Commercial Property Market Is Inflated and May Burst Again – McWilliams

Commercial Property Market Is Inflated and May Burst Again

Dublin property investors had better hope that Brexit happens soon.

They should also hope that it’s not just a ‘hard’ Brexit, but a granite Brexit — a Brexit that’s as hard as possible. They should be betting on the buffoonery of Boris Johnson, down on both knees praying for a massive barney between Davis and Barnier.

A granite Brexit might prompt the migration of hundreds of corporate refugees from isolated London to the freewheeling safe haven of Dublin. If Brexit doesn’t drive a massive uptake in demand for prime property, we are in for a massive wobble in our inflated commercial property market.

Before we remind ourselves how this property story goes, let’s have a look at the facts: the glossy brochures are back, stockbrokers are packaging all sorts of property-related products to “investors”, the price of ad space in the property porn sections of the press is surging and of course the skyline is full of cranes and Armagh flags.

CBRE – a property-flogging outfit – tells us there are currently 31 office schemes under construction in Dublin, which is more than 380,000sqm in the pipeline. They tell us that more than 30% of this stock is already let. It also gushes that 44% of the office stock due for completion before the end of this year has already been pre-let. Meanwhile, agents tell us that prime office rents in the Dublin market stand at approximately €673 sqm.

It looks like things couldn’t be healthier.

Office take-up in Dublin surged 101,000sqm in the past three months, bringing total take-up in the first half of this year to more than 150,000 sqm. That’s a lot of space. 81 individual large office lettings were signed in Dublin since March (45 to Irish companies; 18 to US firms and 11 to the Brits). This is more than double the figure for the period from January to March.

Dublin Office Rent, 2009 - 2017

- Click to enlarge

Before we get carried away, remember rents are a cost and Ireland is competing with other European countries, so let’s compare our prices, not with some of Europe’s poorest countries, but why not with its richest, Germany? This will give a bit of perspective.

Comparing our prices with similar rents in Germany, we see that Dublin is already massively more expensive. Prime rents in Frankfurt are €474 sqm per annum. Remember Dublin is charging €673 sqm. The difference — €199 per annum — means that Dublin is 42% more expensive than Germany’s most expensive city. Once you start comparing other German cities, the extent of Ireland’s commercial property rip-off becomes more evident. Take Munich, capital city of Germany’s richest province Bavaria. Prime rents in Munich are €420 sqm per annum. In Hamburg, Germany’s sophisticated northern powerhouse, prime rents are €312 sqm per annum, while in Dusseldorf, the cross-road of Europe, prime real estate will set you back €318 sqm per annum – less than half of what it costs you in Dublin.

In all German markets, vacancy rates are higher so that means there’s much more choice.

When the price of something as basic as office space is profoundly more expensive in a country that has a much lower economic footprint, much smaller population and less rich capital base, you should worry.

The rebound in the Dublin commercial property market has been significant… (see chart above)

…

Meanwhile the foreign investors have got out with their profit and the Irish are left thinking they can get rich by selling Ireland to each other.

Wait, haven’t we seen this before? Maybe Brexit will ensure a happy ending this time?

Total Global Debt, 2002 - 2017

- Click to enlarge