Noel Rock (Dublin North West, Fine Gael)
Link to this: Individually | In context | Oireachtas source

137. To ask the Minister for Finance if his attention has been drawn to the study by a company (details supplied) which reported that nearly half of the office space leased in Dublin during the last quarter of 2016 has not been built yet; the actions being taken by his Department to tackle the scarcity of new office space in Dublin; and if he will make a statement on the matter. [8187/17]

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

The recent growth in the demand for office space is a reflection of the recovery in the economy and the sustained growth in overall employment. According to the Savills report referenced by the Deputy, the take-up of office space exceeded 200,000 sq.m for the third successive year in 2016. Given the sustained level of demand and the increase in prime office rents, the construction of commercial office space has significantly picked up following a near cessation in activity over 2011 to 2015. Approximately 388,000 sq.m of office space is currently under construction, equivalent to 9 per cent of the stock of office space in Dublin. According to CBRE, approximately 77,000 sq.m of office space was constructed in 2016 alone. Together with a strong granted planning pipeline, this should help to address the current scarcity of office space, particularly in the Dublin region.

The proportion of pre-let office space as a share of overall lettings accelerated significantly in the second half of 2016, a trend which is consistent with two characteristics of our office market: (1) the pent-up demand resulting from a lack of development during crisis years; and (2) the increased discipline in financing construction and development reflecting lessons learned through the financial crisis.

Regarding pent-up demand from a lack of development during crisis years, it is well understood that there was no new development nor demand for such development - during Ireland's financial crisis years, which were marked by low property prices and high vacancy levels. The success of our economic recovery has brought with it an increased demand for office space. It is the nature of property markets that construction typically lags demand due to the time needed to plan and develop a building once the demand for that building has been identified. In the meantime, price and vacancy levels absorb the impact of such increases in demand. These dynamics are evident in the report which notes the current low vacancy rate in prime office space as reflecting the extent of pent-up demand for space and the construction lag. As an open economy, it is in our interest to minimise the construction lag for buildings for which there is proven demand so that we can prevent excessive pressures from building up within the market's price and vacancy response. To this end, the Government has identified a number of initiatives in the Rebuilding Ireland Action Plan which seek to improve the market's ability to respond to demand more quickly both in the commercial and the residential markets.

Turning to the increased discipline in our financing markets, I understand that pre-letting agreements are increasingly becoming a characteristic of office development activity. Securing a pre-let for a development significantly reduces the risk associated with that development, which increases the availability of senior debt finance, significantly reducing the financing costs of the development. One of the factors that contributed to the collapse of the property market and the wider economic crisis was the inappropriate use of debt financing for speculative development. We have learned that only development with proven demand should attract significant levels of debt finance. It is appropriate that these risks of speculative development are not financed by a predominance of senior bank debt, but rather by equity investment, more appropriate for such speculation. As the market adjusts to equilibrium, the use of pre-lets to demonstrate proven demand is likely to be a permanent feature of our market which will help to unlock continued sources of funding.

It is this dynamic, driven by the proper risk-based financing of development, that brings discipline to our development market. Requiring that a high proportion of a building be pre-let helps to curb the risks of speculative development, encourages sustainable lending practices in the commercial real estate market and allows funding providers to manage risk appropriately.

I am encouraged that these market metrics are being captured, analysed and discussed. I wish to assure the Deputy that my Department will continue to monitor these and other developments in the commercial real estate market.