new report has recently shown that very little revenue has been generated by Government from the controversial ‘windfall tax’ introduced in 2009 on the rezoning of development land, which CBRE say proves that this particular initiative was introduced too late.
HOTELS & LICENSED MARKET Although there has been a small increase in the number of hotels coming to the market in recent months, transaction volumes in this sector remain disappointing.
Some of the hotels that are currently being offered for sale are being brought to the market with unrealistically low guide prices – a strategy that will have knock on value implications for the entire hotel stock in the country.
NORTHERN IRELAND MARKET The last two months have seen an unexpected increase in the volume of large property portfolios going in to administration across Northern Ireland. While the rising level of insolvencies is an unfortunate result of the continuing difficult conditions in the market, it will inevitably result in an increase in the number of investment grade assets being publicly offered for sale across Northern Ireland over coming months.
According to Marie Hunt, Executive Director and Head of Research at CBRE in Ireland “There is no doubt that the Irish commercial property sector is considerably busier than it was only 12 months ago, with a notable increase in the volume of properties being publicly offered for sale in all sectors in recent months. Activity in the occupier markets remains healthy and there is clear evidence that prime rents and yields are showing signs of stabilising. However, the big frustration in the market at the moment is the sheer length of time it is taking for transactions to complete in the current climate, with forensic due diligence making negotiations very protracted.”