Rent This Space

Brendan Keenan has an interesting article in the Independent today on the services sector:

Most of the growth in services exports is based on the same model as the previous boom in merchandise exports; the performance of foreign companies which have located operations here, for tax reasons to a large extent.

Despite its 50 years of success, there has always been scepticism about this model. If anything, the scepticism has grown, partly because Ireland has become more expensive, and partly in the belief that, 50 years notwithstanding, it cannot last forever and therefore must one day come to an end.

Neither of these propositions is self-evident. Total labour costs in Ireland are still among the lowest in the EU, according to this week’s survey from Deloitte. There is more of a problem with non-pay costs, but a tough-minded government could sort out a lot of that if the situation really demanded.

My own (fairly limited) experience of this -in terms of decisive factors for companies looking to expand or reduce service operations here- is that the cost of commercial rental property constitutes a thumping proportion of running costs.

A lot of service firms will look at their requirements in terms of the number of transactions to be handled (invoices to be processed, calls to be answered, whatever), and then assess their options based on how much it would cost to have a single transaction performed in a range of locations (Dublin, Warsaw, Mumbai, wherever). So for instance they’ll say $120 in Chicago, $50 in Dublin, $26 in Warsaw, etc. Having spoken to a few people about this, it would appear that in the case of Dublin, a lot of that $50 is made up of rental costs for office space. In dollars, transaction costs in Ireland over the last number of years for firms investing in Ireland have risen pretty dramatically relative to other locations, but -from what I have been told- this is not down significantly to wage inflation, but rather to rental prices (as well, of course, as a falling dollar).

In commercial property, prime rent per square metre per year in Dublin is €646, compared with €300 in Warsaw, and €210 in Budapest, according to this report by Knight Frank. Now before I proceed, I should point out that I know nothing about the specifics of the commercial rental market, so I don’t know how inelastic the overall demand for rental property in Ireland is.

What I do know is that there are plenty of places constantly looking to shift operations to other locations because Ireland is not cheap enough, and for these firms, demand for rental property is relatively elastic. Not so much the case for firms where transactions are relatively complex, requiring a lot of specialist knowledge, since it costs more to shift things, but for those jobs where you can train someone to do the job in a couple of months or less, there is constant pressure to shift operations elsewhere.

It would be interesting to see if the ‘tough mindedness’ Brendan Keenan sees as required from the government would extend to bringing down commercial property rents. I’m cynically inclined to think that such ‘tough mindedness’ would be applied to not bringing down commercial property rents, it being somewhat easier to focus, even though labour costs are still relatively low, on ‘wage restraint across all sectors‘, calling on our sense of duty to the nation, and by extension, to the prosperity of commercial property investors.

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January 2008

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