The initial factor to realise is that we are now in a completely new property game. New rules, new stadium and a various shaped ball. Over the next decade property investment will be mainly about income and small about capital appreciation so don’t expect to make a fast killing.
The second fundamental change is that it will be a tenants’ market for quite some time.
I have spent my life acquiring and managing institutional property and there are a number of principles or mantras that I have successfully used as follows:
• Timing – a lot more dollars is made (or lost) out of getting the timing proper than any other choice.
• Location is critical.
• The quality of the building genuinely matters.
• Tenant(s) strength, fair rent and satisfactory lease terms are crucial
• Price/ yield – does the yield make sense and fit into lengthy-term parameters?
• The economy – what is happening?
• Competition – what else is happening in the property market?
• Mix – no single property ought to represent much more than 10% of a portfolio.
• Replacement – what would it cost to develop?
• Borrowing increases risk and has to be repaid – usually out of (taxed) income.
Whenever I looked at any given property in any country or city, these had been my personal 10 commandments.
So how do we apply this methodology to the present property scenario in Ireland?
On the key issue of timing, whilst I would not have considered buying in Ireland since 2005, the point for reversing that position need to be approaching. My nagging fear is that it is still too early.
There will be lots of well-located excellent buildings in excellent locations coming available over the next few years from the Nama stable so scarcity has to be discounted. The large issues for consideration now are:
• Rental levels – will they rise or fall further?
• Tenants (or their absence).
• Oversupply of space.
• Yields/prices.
• Interest rates.
• The prospects for the economy.
To buy now you would have to be taking a lengthy-term view on these issues, unless the building was let for a very long term to an undoubted tenant such as the government. Rents, which have been falling for the past two years, will eventually stabilise but I do not know if they will plateau at present levels or fall further. This situation will be driven by the economy and the interplay of supply and demand. The situation is currently unstable, with rental values falling throughout 2009. Even so, apart from retail, occupiers of offices and industrial are not having serious difficulties with rental levels but of course they will seek the lowest price going.
Yields have come back to a spectrum that I am now comfortable with and fit into lengthy-term trends. Yields are presently in the spectrum range of 6-6.5% for retail,
7-7.5% for office and approaching 10% for industrial – all in respect of high quality, well-let property – but if not prime top quality, I would be adding significantly to these returns.
Recovery over the next couple of years may see yields coming down to around 5-6% for retail, 5.5-6.5% for offices and 7-8% for industrial, but the boomtime yields are gone for ever.
The huge unknown is the economy. Traditionally, commercial property has lagged behind recovery in the real economy simply because enterprise space users do not rush out and take much more space as soon as organization improves. They typically have surplus space in existing premises and will await taking a lot more space until they have constraints.
The equivalent of about one in four of Dublin offices is available, so the supply is not constrained when demand does come back. There is the possibility that FDI will produce new demand especially in the office sector and this could give an earlier lift off. So having regard to all these elements, what advice do I give to those clients seeking to invest in property in 2010?
These are risky times for all investment. The secure option is to maintain the dollars in the bank and see how markets evolve over the next six months. But if one wants to be adventurous and jump in now, I would make five points as follows:
• Make positive the rents on a given property are not at historic high levels and if so adjust your price accordingly.
• Be aware of your tenant’s financial health.
• Look carefully at the lease terms and take professional advice.
• Look at the bricks and mortar and location. This is your only real lengthy-term security.
• Don’t over borrow.
Truly brave investors will be those who acquire high-quality vacant buildings at knock-down prices in 2010 and wait for an economic recovery to attain lettings – it’s risky and takes nerve but is potentially quite rewarding.