So says the Central Bank of Ireland which yesterday issued a financial stability report examining debt and the Irish financial sector. Of narrow interest on here is what the report had to say about future trends in house prices (bizarrely, nothing) and commercial property prices (quite a lot, mostly positive). The Bank has concocted a series of indicators which suggest that Irish commercial property prices which have already dropped 65% from peak values, may now be substantially undervalued by reference to economic indicators – employment, GDP, rents and “consumption”. Indeed on average the Bank considers commercial property to be more than 30% “undervalued” – mind you, using the Bank’s own figures, it would have thought that commercial property was undervalued by 12%, 28%, 30% and 32% in 2008, 2009, 2010 and 2011. This is what the Central Bank says:
Or to put it another way, if you bought a €100m property in 2008, you might have expected that to increase by 12% to get back to what the Central Bank thinks is the “proper value”. Instead three years later, your €100m property would be worth today, wait for it…€60m with the Jones Lang LaSalle index falling from 880 in Q4, 2008 to 527 in Q4, 2011.
Even with the benefit of certainty on the Upward Only Rent Review issue, new tax incentives to buy and hold commercial property and the straight-forward reduction in stamp duty on transactions from 6% to 2% in the December 2011 Budget, commercial property rose by just 1.1% in Q4, 2011 and if you strip out the stamp duty reduction, the fall would have been 2.6%, following falls in the previous four quarters of 4.2% in Q3, 2011, 5.7% in Q2, 2011, 1.5% in Q1, 2011 and 3% in Q4, 2010.
The importance of stability and recovery in commercial property prices is stressed in the Central Bank report, but it might be worth again saying that the National Competitiveness Council believes that property is still over-valued by reference to its rental potential and underlying commercial worth to businesses operating in the State.