IRELAND 18 February 2018
Value for Money Examination 24: The Provision and Management of Industrial Property Summary
The availability of industrial property is an important factor in attracting new business ventures to regional locations. In recent years, the private sector has been willing to take on this role in areas where there is a viable market for property and where there is a potential for economic gain. Three public sector Agencies are involved in the provision of industrial property for the purposes of achieving economic growth either nationally or in regional and peripheral areas.
IDA Ireland provides industrial land and property in the pursuit of national & industrial development objectives.
Shannon Development uses industrial property to achieve its primary target of economic growth in the Shannon region.
Udaras na Gaeltachta (An tUdaras) provides industrial property to increase employment in the Gaeltacht areas as a means of preserving and extending the use of the Irish language.
At the end of 1996, the Agencies were responsible for portfolios of industrial property with a book value of ?274 million, comprising 2,200 hectares of land and 1.2 million square metres of factory space.
The main objectives of the examination were to ascertain
the extent to which the property portfolios are managed economically and efficiently
whether industrial property is acquired, developed and disposed of in an economic and efficient manner
the appropriateness of the performance measurement systems used by the Agencies taking into account their diverse primary objectives.
Management of the Property Portfolios
The cost of managing the portfolios and the occupancy rates and rental income achieved were the key indicators of economy and efficiency investigated. Management information to support the analysis of performance was limited. In particular, financial data about costs and revenues was not integrated with property data and little information about the history of occupation or the physical condition of assets was available. The Agencies have acknowledged these shortcomings and are upgrading their systems to improve the situation.
The average holding costs incurred by the Agencies (j3.90 to ?5.20 per square metre) was found to be higher than the costs incurred by the private sector ((2.25 to ?3.25 per square metre). This was partly explained by the willingness of the Agencies to bear costs which would be passed on to a private sector tenant and the need for a higher standard of specification to support industrial promotion objectives. Higher costs are also attributable to the age of the buildings in the portfolios.
None of the Agencies set minimum occupancy rate targets. The Agencies view occupancy in terms of the need for some vacant space to show to visiting industrial promoters rather than from the perspective of maximising the occupancy rate. Occupancy levels of 82% to 86% were achieved at June 1998. Despite the current availability of unoccupied space, the Agencies maintain that they have a shortage of space in some areas targeted for development.
The Agencies aim to achieve a market rent based on the age and location of properties and their intended use. Guideline rent rates designed to reflect current market rates are in existence but are not used as formal targets. The average rent achieved by the Agencies did not reach the guideline in 1996. As the guideline rent is exceeded in many cases, particularly in urban areas, this suggests that some properties were let at rates below the market level. As the rent achieved influences the potential disposal price of the properties, this has an effect on the potential realisable value of these properties.
Industrial Land and Infrastructure
The Agencies need to buy and develop land in order to be able to meet the demand for industrial sites. This is an important activity for IDA Ireland which is concentrating on selling serviced land for development by private sector contractors.
Taking the lead time for developing land and the annual demand into consideration, the Agencies were found to hold more land than is required to meet demand in the medium term. Almost one third of the land area held by IDA Ireland and Shannon Development in 1996 was not required because it was in the wrong place or was unlikely to be used in the foreseeable future.
Prices paid for land acquired in 1995 and 1996 were reviewed and found to be reasonable relative to market conditions. The indicative costs of developing land are generally higher for Shannon Development and An tUdaras than the normal amount the private sector would be willing to pay. In some cases, this is due to the peripheral location of the land and to the level of specification required.
The unit sales prices achieved by IDA Ireland and Shannon Development in 1995 and 1996 for the disposal of land were strong relative to market rates. An tUdaras had no sales of land in this period.
The demand for industrial buildings can be satisfied either by encouraging the private sector to invest in property or by the acquisition, construction or refurbishment of buildings by the Agencies themselves. The Agencies are market makers in their respective areas and should keep the impact of their policies on the promotion of private sector involvement under review. Since 1996, IDA Ireland has been actively disposing of its buildings and has a long history of assisting the private sector to invest in the provision of industrial buildings. It is more difficult for the other Agencies to encourage private sector involvement due to the peripheral nature of the areas served.
The costs of provision of buildings were reviewed and found to be within a reasonable range, apart from three (Idaris projects which had a high specification. The option of refurbishing existing older buildings in the property portfolios is not seen by the Agencies as economic as many of the buildings are in areas where there is no demand.
The Agencies establish the selling price of buildings by reference to independent valuations of prevailing market value. Shannon Development and An tUdaras achieved good prices for transactions in 1995 and 1996. The prices achieved by IDA Ireland were lower due to the age and condition of the buildings sold and in some cases, to lease conditions which fixed rents at low levels.
Return on Investment in Property
The Agencies do not keep adequate information to use the conventional approach for measuring the return on their investment in industrial property. This approach would determine the economic return achieved by reference to the present value of the cash flows experienced over the period of ownership. Performance would be evaluated by relating the return achieved to the public sector discount rate which takes account of the special market conditions experienced by the Agencies.
In establishing the economic return achieved on property it is important to eliminate all implicit subsidies to tenants in the form of uneconomic rents. These subsidies should be considered when evaluating the performance of the Agencies in their core activities of industrial development and economic growth.
The financial rate of return achieved by the Agencies in 1996 was between 3% and 4.7% which is considerably lower than the public sector discount rate. Apart from the implicit subsidisation of charging rents which did not recover the cost of property provision, the rate of returnreflects a lack of economy and efficiency through holding too much land for too long, holding property for which there is no market and a willingness to bear high current property costs.