Written by Robert McHugh, on 2nd Jul 2018.
Commercial property specialists CBRE today released their latest bi-monthly report focusing on the latest trends and transactions in all sectors of the Irish commercial property market.
The report shows that particularly strong take-up was recorded in the Dublin office market in the first six months of 2018 with take-up in second quarter significantly boosted by the recent acquisition of 22,146m2 of office accommodation at the Boland’s Quay development in the south Docklands of the city.
In addition to strong volumes of take-up, a number of significant transactions are currently in negotiations and there are several unfulfilled mandates prevailing.
New research from CBRE shows that Dublin currently ranks 27th in a survey of global office occupancy costs, up from 29th place this time last year. With office rents in the suburbs of Dublin remaining at levels that are at least half that prevailing in the heart of the CBD, CBRE believe there is now tangible evidence of occupiers looking to move to more cost-effective locations such as the suburbs.
In addition to a notable increase in lettings to co-working and flexible office providers over the last 12 months, CBRE are increasingly seeing organisations introducing flexible working strategies in an effort to lower costs, improve employee engagement and increase productivity within their existing office buildings.
Following the completion of almost €1 billion of investment transactions in the Irish market in the first quarter of 2018, activity has continued at pace over recent months. Although a somewhat lower investment outturn is anticipated in the second quarter of 2018, there are several sizeable assets being marketed at present which will boost transactional activity further in the third and fourth quarters of 2018. Some further Asian investment is expected to materialise in the second half of the year.
CBRE say investors from a range of jurisdictions continue to be attracted to real estate investment opportunities in the Irish market, attracted by buoyant economic fundamentals and the relative strength of occupier market activity as well as comparatively attractive pricing.
The commercial property specialists envisage a further shift in the sectoral split of investment spend over the coming months with an increasing proportion of investors seeking ‘alternative’ investment opportunities. PRS/Build to Rent continues to evolve as a mainstream sector of the Irish investment market in its own right. Indeed, according to CBRE, the volume of capital chasing residential investment opportunities in Ireland’s main cities continues to escalate with several investors who heretofore focussed primarily on traditional investment sectors such as offices and retail now also willing to consider investment opportunities in the residential sector.
To some degree, this is a diversification play on a sector that is generally less susceptible to cyclical patterns, but investors are also attracted by the attractive yield profile and rental growth prospects in an Irish context. According to CBRE, most of the capital targeting the PRS/Build to Rent sector in the Irish market is looking to invest over a long-time horizon.
Commenting on the bi-monthly report, Executive Director & Head of Research at CBRE Ireland, Marie Hunt said, "Activity in each of the occupier markets remained strong throughout the first half of 2018, buoyed to a large degree by continued job creation in the Irish economy. The months of July and August will now see the pace slow a little with the focus shifting towards closing out many of the transactions that are either in legals or in negotiations at present before the next wave of activity commences in Autumn. Prime rents and yields in all sectors remain relatively stable at this juncture although further rental and capital value growth is anticipated in all sectors of the market in the second half of 2018."
She added, "Considering the strength of both the domestic Irish economy and occupational activity, demand for core real estate investment opportunities in the Irish market remains strong although there has been a notable sectoral shift in investor appetite over recent months with focus on the Build to Rent/PRS sector becoming increasingly evident. Another trend that has become evident over recent months is that an increasing proportion of transactions in the hotel, development and investment sectors are being conducted off-market."
MyHome.ie Q2 2018 Property Report
- Annual rate of house price inflation slows in Q2 due to Central Bank lending limits
- Annual price inflation nationally is up 7.2%, the slowest pace in two years
- "Slowdown in house price inflation should be welcomed"
- Dublin housing stock has risen by 25% to 5,000 since last year
MyHome.ie asking prices, Dublin and National
While house prices are continuing to rise the rate of inflation is slowing due in the main to tighter bank lending according to the latest house price report from MyHome.ie.
Asking prices rose 7.2% in the year to Q2 2018 – the slowest pace of inflation in two years – and down from 9.5% in Q1. In Dublin, asking price inflation has slowed to 6.8%, down from 11% at the turn of the year.
The report, which is published in association with Davy, found that the prices of newly listed properties nationally rose by 3% in Q2 while prices in Dublin rose by 2.2%. Newly listed properties are seen as the most reliable indicator of future price movements.
The median asking price for new sales nationally is €270K while in Dublin it’s €384K.
The author of the report, Conall MacCoille, Chief Economist at Davy, said that the slowdown in house price inflation should be welcomed as double-digit price growth could not be sustained over the long term.
"The Celtic Tiger years demonstrated the folly of allowing rising leverage in the mortgage market to drive double-digit house price inflation indefinitely. This time round, the Central Bank's 3.5 X loan-to-income (LTI) threshold is preventing households from chasing prices higher by taking on excessive mortgage debts.”
"We would normally expect the slowdown in asking prices to feed through into transaction prices within the next three to six months. For now, we are seeing stronger price gains in less expensive areas of Dublin and among the less expensive property types. For example, one-bedroom apartments in Dublin are up 11.4% on the year but four bedroom detached houses are only up 2.3%"
"Of course, Ireland still faces an acute housing shortage but unlike the past there is a more sensible debate on how to solve the problem. Short-term ineffectual measures from the early 2000s such as allowing increased leverage on mortgage loans, tax breaks or mortgage interest relief have been left by the wayside. Instead the debate has focused on planning reform, housing density and efficient use of state land and infrastructure funds" MacCoille concluded.
Angela Keegan, Managing Director of MyHome.ie said the improvement in stock levels, particularly in Dublin was most welcome.
"Our data shows that stock levels nationally are up 3.7% on the year to 21,600, the first positive growth since 2015. In Dublin where the housing shortage is most acute, stock has risen by 25% to 5,000 homes which is very positive. With few homes now in negative equity transactions among existing homeowners with mortgage debt are on the rise. There are also now 409 new housing developments listed for sale on MyHome – well up from the 342 in mid-2017”
"While some thought the lending rules would hold back activity, figures from the Property Price Register show transactions in the first five months of 2018 were up 6% and that the increase for the year may well be closer to 10%, bringing the level of transactions for the year to 60,000. While we are still clearly in the midst of a housing crisis, all the key indicators are moving in the right direction as we inch closer to a normally functioning property market" Keegan said.
By Philip Farrell – 1st May 2018
The Irish rental market is a ticking time bomb akin to a Bond film, rolling down to zero however, in this instance there will no ‘007’ to save the day. We now have a situation where an ever increasing 34% of the Irish population are renting, some by choice, most by necessity. There are currently less than 3,000 properties available to rent in Ireland, just 0.15% of the total housing stock. Demand is at least four times that level. Rental values having increased over 65% in some urban areas over the last 4 years. Currently, less than 5% of newly constructed homes are being bought by investors. At the height of the Tiger’s roar, this figure exceeded 45%. So where are these rental properties going to come from? Take a regional town of 5,000 people. A town of this nature would have a demand for least 200 privately rented properties. Who is going to service this market in the future? Due to its’ fragmented nature, it holds no appeal for the large investor. Most one-off investments are now purchased with cash. Servicing a loan at rates north of 4% is simply a non-runner, in addition to paying income tax, USC, LPT and increasing RTB compliance costs. What this means is the only real potential upside for the investor is capital appreciation however, values have increased by up 50% in many urban areas over the last four years which will make investors more cautious when investing.
The government recently announced that they had exceeded their 2017 target by housing 23,000 people. The devil is in the detail. Delve a little deeper, less than 1,000 new social homes were built in 2017 with a further 500 provided through Part V.
Many people understandably have little or no sympathy for landlords, believing they played an integral part in both inflating house prices during the noughties, and the subsequent crash. Herein lies the problem. With property values currently increasing 10% per year, additional homes must be provided for the increasing number who cannot afford or secure a mortgage or the ever increasing number who simply choose to rent.
It is a responsibility of government to provide housing for those who cannot secure a home. Our current rulers, in their wisdom, decided following the crash, that the private sector would deliver the homes needed. This was never going to happen. An industry which had been forced to take a long lunch (6 years) was always going to take some time to reinvent itself. On top of this there is the archaic planning process to contend with. The construction industry has returned to growth, but only in the large urban areas where values are now making it profitable again to build.
‘Rebuilding Ireland’ was launched in mid-2016 by the government to much fanfare. While it can be applauded for success with the ‘Help to Buy Scheme’ and the introduction of fast track planning permissions, it has failed to deliver in a number of areas. At one point, ‘modular housing’ appeared to be the answer to all our prayers! This was short lived. The recent announcement of the home purchase scheme through local County Councils should be cautiously welcomed as it will only assist a small percentage of home buyers. Also, a note of caution, historically, similar type schemes have proven to accrue arrears issues.
Rent controls have had varied success internationally. It is to early to say how they have fared since their introduction here in Dec 2016 however, they do not seem to have stemmed increases in average rents. A downside is they have punished many landlords who had a good relationship with their tenants, and this was reflected in the agreed rent. Many of these landlords are now leaving the market as they cannot legally charge the market rent once they are located in one of the 21 electoral Rent Pressure Zones (RPZ)
Solutions? Two areas of focus - the supply side and the taxation side. As is now happening in the UK, the government must attract back the smaller, buy-to-let investor. Our cities will be well served by professional investors like REITs and pension funds for decades to come with large ‘Built to Rent’ type developments comprising of hundreds of rental properties is desirable areas which offer all day to day amenities, on-site.
What about the regions? Incentives for the small-time investor should include lower income tax from rental income, extra allowances for capex (capital expenditure) and reduced CGT on exit, which currently stands at 33%.
On the planning side, the level of social housing in Ireland currently stands at 10% of the total housing stock, with a further 24% of residential homes privately rented. This figure is higher in cities. In addition to Part V, introduce a requirement that 10% of the total number of units in new developments must be sold to private investors. Currently, investors cannot compete with the FTB for starter homes. For the FTB, this is to be welcomed however, for those requiring somewhere to rent, it is limiting their options. Some would claim that this move would just increase pressure on the FTB. To alleviate this, housing densities could be increased by one unit per acre, for a limited period.
The rental market needs rental properties or else it is just a market! People need to recognise that landlords play a fundamental role in the property food chain and for those who find it hard to accept will need to accept them as a necessary evil.
The figures in this latest Daft.ie Sales Report are unlikely to surprise many who have an interest in the housing market. Comparing prices in the first three months of 2018 with those in the final three months of 2017, they rose in 53 of the 54 markets covered in the report, with only Monaghan recording a slight fall. Compared with prices a year ago, only Donegal has seen a fall.
It is, in other words, a market that continues to see almost across-the-board strong increases in prices. Looking at the national average, the annual rate of inflation was 7.3% in the first quarter of the year. The optimist will point out that this is the slowest rate of inflation in almost two years.
However, in a healthy housing system, housing prices increase at the same rate as prices in the rest of the economy, no faster. According to the official measure of the price level, general prices in the Irish economy are no higher now, in early 2018, than they were five years ago. This is a remarkable achievement in recovering the lost cost competitiveness of the Celtic Tiger years. It is all the more remarkable considering that one of the single largest components of the CPI is private rents - so in truth, leaving the housing market aside, consumer prices in Ireland have fallen over the past five years.
In the same time, though, the purchase price of housing has risen by one half, on average. In Dublin the increase is slightly above 60%, outside urban areas, the increase is closer to 40%. But overall, this is a collection of geographical markets more defined by their similarities than their differences.
The reason that prices are rising is not complicated: the growth in demand far exceeds the growth in supply. The fundamental barometer of a healthy housing system is that, where new demand occurs, new supply follows quickly. This should be true for the housing system as a whole - i.e. both market and social housing segments. But a closer look at the figures reveals just how dysfunctional Ireland's housing system is.
Turning to demand, first, Ireland's population is rising by over 50,000 people a year. About two-thirds of that increase - between 30,000 and 35,000 - is down to a natural increase in the population. The remainder - a far more volatile number in Ireland but 20,000 in 2017 and on average that amount over the last two decades - is net migration.
Of course, it's a little more complicated than births exceeding deaths. A population increase of 50,000 does not mean the country needs 50,000 new homes a year. At a very basic level, not every individual - and certainly not new-borns - has a household by themselves.
So, in order to understand housing demand, we need to look at household formation. But the picture here reinforces the stats above. There are about 330,000 women in Ireland aged between 25 and 34, compared to about 110,000 aged 75-84. This gap of between 20,000 and 25,000 per year gives a good measure of the underlying demand for new housing in Ireland each year.
But in addition to the increasing population, there are two further elements that need to be factored in. The first is obsolescence: even in countries with a declining population, new homes need to be built to replace stock that falls out of use. Even if every home lasts on average 200 years, that's still 0.5% of the housing stock - or in Ireland's case, 10,000 homes.
And lastly, there is household size. While at first glance, this appears to have been static in recent years, or indeed even increasing between the 2011 and 2016 Censuses, this is merely because household formation is what economists call endogenous. Simply put, if you can't find a dwelling, you cannot form a household. Looking at the bigger picture, including long-run trends in Ireland and elsewhere, it is clear that the bulk of new households formed will be 1 or 2 persons.
This has implications for both how many new dwellings are needed and what type. If Ireland adds 2 million people in the coming decades, but they are in households of 4 persons on average, this is an additional 500,000 dwellings. But if - as is overwhelmingly likely - they are closer to 2 persons on average, Ireland needs twice as many new homes to cover the same increase in population.
And not only that, Ireland is urbanising. Dublin and the other major cities are likely to account for 80% of the country's population by mid-century. This is not some anomaly, with Dublin far too big - indeed, if anything, Ireland is anomalous in not having this process happen already.
Ireland is in the middle of a century-long process of moving from rural households of roughly 4 persons to an urban society of 2 persons per household. This has huge implications for what we build and how. Supply will be needed in and around the cities - and predominantly in apartment form.
What is clear is that this is not happening. Planning permission was granted for a little over 5,000 apartments, nationwide, in 2017, and for 20,000 dwellings in total - less than half the likely demand. It is often said that the mantra in the housing market is "location, location, location". For housing policy in Ireland, it needs to be "supply, supply, supply".
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