CPW Quarterly Newsletter

As part of our ongoing dedication to customer service, CPW Consultants are committed to providing quarterly updates to keep our vendors, purchasers and contacts informed of the latest trends and developments in the commercial property & financial market.

CURRENT COMMERCIAL PROPERTY MARKET

In early 2007, the Irish commercial property market was in rude health. Strong demand for investment property was driving yields lower, and demand for space was pushing rents higher. By the end of 2007, the buoyancy was gone from the market and the first half of 2008 has been increasingly quiet, in terms of activity, with virtually no major transactions taking place. 

Capital values began to fall as a result of low sentiment which resulted from rising funding costs as banks tightened their lending policies. With increasing economic uncertainty, potential purchasers reined in their acquisition plans. The credit crunch has resulted in a reluctance by banks to fund speculative developments — banks now require buyers to put up a significant amount of their own cash before they consider advancing a loan.

In general, falling capital values were to be found across the board in all sectors. In retail: a downturn in consumer spending growth was accompanied by a slump in consumer confidence. Both the industrial and office sectors also recorded capital value declines. However, the lack of material transaction volumes makes it difficult to determine the exact situation at present.

Office Market: 

Since the beginning of 2008, there has been a dearth of transactions in the previously buoyant office market. With investors opting to ‘wait and see’, the focus has shifted towards owner-occupiers. However, the downturn in economic prospects also seems to have put some companies’ expansion and relocation decisions on hold.

At the same time, the first quarter revealed a healthy take-up in space in the rental market. While headline rents in prime letting areas remained largely unchanged, anecdotal evidence suggests that occupiers are negotiating more flexible lease terms. Up to 45,000 square metres of space was let in the first quarter. While this is more than 10,000 square metres less than the same quarter last year, it’s higher than the five-year average. As with all sectors of the market, prime office yields in the first quarter softened in all areas of the Dublin market, with secondary properties showing a more pronounced downturn.

Retail Market:

The backdrop for retailers has not been encouraging as of late as consumer confidence slumped, amid a notable pick up in unemployment, surging inflation and the ongoing depression in house prices. Retail park development in recent years looks to have brought a threat of over supply, which in turn has put upward pressure on yields. We expect that vacancy rates will increase and rents are likely to stabilise. The increasingly difficult trading conditions will most likely result in greater demands from prospective tenants. Extended rent-free periods and larger capital contributions are likely to be commonplace.

In shopping centre developments, it is likely that prospective tenants will be looking to the landlord to share the risk by way of turnover-linked leases. In this way, if the centre performs, both the retailer and the landlord will benefit and likewise if it does not, then they will both lose out. We see no immediate solution to trading difficulties with retailers becoming increasingly selective in their location decisions.

Industrial Market:

In recent years, low interest rates meant that the majority of occupiers were able to own their own building. The impact of the credit crunch has resulted in companies opting to rent premises, either by choice or circumstance. Industrial rents have held up, but negotiations have become more protracted as occupiers seek to secure favourable deals. Companies require flexibility in order to see how business develops over the short term. Many lettings are also being offered by landlords/ developers incorporating purchase options.

Development Land Market:
           
Current difficulties in the sale of land include lack of availability of finance, prospects of a rise in interest rates, the continuing rise in oil prices, stock market declines and general negative market sentiment. Where funding is available for the purchase of land through banks and financial institutions it is subject to more stringent conditions and is more expensive than before. This has led to much reduced activity in the land sector where vendors are divided between those who are prepared to accept the best current price available and those who feel they should wait until Spring 09 in the hope of an improvement in market demand.

LANDLORD AND TENANT LAW: CHANGES IN RENEWAL RIGHTS

Since July 2008 there has been a significant legislative change for business tenants in Ireland. Tenants now have the freedom to “contract out” of statutory provisions under the Landlord and Tenant Acts, which automatically gives them the right to a new tenancy, in certain circumstances, after five years. Many business tenants were forced to move from their premises because landlords wanted to avoid this automatic renewal.

Up until now, the only sector that was allowed to contract out of these rights was the office sector. So, for example, a person or company renting a small office was able to contract out of their right to a new tenancy after five years, whereas multiple retail organisations renting an anchor unit in a shopping centre or multinational companies in an industrial estate could not. To overcome this anomaly, four-year and nine-month tenancies were developed for “non office” business tenants, so that automatic renewal rights would not apply.

The Civil Law (Miscellaneous Provisions) Act 2008 now allows any tenant to contract out of his/her renewal rights. This provision of the Act allows all business tenants, regardless of user, to waive landlord and tenant rights, strictly provided they receive independent legal advice prior to commencement of the tenancy and sign a waiver. This means the parties can now agree a lease term of more than five years which will reflect the commercial terms and realities with the knowledge that a landlord will have vacant possession at the end of the term, if required.

One advantage of this is that landlords and tenants can now agree commercial terms which will reflect their intentions and wishes. Another plus is that this mechanism will be useful for existing tenancies where a tenant is on a short-term letting and has built up goodwill and a customer base in a particular premises. Now, provided the formalities are properly followed, the landlord and tenant can seek to add another term at the expiry of the existing four-year nine-month tenancy.

This welcome change will liberalise the business rental market and give landlords and tenants much greater flexibility to enter into lease agreements that suit their particular circumstances which is crucial in these uncertain economic times.

NEWS ITEMS

Pension Options: Life companies such as Irish Life & Hibernian are currently offering access to deposit accounts through pension products. As well as benefiting from tax relief on pension payments, your money can be placed on deposit which is very useful in these difficult times. Remember October 31st is the deadline for tax relief on pension contributions!

Interest Rate Cuts: The world’s monetary authorities joined forces on October 8th 2008 in announcing a co-ordinated 0.50% reduction in official interest rates. The central banks participating in the move are the Fed, the ECB, the Bank of England, the Bank of Canada and the Swedish Riksbank. The ECB Rate has been reduced to 3.75% from 4.25%. This is a move that is extremely welcome and is exactly what is needed to help stem the slide in confidence globally in the operation of the financial & banking systems and consequent risk to economic activity.

Grafton Street, 6th Most Expensive Street: Grafton Street, is not just Ireland’s most expensive retail rental location – it now takes 6th position in a new world ranking, according to a new survey. New York’s Fifth Avenue is the most expensive street in the world, with rents reaching $1,650 (€1,047) per sq. ft. Fifth Avenue is closely followed by the Champs Élysées in Paris, The Tverskaya in Moscow, Bond Street and Oxford Street in London. Dublin’s Grafton Street came in sixth after these. Grafton Street rents are ahead of those of Tokyo, Los Angeles, Hong Kong and Zurich. The rents commanded in the commercial retail sector are based on square footage with Grafton Street coming in at €954 per sq. ft.

New Safe Deposit Funds: Some Life companies have introduced new stop gap investment solutions during this unsettled time for investors. While everyone knows that stock markets have consistently given the best long term returns for investors in the past, investing in shares does not come without risks. The Safe Deposit Funds are available to those investors concerned about market volatility and when the best time is to start their investment.
The Safe Deposit Fund rate is currently 4.75% AER - ECB+1% and will continue to reflect the ECB +1% until December 2009.

Interest Rates: (before fund charges):

These rates are offered for a limited period of time. It is recommended that investors consider the Safe Deposit Fund as a short term opportunity with a view to investing in other funds on a longer term basis.

COMMERCIAL PROPERTY OPTIONS

CPW Consultants are keen to talk to people looking to purchase or lease a commercial property or those who have a property they may wish to sell or lease. We can carry out valuations and rent reviews on commercial properties and we deal in all sectors of the commercial field including retail, office, industrial / warehouse / storage space & development sites/land around Carlow and the surrounding areas.