IRELAND - Ireland's real estate industry has tough times ahead and is unlikely to recover any time soon, according to analysts at the SCS/IPD Annual Results presentation in Dublin this week.
An asset price recession, the rapidly-deteriorating labour markets, public financing issues and rising yields are the main concerns facing the Irish property markets going forward.
Total property returns in 2008 stood at -34.2% and were driven mostly by a decline in capital growth. Capital values stood at -37.2%, however, rental values were up by 2%, albeit they are expected to decrease in 2009.
"While income returns, rental growth and the restructured residual contributed positively to total returns in 2008 the huge outward movement in yields more than counteracted this affect," said Angela Sheahan, head of indices at IPD.
The retail sector was the worst performing sector and the most impacted by widening yields, delivering returns of -40.2%. Yield impact for retail was -45%, however the retail sector did actually grow 3.4%.
The yield impact for offices was -36.4% and the sector recorded the weakest growth, at 1%, while industrials delivered returns of -21.8% and grew by 1.8%.
According to Dermot O'Leary, an economist at the Goodbody Stockbrokers, Ireland's economic structure was "in the wrong place at the wrong time", as its economy was growing much faster than others going into the recession and was helped by banks abroad lending to fund domestic construction activity.
This has partly led to an oversupply in the housing market, which O'Leary believes will lead to a "two-speed housing market emerging over the next two years."
The middle regions of Ireland are predicted to experience higher levels of oversupply and stronger property value declines, while Dublin and its surrounding areas are expected to fair better.
Sheahan said transactions and investments "completely dried up" by the second half of 2008 and vacancy rates increased. The average vacancy rates for all property levels in 2008 were 6.8% compared to 4.8% the year before.
Over a five-year-period, property has slightly outperformed bonds in Ireland, while over 10-25 years it has been the best performing asset class.
The limited and volatile nature of Ireland's markets is unlikely, however, to attract large institutional investors like pension funds.
Ian Cullen, co-founder of IPD, said: "I think now would be a fairly unlikely time for mainland European pension funds to start investing in the Irish real estate market not just because of the current market uncertainty but also because of its small size - they could not get a big enough exposure."
Another concern facing Ireland's real estate industry is a lack of pricing transparency in the residential market, which is reducing investors' confidence to begin reinvesting.
Ireland's economy is predicted to suffer a 5% contraction this year and experts say more must be done to boost liquidity into the market.
"First we must start with the stability in the public finances. It must be credible and achievable. As part of this we should continue to focus on infrastructure spend," said O'Leary.
"If we are going to get to the root of the problem we are going to have to stall the fall in asset prices," he added.
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