Irish spend on property down 60% in 2008

Irish spend on property in 2008 is forecast to fall to €15 billion, down 60% from €45 billion in 2007 and a phenomenal 73% down from the peak of €54.4 billion in 2006 according to Joan Henry, Head of Research at Savills Ireland. This is one of the main findings of Property Outlook, Savills regular property commentary. Savills say it is imperative that the government and the banks take immediate action to solve the lack of liquidity that is crippling both the residential and commercial property markets.

Deterioration in market conditions this year has outweighed all expectations with the pace and impact unforeseen by most experts. At the peak of the market in 2006, Irish spend on property (at home and abroad) hit a phenomenal €54.4 billion. Dropping to €45 billion in 2007, this total remained strong, but reflected the beginning of a slowdown in the new homes market, which was being driven in turn by increasing interest rates. What has happened this year has changed all that, with spend expected to be down an estimated 73% (or €40 billion) in 2008 from the peak in 2006 says Ms. Henry.

Angus Potterton, Managing Director says the government and banking sector must act now in order to find a solution to the lack of liquidity. There are signs that something will be done to recapitalise the Irish banking sector but every day that goes by puts more companies out business, pushes up unemployment, reduces tax revenue and brings us deeper into recession. It is imperative that the government and the banks take immediate action, not just for the 250,000 people in the property and construction sector but for the wider economy he says.

Joan Henry states that the evidence of the huge decline in spending is clear across all sectors of the property market and is most obvious in the new homes area. The total spend on new homes is expected to fall from an estimated €23 billion in 2007 to just €6 billion this year. Spend in the Irish investment market is expected to be down as much as 75% from last year’s €2 billion. Spend on domestic land is expected to fall by a staggering 80%. These numbers reflect both the fall in volumes of deals being done and also obviously a significant drop in the value of individual deals being done.

In terms of values, the level of the drop depends on the sector. In the new homes as in second hand market, prices have fallen by as much as 30% this year and maybe more if looked at on an individual basis. Successive price reductions this year, coupled with the fact that the development of new homes has come to a virtual stand-still (we estimate that at most 25,000 new homes will be built next year), lead us to expect that supply and demand factors have pushed prices close to the bottom and that by mid 2009, prices will have stabilised. What is needed then is a period of at least six months to a year of price stability to allow buyer confidence to be restored which will in turn increase activity levels concludes Ms. Henry.

Commenting on the development land market, Henry says that the value of land has dropped by as much as 50% depending on the location, with sites in secondary areas being the worst affected. The value of properties on offer in the domestic investment market has also fallen, with considerable upward pressure on yields.

Although investment transactions remain limited, it is widely accepted that prime yields should now have shifted out from their peak by up to 200 basis points. The yield gap between secure income producing investments and those with higher risk profiles has also widened considerably. Significant price adjustment is currently underway as yields move out to more sustainable levels, however activity in the investment market will remain subdued until banking liquidity improves says Michael Clarke, Associate in the Investment Division at Savills Ireland. On Market supply is down, however the reality is that many properties can potentially be acquired off market and there are a number of quality assets currently being discretely marketed, added Clarke.

In the office market, Roland O’Connell, Director of the Offices Division at Savills Ireland, says that tenant demand has fallen significantly and rents, particularly for second hand or poorly located space, have dropped. Take-up in 2008 is expected to be close to 180,000 sq.m. which, although significantly below the 2007 level, is still a good rate. In suburban markets there is a rise in the level of over supply and rents remain very competitive.

Looking to 2009 it is likely that the first half of the year will see similar low levels of activity to those experienced in the second half of 2008 with maybe a marginal improvement in the second half of the year. It is likely to be into the second half of 2010 before any significant improvement in market activity is experienced and it is likely this improvement will be seen in the City Centre first of all says O’Connell.

In the industrial market Gavin Butler, Director of the Industrial Division at Savills Ireland, says that the total take-up for the first six months of 2008 totalled almost 100,000 sq.m. which was in fact higher than the corresponding period in 2007. Traditionally, the second half of the year has witnessed higher levels of take-up, but the expected take-up for the second half of 2008 will be 100,000 sq.m. at best as the industrial sector begins to feel the impact of a weakening economy. The vacancy rate at the end of July 2008 stood at approx. 444,500 sq.m. up slightly from the 439,000 sq.m. of vacant space recorded in January 2008. This figure is likely to rise again slightly before the end of the year as the strong levels of take-up in the first half of the year are unlikely to be sustained.

Although there is little market evidence of falling values, in our view, industrial values are down between 10-15% in 2008. The overall trend in the industrial market has reversed and is now for renting rather than buying says Gavin Butler, Director of the Industrial Division at Savills Ireland.

The number of residential properties coming to the Dublin market in the fourth quarter of 2008 continues to decline. Residential property volumes in Q4 2007 were 10% less than Q4 2006 and again volumes declined in Q4 2008 by a further 11% on the previous year. Prices in some cases are back 45% from 2006 but we expect this to level out, particularly as interest rates are expected to fall again says Wade Wise, Director of Residential at Savills Ireland.

The main positive note from Property Outlook is that the market is expected to have bottomed out by 2009. Given the extent of the adjustment in the property market and the pain being taken this year, coupled with decisive action by central banks to free up the liquidity situation, we expect the market to bottom out by 2009 and for activity levels to pick up throughout next year, albeit at considerably lower values and volumes. concludes Joan Henry, Head of Research at Savills.