We are in a very strange world indeed at present. In economics we are taught that Price is determined by demand and supply. If demand exceeds supply, price tends to rise. If supply exceeds demand, price tends to fall.
In the commercial property investment market in Ireland there is little or no available supply yet there are many foreign investment funds seeking product. Even more so many of these funds are after the same type of product i.e modern, solid income producing investments. Even still however according to IPD capital value growth is negative. Why is this?
There are several ingredients needed in order for markets to work efficiently. Included in these are full information i.e transparent prices and well informed consumers and strong institutions that protects property rights and ensure that contracts are enforceable. Neither of these are present in the market at the moment. The Government manifesto on rent reviews means that there is no certainty that lease contracts that determine rental flow will be enforceable going forward. Lack of activity means that full price information is also not available.
It is impossible for the market to reach equilibrium whilst this scenario exists with no party having information on the likely outcome. Risk is being priced differently. Purchasers are pricing in the downside risk of a change in legislation leading to downward rent reviews whilst vendors are hoping that the current situation will be maintained. Whilst risk exists, valuations need to reflect this and hence values continue to fall.
Markets need certainty. Until we get this certainty the market cannot function efficiently and effectively stagnates. We need decisions and quickly!
