What effects will Brexit and the proposed tax changes have on the commercial property market?
The combination of both could impact the recovering provincial investment markets, particularly shopping centres and retail parks. The fall in value of sterling, if long term, could lead to significant leakage in retail spend across the border, restricting the predicted rental recovery. In addition, the potential for import tariffs post-Brexit could have a particularly negative impact on the agricultural sector and on income levels outside the main urban centres. The private equity firms, who are the most affected by the tax changes, had been the main buyers of larger provincial assets and a pull back by these funds would limit the number of potential buyers.
Is there sufficient bank funding available to allow the owners of large portfolios to offload individual properties next year?
Although the main banks are now actively looking to lend, their criteria is still relatively narrow, with limited appetite for letting risk. Although there are a number of prime assets in the loan portfolios, the majority tend to be in off-prime locations with less certain lease terms. In order to get the market functioning, debt will be required for good non-prime city centre and suburban investments with short lease terms. Many of these assets trade for less than replacement value, underpinning their longer term performance.
Where are the best investment opportunities?
The city centre markets continue to offer opportunities with strong European investor demand for well-located office and retail blocks. High street retail in particular has the potential for further rental growth. Although retail spend has slowed somewhat in recent months, increasing employment levels should support the market. Rents in the main city locations including Grafton Street and Henry Street and Patrick Street in Cork are still significantly off their peak and these locations should be least impacted by any Brexit changes. Even though yields on both prime office and retail have fallen, they still provide an attractive margin on the rates available in the main European capitals.
One thing to watch out for in 2017?
With the new US administration due to adopt expansionary budgets and increased borrowing, both economic activity and inflation is likely to pick up over 2017. The increased profitability of US firms should to lead to further FDI (foreign direct investment) into Ireland, even if US tax rates are reduced. Added to this, it looks like a number of UK insurers are close to securing regulatory approval to open bases in Ireland. So the office and residential markets may be set for a further boost in 2017 with increased occupier demand.
Adrian Trueick is a director of Knight Frank
