AFTER last year’s improvement, the commercial property market shows no sign of slowing down in 2014.
There is around €5bn in requirements looking for opportunities, with IBRC, Ulster Bank and NAMA seen as the key strategic vendors supplying the market with substantial portfolios of loans and assets.
Many buyers are looking for scale with an expectation there will less pressure on pricing if they compete for larger lots as there should be a thinner market of buyers. Key purchasers for these include Kennedy Wilson, Lonestar, Hibernian REIT, IPUT, Irish Life, Blackstone, Apollo, Hines, Green REIT, Brehon, Pimco, Avestus and Signature Capital.
As the portfolios become more diversified, purchasers are looking to partner up to ensure they are competitive on pricing and have the right mix of skills. Buyers driving the deals are a combination of REITs, pension funds, asset managers, international opportunistic funds, international institutions and private investors.
Total investment volumes were €1.9 billion in 2013 – three times the turnover on the previous year. At the height of the market in 2006, over €3bn worth of deals were done. This is likely to be exceeded this year.
The three largest transactions completed include the sale of the Platinum Collection by NAMA to Blackstone for €165m and Central Park by NAMA to Green/Pimco/ Kennedy Wilson for €311m. The third was the sale by Aviva of 73pc of Liffey Valley Shopping Centre to a Hines consortium.
With Q2 figures due out at the end of the month, there is a sense that asset deals completed will be less than Q1 but loan sales will be significantly higher.
There are some key sales at the advanced marketing stage, such as the Redwood Portfolio by NAMA, which is guiding €160m. This Dublin-based portfolio is predominantly office income. The Acorn Portfolio is also in the market and is a NAMA sale of regional shopping centres with a guide price of €130m.
The Irish market has now returned to 2007 liquidity levels, which offers investors transparency when buying and comfort on their potential exit strategy.
Traditionally, when institutional investors compare government bond yields to property returns, they require a minimum yield gap to factor in the higher risks. The margin required is very much dependent on the market and the asset, but a minimum of 300 basis points was often used as an indicator.
In Ireland, the 10-year government bond rate stands at 2.67pc with an average rate over the last 10 years of 6.9pc. The current rate compares to 2.73pc for the UK, 2.65pc for the US and 1.47pc for Germany. This low rate of borrowing for the Government underlines the recovery in the Irish economy, which is feeding through to stability and, in certain sectors, growth. Many investors are reviewing their target returns to reflect this reduced risk.
The activity in the property investment market is a good illustration of the direction of the overall commercial occupational market. The first half of 2014 saw the bulk of activity in the CBD office sector. Demand has been focused on prime assets in terms of location and either existing grade A space or opportunities with potential to convert to grade A. Supply and demand is now spreading to the retail investment sector and with a sense that retail rents have stabilised. Investors looking to diversify their portfolios and to achieve double-digit returns see the retail sector as the next opportunity.
The most recent Investment Property Databank (IPD) figures show that Q1 2014 saw the highest quarterly returns since Q2 2006 at 7.2pc. This figure comprises capital growth at 5pc, which is driven by positive market sentiment.
The third quarter in 2013 saw the first positive rise in IPD values of 0.3pc, following 23 quarters of capital declines. Capital appreciation for Dublin commercial property is increasing at a considerable pace, and as a result there is a time lag between deals completing and the evidence feeding into formal valuations.
The all property equivalent yield now stands at 7.6pc, and this reflects an incredible compression of 70 basis points in the first quarter of 2014.
In particular, IPD figures show capital growth for the office sector of 6.2pc for Q1 2014. Offices are the only sector seeing positive rental value growth. The total return for the office sector was 8.4pc, which comprised of 2pc income return and 6.4pc capital growth. The capital growth is based on the positive market sentiment and investors’ expectations of the rate of rental growth due to the fall in vacancy rates.
The IPD figures show capital growth of 3.9pc for retail in Q1 2014, and this reflects a slowdown in the pace of rental decline combined with positive yield movement.
For many institutional and international investors, the IPD data is used as a benchmark for comparing Ireland to other markets and also to see where current pricing sits in the context of historic performance.
The long-term average yields for the Irish market show the all property equivalent yield at 6.7pc, with retail at 6.2pc, offices at 6.8pc and industrial at 8.1pc. International investors in particular want to buy assets above this long-term pricing for a particular sector and sell when they can secure a good margin below it.
Michele Jackson is a director of property consultants TWM Select