05/01/2015 – This article from yesterday’s Sunday Business Post references research carried out by Link2Plans. The article looks ahead at the likely market scenarios from both the commercial and residential perspective. Link2Plans research is referenced and Managing Director Danny O’Shea gives his view on the residential sector during 2o14 and for the year ahead.
With the 2014 property market closing on a high, with better than expected commercial and residential sales transactions, agents and market analysts are bullish about the sector’s performance for 2015.
Already some €11 billion-worth of major construction projects are scheduled for this year and plans for a new phase of large-scale development within Dublin’s Docklands and at Cherrywood in south Dublin has boosted market confidence even further.
Experts say that problems that persisted in 2014, including a lack of supply in specific segments of both the commercial and residential markets (particularly in the capital), will continue to challenge the sector this year. But moves are afoot to address these issues as the recovery continues.
The National Asset Management Agency (Nama) – a key driver of the buying frenzy last year – together with the country’s largest banks, are expected to proceed with loan and property assets sales as fast as they can in 2015.
According to Nama, the agency has repaid half of the €30.2 billion in senior debt it had issued to buy up bad loans and that it was on track to pay back 80 per cent of the debt by 2016.
In doing so, Nama is going from ‘the world’s largest landowner to Ireland’s largest landlord’ as the agency’s wider mandate now includes being the driving force behind construction in the capital of both Grade A office space and residential units, in partnership with investors and developers.
According to Nama’s 2015 forecast, the agency plans to coordinate and deliver 4,500 new residential units in Dublin by the end of next year, with 1,500 of those earmarked for construction in 2015. Most of the units will be delivered on 62 sites where building has either started or the sites are ‘shovel ready’.
The agency is also looking at additional ‘Tier 2’ sites in the greater Dublin area – of which there are 287 – and which, if developed, would deliver more than 25,000 units after 2016.
It’s a start, but still well below the figure of 12,500 homes the Economic and Social Research Institute (ESRI) says Dublin will need every year for the next six years.
Analysts predict that the commercial sector will continue to recover in 2015 with a push for high-end offices to attract and accommodate high-profile multinationals and IT global superstar companies already making Dublin a global digital hub.
“The vacancy rate for Grade A offices in Dublin’s Central Business District has declined rapidly over the past 12 months and hit a low of 4 per cent at the end of September 2014, net of reserved and signed space,” said Aidan Gavin, managing director of Sherry FitzGerald DTZ.
“The acute shortage in supply of Grade A office space in the CBD [Central Business District] could potentially compromise Dublin’s attractiveness to corporate occupiers, both domestic and overseas,” he said.
“CBD vacancies are falling and the development pipeline is only equivalent to 1.3 per cent of overall stock.
“The lodgement of a planning permission application by Oaktree/Bennett/Nama on the Hanover Quay site for 21,000 square metres is likely to be swiftly followed by a number of other applications in the area where there is potential to deliver over two million square metres of Grade A space.
“How much of this will be developed on a speculative basis still remains to be seen. The developers who want to secure first advantage on the chronic shortage will be well rewarded for their vision,” said Gavin.
Market confidence and limited supply fuelled rental hikes last year.
According to Gavin, prime headline rents in the CBD increased by 33 per cent last year to €468 per square metre and will continue on an upward trajectory into 2015, as competition for the limited supply of available space intensifies.
Gavin anticipates that rents will exceed €650 per square metre this year.
Savills’ head of research, Dr John McCartney, concurred. “Dublin office rents are almost certain to continue rising rapidly in 2015,” he said.
“Our economy is growing more than twice as quickly as the next best performing economy in the eurozone and, according to the European Commission, we are set to create well over 40,000 additional jobs this year and again in 2016,” McCartney said.
“This will continue to drive the demand for office space. At the same time the pipeline of new office supply is dry; there are unlikely to be any completions before the end of 2015 and it will be 2017 before any meaningful new supply becomes available. As such, rents can only go on rising.”
Marie Hunt, head of research at CBRE Ireland, said: “Considering the volume of deleveraging that has still to occur in the Irish commercial real estate sector, we anticipate another very strong year in the investment sector in 2015 with considerable volumes of both loan and asset sales expected to trade over the course of the next 12 months.
“Another dominant trend this year will be an increase in the volume of secondary re-trades from portfolios that were sold over the last number of years,” she said.
The CBRE expert also predicts an increase in the number of joint ventures and partnerships between different groups of buyers, both overseas and domestic, over the course of the next 12 months and the arrival of new entrants to the market in 2015, particularly if large portfolios are offered for sale.
“With interest rates expected to remain relatively benign for the foreseeable future, property yields are likely to contract further in 2015 but there is still upside for many investors in Irish real estate, particularly considering the superior rental growth expectations that Ireland offers,” said Hunt.
Goodbody Stockbrokers in Dublin is also being bullish in its early 2015 forecast.
According to its head of property, David Clarke, the drivers behind the interest in Irish commercial property are beginning to change. Investment momentum this year will be based “more on rental growth, income streams and comparative value versus other asset classes than on increases in capital value,” he said.
According to Clarke, the ability of assets to generate income in the medium to long term is becoming more important, which is one reason why Reits have proven so popular.
“The technical supply/demand equation may be changing, but there’s still a lot of capital coming into the market and Irish commercial property remains a positive story. We expect to see an above average performance in 2015, though at more modest levels than in 2014,” said Clarke, who predicts rental growth to be the key driver.
Tight supply, high demand, rising rents and Central Bank rules for 20 per cent deposits dogged the residential market last year and will continue to haunt it this year, experts say.
However, while 2014 brought with it a record volume and value of residential sales, again dominated by the capital, market experts expect house prices to soften this year.
At the same time, house hunters and renters will be driven further out of the cities in search of affordable accommodation.
The clearest way to gauge the market is to look at the statistics collated by Link2Plans, which compiles the National Housing Construction Index.
According to managing director Danny O’Shea, project applications nationwide increased by 18 per cent last year and by 36 per cent in Dublin.
However, commencement applications and grants are key to informing the market.
Applications are valid for up to five years and can be extended, but project commencements are finite, signify immediate construction and are often tied to levies and contributions.
Commencements were up by 33 per cent nationwide in 2014 and by 29 per cent in Dublin, where housing supply is critical. The number of residential developments that started construction last year – a total of 264 and the value of these projects is €1.47 billion.
“We’ve seen a paradigm shift in the property sector in the last 12 months with all areas, from housing developments, one-off builds and extensions increasing across the board,” said O’Shea.
“That’s important, because an inability to access finance in the last few years sowed the seeds for a shortage of property and a block in land development. An increase in commencements was still up in October/November 2014, which are traditionally very slow months. We’re up and running in the right direction in terms of new builds completing and coming to market this year to address the shortage.” The new developments will lead to 6,388 new housing units, 3,610 of which will be in Dublin.
Nonetheless, O’Shea pointed out that many of the new developments are on a much smaller scale than were undertaken during the boom but are more sustainable in terms of developer loans and investments.
Most experts expect prices to soften this year.
McCartney of Savills offers two reasons for this.
“The mainstay of the market in 2015 will be traditional mortgage-backed buyers. And with average earnings still falling and the banks imposing strict lending constraints – even before the Central Bank’s proposed macro-prudential measures – these buyers are likely to be much more price sensitive than the cash purchasers that have dominated over the last two years.
“In terms of price, increases will be low, single digit affairs,” said Ronan O’Hara, residential director at Sherry FitzGerald and manager of one of the agent’s busiest branches in south Dublin.
O’Hara sold the most expensive private residence on Dublin’s Property Price Register last year when he concluded the €7.9 million sale of Deepwell, a landmark detached house in Blackrock.
“Most postal districts will not increase by more than 5 per cent, so buyers will be happier. The Central Bank capping mortgages will have an impact and what the bank finally decides to do will have a bearing on the market this year,” he said.
First time buyers will have difficulty getting on the property ladder this year, according to O’Hara and there were less cash buyers last year than in 2013, perhaps as a result of rising prices and less perceived ‘bargain’ value.
“Long-term, slower price rises are a good thing. We’re still 38 per cent off peak, but peak prices are not a benchmark. However, to have market recovery, we can’t be at 0 per cent,” he said.
Source: Sunday Business Post