What would you like to see in the commercial property market in 2015? Much of the overseas capital that has been invested in Irish real estate during this cycle, both direct and via loan portfolios, has been driven by value. Not as part of a long term global diversification strategy. Whilst the addition of three new REITS over the past two years has done much to widen the base of existing domestic long-term capital we have a need for an increase in the number of international long term core investors.
With the significant volume of loan sales that have transacted, coupled with those anticipated to trade in 2015, the timing of new entrants is critical for the long-term stability of the market. Much of the opportunity capital that has been active in recent years seeks to divest the portfolios and loan books acquired over the short-to-medium term. An increased presence of core international money is also required as the narrow spectrum of pre-funders is inhibiting new development against a backdrop of scarce and very expensive development finance.
Where are the best opportunities? Key investment picks for 2015 are short income offices with asset management opportunities, and prime retail across all sub markets. With supply effectively fixed until 2017, and with strong economic and jobs growth forecast, Dublin office rents are likely to continue rising very rapidly throughout 2015. The retail recovery is more gradual. The consumer economy is clearly heading in the right direction. This has already seen rents edging up in Dublin's Grafton and Henry Streets. This momentum should continue into 2015 and should become more widespread.
What will happen when the overseas money runs out? The Irish economy has rapidly shifted from contraction to growing at more than twice the rate of the next best performing economy in the euro zone. Property values are still competitively priced with a large number of investments trading at below viable new development cost. For Dublin and other core markets we would be optimistic that the overseas money will remain in Ireland but a change of investor profile to core buyers needs to happen.
The challenge will be felt in peripheral markets where business-plan exit theories applied on loan-book acquisitions will be tested. We would hope lending from both Irish and overseas banks will increase in the short term.
Will property values continue to rise and, if so, by how much? Capital values will continue to rise driven not only by rental growth, but also by further yield compression. Commercial yields have hardened considerably this year and are now approaching levels last seen during the boom. Nonetheless, there is scope for further compression next year as the spread between commercial yields and bonds is currently hovering at more than twice its long term average. Domhnaill O'Sullivan is director of investments at Savills
