Dublin commercial real estate market showing signs of improvement
July 2010

Despite recent turbulence in European markets dampening prospects for global recovery, there has been an encouraging improvement in activity in the Dublin property office market in recent months, according to a new report.

Take-up in the Irish capital over the last three months is likely to be higher than the first quarter of the year, said the report from CB Richard Ellis as a number of notable deals are due to sign shortly.

Almost all of the transactions being completed in the Dublin office market at present are letting deals although there was one high-profile office sale concluded on the instructions of a receiver in recent weeks, the sale of a Georgian office building on Lower Baggot Street for approximately €2m.

In addition to a healthy level of letting activity, there are a number of significant requirements for office accommodation in Dublin, including two large requirements, which is very encouraging, the report said.

Prime rents in Dublin city centre are holding steady at approximately €376 per square metre or €35 per square foot although downward pressures remain for secondary accommodation, particularly around the M50 where there is a large concentration of vacant accommodation.

Despite a significant decline in the number of new schemes coming on stream, the existing overhang of space will be slow to erode until more net absorption is achieved, the report points out.

“We are encouraged by the increasing number of overseas firms, particularly pharmaceutical and IT companies, choosing to locate their European headquarters in Ireland. They are attracted by the 12.5% corporation tax rate, the fact that prime rents have declined by as much as 44% from peak, the potential for upwards and downwards rent review clauses, the notable decline in wage rates in the last 18 months and the ready availability of labour,” the report said.

It also pointed out that the ability to make quick decisions can make the difference between potential tenants choosing one building over another in the current climate.

“Occupiers remain extremely cost-conscious, are focused on turnkey solutions and are showing a preference for fully fitted accommodation. In addition, occupiers are focusing attention on the all-in costs of occupation, including service charges and rates as opposed to just rents, with finance directors having significantly more input into the decision-making process than before,” it added.

The Irish retail sector has seen a modest improvement in underlying consumer spending trends but a number of retailers remain under pressure and there continue to be casualties. From a property perspective, there are a number of deals progressing, primarily because the terms and conditions on offer in the current climate are leading to an increase in the number of rollout and expansion plans being announced, the report also said.

Analysts also report a notable reduction in the volume of industrial transactions signed in recent weeks. Almost all of the industrial transactions being concluded in the current market comprise short-term lettings. Occupiers are purely focused on cutting costs and as a result, rental values remain under pressure with a clear gap emerging between rents for modern/new premises and older second-hand accommodation. Certain occupiers are willing to compromise on building quality and in some cases efficiency in order to cut costs. They are demanding greater flexibility and shorter lease terms and landlords are willing to do deals on this basis in order to generate rent roll in the short to medium term, it added.

Although overall there is a definite improvement in demand for Irish investment property, there is a dearth of prime properties being offered for sale and transaction volumes, albeit up significantly year-on-year, remain weak, the report concluded.

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Commercial real estate sales in Europe, Middle East and North Africa set to rise

Direct commercial real estate transaction volumes are predicted to increase by 30% in 2010 in Europe, the Middle East and North Africa, according to a new report.

The positive outlook comes on the back of a better than expected first three months of the year which is traditionally a quieter time for the market. But volumes reached €20bn, a 75% increase on the first quarter of 2009, the report from international real estate consultants Jones Lang LaSalle shows.

Although transactions are 15% below the final quarter of 2009, analysts say the market is well poised for the rest of the year.

Transaction volumes in the UK at €7.8bn accounted for over one third of the total and remained at the same level as the previous quarter. The UK was followed by Germany, France and Sweden in terms of quarter one volumes and each recorded an increase in activity compared to the previous year’s volumes.

"The first quarter of the year is typically one of the slowest quarters; investors do not have the urgency to press on and close deals as they do towards the end of the year. Typically the first quarter is some 20 to 30% below the fourth quarter, so we do not read a 15% decrease as a sign of a slowing market," explained Richard Bloxam, director, EMEA Capital Markets, Jones Lang LaSalle.

‘We expect investment activity to increase throughout the year. Already a number of transactions over €100m and portfolio deals are under offer in the market. We estimate that direct commercial European real estate transaction volumes will reach at least €90bn for the full year. This will be around 30% higher than 2009," he added.

Nigel Roberts, chairman of EMEA Research, Jones Lang LaSalle said there is strengthening investor interest for good quality real estate. "This has clearly been demonstrated by movement in prime office yields which compressed in the majority of the European markets in the first quarter of 2010. London prime yields moved in by 50 basis points and continental European markets between 10 to 50 basis points with only a handful of markets remaining stable," he said.

"Whilst economic recovery still remains fragile, business confidence is generally rising and with improved credit conditions the demand for real estate from core investors is driving down yields. In the short term interest rates still offer positive cashflow opportunities for leveraged buyers but longer term investors will be looking for improving fundaments translating into stronger rental markets," he added.

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Furnished holiday lettings – an update!

The preferential tax treatment for UK properties, which meet the tests to be treated as Furnished Holiday Lettings (FHL), will cease at the end of the current tax year.

The general qualifying conditions to secure FHL tax treatment are:

• Let on a commercial basis with a view to realising a profit;
• available for letting to the public for at least 140 days during the relevant 12-month period; and
• actually let for at least 70 days during the period, ignoring any lettings of more than 31 days.

Income tax:

The 2009/10 tax year is the last one that can create a loss that can be set against general income.  Losses in subsequent periods will only be relievable against property rental income for the same year, or carried forward to set against future rental profits.  It may therefore be worthwhile incurring essential expenditure before, rather than shortly after 5 April 2010, to take advantage of the loss against general income.

Capital gains tax relief:

·      For a disposal prior to 5 April 2010, Capital Gains Tax rollover relief will be available, but not for disposals after this date.

·      Holdover relief is available for a gift of a FHL property prior to 5 April 2010, but not afterwards.

·      There is better news for entrepreneurs relief. Initially, it was suggested that this too would be unavailable for a disposal after 5 April 2010.  Now relief will be available for a disposal of the property up to three years from the date that the business ceased. There is a deemed cessation on 5 April 2010 for FHL business still going at that date. Clearly, there is a great deal of uncertainty and concern about future rates of capital gains tax. Many suspect that the current 18% rate will increase in the near future and therefore delaying a sale could result in a higher tax charge. As always, the date of exchange of unconditional contracts is the relevant tax point for capital gains.

Inheritance tax:

Business property relief for FHL properties will also disappear from 5 April 2010, but this may be an academic point for many.  HMRC has generally taken the view that FHL businesses did not actually qualify for relief at the time of death anyway because of the lack of involvement in the business by many owners.

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Fall in UK commercial property market easing as 2010 kicks off
February 2010

Prime yields in the UK commercial property market stabilised in January, dropping just 7%, the smallest monthly fall since May 2009, according to the latest sector report.
 
The average fall across all commercial sectors is 6.02% and while falls on the scale of last autumn are not expected, further declines in some parts are anticipated in the first half of 2010, says Cushman & Wakefield’s January business report on the UK property investment market.

The report suggests that the initial re-pricing of the market was driven by a lack of quality products and increasing awareness that pricing had moved too far. ‘The current stabilisation reflects the fact that pricing moved back a long way in a short space of time and we are seeing a pause for breath as the market absorbs the changes seen,” it said.

Central London offices are still the main source of good news in the occupation market, with activity and demand up, incentives down and headline rents increasing in the City. With a subdued pipeline, growth projections are being marked up and a period of strong performance is likely.

In the retail sector, better than expected Christmas trading has provided a fillip to the market but this is set against a weak 2008 and the fact that many retailers are not prospering, the report points out.

“Moreover, as temporary Christmas lets are handed back and retailers re-evaluate their trading portfolios, availability will edge up further in some areas,” it added.

David Erwin, CEO of UK Capital Markets at Cushman & Wakefield said 2010 has kicked off with a bang and most investment agents have been busier in January than at almost any time since the late 1990’s and he predicts significant turnover in the next few months. “Experienced vendors, including recent buyers, are taking profits whilst purchasers continue to seek stock which broadly remains in short supply. The current dynamics suggest the market is a win win for buyers and sellers and it will be a busy run in to Easter,” he explained.

David Hutchings, head of research at Cushman & Wakefield said that one of the most notable changes of the past six weeks has been the improving confidence shown towards the occupational market, backed by pressure on rents in Central London as well as a hardening of attitudes towards incentives in a range of other areas.

“As a result, more investors are ready to look further up the risk curve, accepting shorter leases for example. However, some of the recent improvement is a product of existing tenant demand being fast-tracked as occupiers sense a change in the market as well as by temporary lettings in the run to Christmas. Hence, investors need to maintain a realistic perspective and be looking to price in a stabilisation in activity and prime rents rather than an imminent recovery,” he added.

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Buy-to-let ends 2009 on a high
January 2010

2009 leaves landlords £12,700 in the black, almost reversing £15,000 losses in 2008 according to LSL Property Services, which owns the UK’s largest lettings agent network, including national chains Your Move and Reeds Rains. Landlords enjoyed a 7.6% annual return on their investments by the end of December 2009.

In 2009, a typical landlord made a return of £12,740. This was a combination of modest capital gains of £4,831 on each property and £7,909 in rental income. The value of their properties rose 3% in the year while rental income after void periods added a further 4.6%. By contrast, in 2008, a typical landlord would have lost 8.8% even after allowing for rental income. They lost £23,000 in capital as the property fell in value, and earned £7,900 in rent for the full year, leading to a total loss of £15,100.

Increase in property values and recent slight drop in rents causes dip in yields in December. Landlords’ properties rose in value by 0.4% in December. By contrast, the average UK rent fell slightly in December, down 0.4% to £661 per month. Rents have corrected slightly since September giving up a third of the sharp rent rises in the summer. Rents ended 2009 0.2% higher than the previous year.

2010 is set to see higher returns than 2009. If house prices continue to rise at the current modest rate of 0.4% per month, equivalent to 4.9% for the full year, a typical landlord will make a total return of £16,000 in 2010, equivalent to 9.8%.

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A precarious path predicted for UK commercial property market in 2010
December 2009

Cautious real estate investors should resist the temptation to join a stampede for UK commercial property in 2010 as the market treads a precarious path between a new boom or a second bust.

Fears of freefalling commercial real estate values have been replaced by worries of a pricing bubble in the UK after yield chasing buyers triggered a 2.7% rise in prices in November, the highest monthly gain in nine years.

Data from CB Richard Ellis showed that average UK commercial property yields were 7.6% in November, more than double the yield on 10 year UK Gilts.

Cash rich property funds face increasing pressure to outbid wealthy sovereign buyers and global pension funds for a limited pool of desirable real estate stock, creating an investment market that is worryingly out of synch with falling rents and tenant demand, property analysts have said.

"I think some people have gone into UK real estate not quite understanding the risk that they may not see a real capital gain for some time," warned Jonathan Thompson, global head of real estate at KPMG.
"Ten years down the line, those putting money in now might be very happy they did so but two years over the horizon, we might find ourselves in a position not wholly unlike the one we're in now," he explained.

"The market is so painfully thin and I'm somewhat concerned that the money flowing into some open-ended funds forces a behaviour that is not investment driven. Some managers have to buy property irrespective of whether they see value because they can't hit target returns if they are laden down with cash," he added.

Even though some lenders are confident their UK real estate bad debts have already peaked, Jonathan said they still had much work left to repair their balance sheets. "On the face of it, it looks like real estate is the market to be in but you can't forget the vast raft of loans and CMBS secured against real estate that remains to be worked through. Nowhere near enough degearing has taken place," he said.

While he urged buyers to be vigilant for evidence of overheating in some pockets of Britain's property market, he was less concerned about apparent bubbles in Chinese real estate markets.

"When you look at China through western eyes, you're guaranteed to get it wrong. We had a credit fuelled boom, and people argue that China is enjoying the same. But the big difference is the Chinese government runs China as a corporation. And it can turn the taps off fast," Jonathan continued.

And he is "quietly quite bullish" about the US property market, where he saw an energy among real estate investors to embrace new pricing. ‘It is the only country in the world where residential prices look to have moved to a level actually below the long term affordability index. The banks are showing more drive to clean out their problems and the dollar is weak so it will attract overseas investment. When else have you had a better chance of getting your hands on a slice of Manhattan?" he concluded.

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Buy-to-let market grows for first time in two years
November 2009

Gross lending in the buy-to-let mortgage market grew in the third quarter for the first time in two years, according to the latest data published by the Council of Mortgage Lenders (CML). At £2.1bn, lending was 10% higher than in the previous three months. The third quarter also saw a similar first increase in two years in the number of buy-to-let loans advanced, from 21,600 to 23,700. But the welcome recovery in buy-to-let lending was from a low base, with current lending volumes sharply lower than their peak in 2007.

The number of outstanding buy-to-let loans grew to 1,205,000, representing 11% of all mortgages by the end of the quarter (compared to 1,180,000 three months earlier). The value of outstanding buy-to-let mortgages increased by 2.5% to £144.2bn.

Within the buy-to-let market, both lending for house purchase and remortgaging grew in the last three months. As with the mainstream mortgage market, however, house purchase lending was appreciably stronger. Remortgaging capacity was constrained by the unavailability during the quarter of any buy-to-let mortgages at over 80% loan-to-value (LTV). Landlords with existing mortgages at a higher LTV are therefore effectively obliged to stay on their existing lenders' reversion rates. But with variable interest rates remaining low, it is relatively painless for them to do so and there is little pressure to re-finance.

Low borrowing costs are also contributing to a continued improvement in cases of buy-to-let arrears and the number of landlords facing enforcement action. For the third quarter in a row, there was a decline in the number of buy-to-let mortgages with arrears of more than 1.5% of the balance. In the last three months, the number has fallen from 22,900 to 20,500, representing 1.7% of outstanding buy-to-let mortgages.

The number of properties taken into possession rose in the third quarter, from 1,400 to 1,600, equivalent to 0.14% of all buy-to-let mortgages. Over the same period, however, there was a sharp decline - from 2,500 to 1,700 - in the number of arrears cases in which a receiver of rent was appointed, often as an alternative to seeking possession of the property.

Commenting on the newly-published data, the CML's director general Michael Coogan said: "At this stage, the recovery is modest - but the figures show that buy-to-let is here to stay. Buy-to-let lenders are among those facing some of the biggest challenges in raising mortgage funding, so the improved figures are all the more welcome.

"Future demand for housing in all tenures supported by lenders will remain strong, despite mortgage funding constraints and low construction rates. With funding for social housing under pressure, the private rented sector has a strong future. Mortgage lenders will have an important role to play in it, and will continue to help improve choice and standards for private tenants."

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Outrage over Clintons’ £13.5m profit from pre-pack
October 2009

Clintons placed all its 323 Birthdays stores into administration in May, with Zolfo Cooper appointed administrator. A month later it bought back 196 stores for £3.5m, mainly paid by foregoing a £3.25m inter-company debt - £250k in cash was paid. 

In its annual results, published on 16 October, Clintons was forced by accounting regulations to revalue the stores to their fair value of £17m, booking an exceptional £13.5m profit.

British Property Federation chief executive Liz Peace said: "The deal underlines why many landlords feel aggrieved by the insolvency process and why so many retailers are also up in arms at their competitors getting what they see as subsidies.

“Rent is such a small portion of a firm’s outlay that if they can’t afford it, there are truly serious problems,” she said. “The issue is that insolvencies like this are a charter for failing business to walk away from legally-binding contracts without paying a penny, while everyone else – like the 750 people who lost their jobs - has to accept the consequences of bad business decisions.

“No one is against being flexible, but when firms claim hardship and then buy themselves back saving millions of pounds or start expanding again with rights issues and new stores, the likelihood is that landlords will stand firm for the sake of not wanting to annoy the rest of their customers.”