Irish commercial property investment has been at a virtual standstill in recent months. Since the beginning of the year, the Irish property investment market has been characterised by a lack of transactional activity, with only €392 million of Irish investment deals signed in the six months to the end of June 2008 compared to €1.9 billion in 2007. Irish investment in UK property plunged to €795 million in the first six months of 2008 compared with €5.5 billion of investment transactions in the UK in 2007.
CB Richard Ellis Ireland, the commercial property consultants, said today that while there has been little transactional evidence to indicate yield movements in the Irish market, it believes that yields in the Irish commercial property market effectively increased across the board by at least 100 basis points in all sectors in the first six months of 2008.
Gauging current investor sentiment, it is likely that these yields will have to move further if deals are to be agreed between now and the end of the year. CBRE says that yields may have to increase by another 50 to 75 basis points to attract buyers. This could bring prime retail yields to 4.25% - 4.50%; prime office yields to 5.25% - 5.50% and prime industrial yields to 6.25% - 6.50%.
According to the Investment Property Databank, (IPD), total property returns in Ireland declined by 8.5% in the first six months of 2008, while capital values declined by 10.5% in the period. In previous cycles of the Irish commercial property market, annual total returns fell by up to 2.0% in downturns and remained negative for some two years before recovering. CBRE says in this cycle, which is severely compounded by a lack of liquidity, values have declined by a much more significant degree and have the potential to fall further if bank funding does not improve. There is a weight of money building up forinvestment in property in Ireland, but not at current pricing. The sooner that values readjust, the sooner liquidity will return.
Irish Investment in the UK
CBRE says the trends that have been witnessed in the Irish investment property market in 2008 are very similar to those being experienced in the UK. In fact, UK property values began declining in Autumn 2007 and the biggest yield shift experienced across Europe to date has been in the UK market.
From peak, yields in the UK have already shifted by as much as 150 basis points. In some sectors, yields have increased by 175 basis points.
According to the Investment Property Databank (IPD), total returns in the UK fell by 3.4% in 2007 and by another 6.5% in the first six months of 2008. In the same way that Irish investors have curtailed investing domestically, they have also largely stopped investing in the UK with only €795 million invested by Irish investors in the UK in the first six months of 2008 - a dramatic reduction considering Irish investors accounted for €5.5 billion of investment transactions in the UK in 2007.
CBRE says many Irish investors are now prepared to look at investment opportunities in the UK market but only where there is real value on offer. Average yields in most sectors are now trending close to their long-term average. However, until such time as investors see yields stabilising and liquidity improving, transactions will be thin on the ground. There is particular appetite for Central London, specifically from German open and closed-end funds and some high net worth investors looking to purchase prime properties, which offer superior wealth preservation and liquidity.
Looking forward, liquidity in the debt market continues to restrict investors and until debt becomes available on more favourable terms, CBRE expects the UK property market to remain challenging. On a positive note, the five year swap rate reduced from 6.3% in June 2008 to approximately 5.35% over a two month period.
