The Irish government must look beyond the signs of recovery to ensure the wrong kind of construction does not prompt another property bubble, a senior agent has warned.
There are already signs Ireland’s property market is getting out of control, fears Angus Potterton. “As a country we certainly don’t need another boom and bust cycle and the real danger will come if the government just sits back, does nothing, and lets the market take care of itself,” added the managing director of global real estate services provider Savills.
The weakest point in the bubble-and-bust cycle is Dublin, says Potterton. The office shortage in the capital means there will almost certainly be a spike because the process of bringing new office blocks to market will be slow and it will be at least two years before we have significant office supply. “As a result,” he said, “rents will jump massively, the new supply comes online eventually and rents could fall again, and in six or seven years’ time we are back to square one.”
Prime Dublin office rents have risen sharply since the middle of 2013 and building new office blocks once again makes economic sense. It’s that 18 to 24-month lead-in time for Grade A developments that is most worrying. “It is a slow process and, just as you are seeing with the residential market, there has been a spike in prices through a lack of supply,” he said, stressing the government must legislate now to speed up the planning process.
“There is a strong demand for renting offices at the moment and that is showing little sign of slowing down,” he added. “The Grade A office vacancy rate is about four per cent, well below where it should be. In a normal market you are probably looking at a vacancy rate of six to eight per cent and that provides that little bit of headroom to keep rents in check and deal with a big influx into the market.”
Despite the recovery — and with internet and high-tech companies like Facebook and Google gobbling up entire buildings — certain parts of Dublin are still struggling with vacant office blocks. This, said Potterton, was another point where government intervention was urgently needed.
“It is a dirty word these days, but the government should look at the whole issue of incentives for the office sector,” he said. “If you look back to the development of Ireland’s International Financial Services Centre there was the double rent allowance. Today, there are areas of Dublin like Smithfield and Thomas Street where incentives would go a long way to landing a badly needed anchor tenant.”
Using Google as an example he said the knock-on effect of internet giant’s presence at Grand Canal Dock was increased demand for nearby office space and an even stronger residential market. “That all came from Google’s arrival and the government should now be looking at ways and incentives to attract other major tenants to different parts of the city,” concluded Potterton.
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