There has been much talk of how Ireland is currently experiencing an economic recovery and such a recovery is further evidenced by The Society of Chartered Surveyors Ireland (SCSI). In their Commercial Property Review and Outlook for 2015 it is reported that during 2014 commercial markets surpassed all expectations with investments exceeding €4.5bn. These results have far exceeded the €1.9bn invested during 2013 and are 25% higher than the peak of €3.63bn experienced in 2006.
Tax Incentives Assisted Growth in Commercial Property Investment
One of the factors identified as having an impact on the increase in investment during 2014 related to the cessation of a Capital Gains Tax (CGT) incentive for property purchased on or before 31st December 2014. The impact of the cessation of this relief is evidence by the €1.55bn invested in Irish real estate in Q4 of 2014, as reported by Jones Lang LaSalle.
Under this relief, if a property was purchased during the relevant period and held for at least 7 years, any capital gain relating to that 7 year period would be fully relieved from Irish CGT. This was as significant incentive given that the current rate of CGT in Ireland is 33%.
Increase in Demand for Property
Our improving economy coupled wtih Foreign Direct Investment (FDI) also enhanced the growth of Ireland’s commercial property sector. As we reported in our recent blog, Ireland Continues To Attract Foreign Direct Investment (FDI), the IDA recorded 197 FDI investment projects during 2014, with 88 of these coming from new investors.
The announcement earlier this year by Apple to invest €850 million in the development of a new data centre in Co. Galway also indicates that further growth from FDI can be expected in future years.
Investment by REIT’s (Real Estate Investment Trusts) also recorded improved results for 2014. Q2 of 2014 saw one of the largest REIT investments at €375 million. The investment, named Project Sapphire, saw Green REIT purchase two office blocks at George’s Quay and George’s Court (Dublin 2) and Westend Retail Park (Dublin 15) from Cosgrave Property Group.
According to SCSI’s data, the total investment return for the Irish property market in 2014 reached 40.1%, which has outperformed both Irish Bonds (23.1%) and Irish Equities (16.9%). Furthermore, according to MSCI, returns from Irish commercial property have also outperformed both the UK (17.9%) and the UK (11.2%).
Commercial Property Sector Results
Dublin saw the largest increase in rent for prime “grade A” offices at €452 per square meter, which is an increase of 29% on the 2013 figures. Returns for Irish commercial offices reached 45.3% year on year, compared with 18.3% in 2013. With rental growth in Ireland now firmly established, further growth is expected for 2015 and 2016. However, for such growth to be achieved it is important that Ireland’s Government address the potential lack of supply that may arise if new projects are not commenced in the near future.
Result for Irish retail property continues in the same manner as offices, with MSCI reporting returns of 34.7% for 2014 as a whole. Prime retail rental in Dublin increased by 11.5%, with further increases of 10% expected for 2015. Connacht and Ulster can expect to see increases of approximately 9% for 2015 with predicted increases for Munster and Leinster of 5.5%
Development Land and Industry
As with office and retail, development land also reported improvements, with Dublin reflecting increases of 34%. Munster and Leinster are showing increases of 24%, with a modest increase for Connacht and Ulster of 4%. Industrial rents in Dublin also reflect an increase of 34%, with rents under 500sqm achieving €82 per sqm.
Future of Irish Commercial Property
The Commercial Property Review and Outlook 2015 Report indicates towards continued growth during 2015 and 2016 for Ireland’s commercial property. While results may not match those achieved in 2014, investment is still expected to reach €3bn in 2015 as a significant volume of assets are still due to be released to the markets by the banks. As mentioned above, there is some level of concern surrounding the potential lack of supply within the commercial property sector. However, measures introduced by the Government in the Planning and Development (No.1) Bill 2014 such as a vacant site levy and the provision of a “use it or lose it” clause for planning permission are expected to assist in increasing construction activity to meet the growing demand for property.