The seismic events of 2016 will see “uncertainty” become the buzzword for 2017. With the precise direction of Brexit still unknown, Trump’s late-night tweets, elections this year in France and Germany, this uncertainty will continue. Such uncertainty makes decision-making difficult. If 2016 taught us anything, it is the importance of preparing for all eventualities. The following trends are worth watching out for this year.
1. Demand for prime assets
In uncertain times there is a flight to quality and safety. With issues on the horizon for most European markets, asset quality is key for risk-averse, institutional investors. Property is the investment of choice across Europe currently, with those seeking prime assets dominating the market and driving prime property yields lower. This is also the case in Ireland and is likely to continue through 2017, with particular demand coming from high-net-worth individuals, family offices, pension funds and insurance companies seeking long, secure income streams. A two-tier market will continue with investors having one eye on domestic demand and the other on general global real estate demand, bond yields, and secondary assets providing higher returns aligned to locational factors and associated risk around rental income.
2. Foreign investors and new names
Dublin is now part of the European property investment spectrum and European institutional investors see an exposure to the Dublin market as desirable. We are seeing new entrants come to the market constantly. For example, when TWM were selling 90 St Stephen’s Green last year, there were bids from French and UK funds who hadn’t looked at Ireland previously. German funds Real IS and Catella have recently entered the market. We are also seeing new enquiries from the Middle and Far East who had been focused on the UK but are now looking to invest here. The impact of the new tax on structures used by foreign investors has yet to be seen, however, but it is likely to have a negative effect on pricing as some investors add in the additional cost.
With the British government stating they will serve their official ‘break notice’ to the EU by the end of March, there will be much speculation on what this means and what tack Britain will take in subsequent negotiations. Brexit will undoubtedly be negative for Ireland overall with export-oriented sectors suffering the most. From a property perspective, however, Ireland may benefit from a ‘hard Brexit’ as this may see the withdrawal of service industries from London. In that event, it is likely there would be increased demand for office space, with the knock-on effect being an increase in the workforce requiring housing and ancillary services.
4. New offices / new rents
This year we will see delivery of the first tranche of the speculative office supply pipeline with the completion of a number of new office blocks in Dublin city centre. In its 2016 annual report, Green REIT estimated that there was 4.4m sq ft of office development under construction, of which 66pc was speculative. Approximately 1.3m sq ft was to have been delivered in 2016 (much of which was pre-let) with the remainder to be completed in 2017 and 2018. With the delivery of these new offices, the new prime rent for Dublin city centre will finally be set.
With the completion of the Luas extension in 2017, the city centre will change in many ways. New locations such as Grangegorman, Marlborough Street and North Earl Street will benefit, while other tired locations such as Dawson Street, College Green, Poolbeg Street and Tara Street will at last have their proverbial day in the sun. New developments are already underway or planned, which will transform these locations.
6. Interest rates / returns
As a result of the current low interest rate environment and the lack of favourable returns available from other investment classes, property is the investment of choice at present Europewide. There is an under-supply of quality investments, which has led to a further tightening of yields. Factors stacked against real estate for 2017, however, include Trump’s proposed economy-boosting measures in the US, which may result in an increase in interest rates there.
On this side of the Atlantic, meanwhile, Germany will continue its push for an end to low interest rates. For while European inflation reached its highest level since 2013 in December, it came in at a relatively anaemic 1.1pc. Bond yields are also rising, which may lure investors out of property.
7. Portfolio versus asset sales
The major loan and portfolio sales have now washed through the system and it is likely that the overall volume of assets traded, having been approximately €4bn each year for the last three years, will be lower as a result. The majority of sales will most likely comprise smaller average lot sizes as the loan buyers sell on assets and portfolio buyers start to re-trade. Large lot sizes will be in demand from foreign institutions seeking scale, so there will be a premium rather than a discount attached to size.
Debt is the new equity. Opportunity funds who are finding it difficult to obtain attractive returns are turning their attention to property finance to improve returns. These debt funds have emerged throughout Europe providing debt at higher interest rates and higher LTVs than the traditional banks. There are a number of such funds now in Ireland. This is a positive in terms of filling in the market for secondary assets and IRR-driven investors.
9. Domestic private investors / syndicates
While the major opportunity funds are finding it difficult to find suitable scale for asset purchases, some smaller Irish funds and syndicates have emerged seeking opportunities, albeit on a smaller scale. We see this continuing in 2017. These may be ready purchasers of assets from the loan and portfolio owners seeking to trade.
10. Rent reviews
With an excess of demand over supply in all sectors of the property market and rents on the increase, landlords are seeking to implement rent reviews to obtain income growth and drive returns. After 10 years of reductions, expect to see a significant increase in rent review disputes.
Sean O’Neill is a director at TWM Property Solutions