A Busy But Different Year In Prospect For The Irish Commercial Property Market In 2017
Economics, tax and politics to have a huge bearing on the trajectory of the CRE market over the next 12 months
Dublin, 17th January 2017 – Commercial property specialists CBRE today released their OUTLOOK 2017 annual report containing their final year figures for transactional activity in each sector of the Irish commercial property market in 2016 and their predictions for each sector in the year ahead. The property consultants say that 2016 was an extremely active year in the Irish commercial property market and that 2017 is shaping up to be a busy, albeit different year for the sector.
To say that 2016 was a year of surprises is clearly an understatement. The unexpected outcome of the Brexit referendum last June and in turn the US election result in November took the world by surprise. These seismic events will in due course influence the direction of economies the world over including Ireland’s and by default will have implications for the Irish property sector. While the Brexit result will, for the most part, be negative for the Irish economy and lead to GDP forecasts being downgraded somewhat, one of the sectors of the Irish economy that will potentially benefit is the commercial property sector if anticipated Brexit-related relocations from London materialise as we expect they will in 2017.
- 223 investment transactions of greater than €1 million were completed in the Irish market during 2016, totalling more than €4.5 billion between them. Investment spend surprised on the upside, skewed by a number of trophy transactions including the sale of both Blanchardstown Town Centre and Liffey Valley shopping centres in West Dublin. Indeed, 50% of investment spend last year comprised retail investments.
- CBRE expect to see continued appetite for Irish real estate from core buyers throughout 2017 with the biggest challenge being a scarcity of prime product to satisfy the volume of bidders. Against this backdrop, the property consultants expect that forward funding of new development will become more prevalent in the market this year.
- Total returns, rental growth and investment spend volumes are all expected to be lower in 2017 than last year.
- CBRE expect to see some new Irish REIT’s emerging in 2017.
- Prime yields are expected to remain stable this year but CBRE expect that there will be some upward pressure on secondary yields over the next 12 months.
- 66 hotel sales concluded in the Irish market in 2016 totalling over €805 million between them. This marks the third consecutive year in which more than 60 hotel transactions were completed in the Irish market in the calendar year.
- Some slowdown in transactional activity is expected in the hotel sector in 2017 following two record years.
- Some Dublin hoteliers may decide to capitalise on the demand for hotels in the capital and bring hotels to the market in advance of an increase in new supply coming on stream from 2017 onwards.
- Increase in forward-funding transactions expected in the hotel sector this year.
- 30 Dublin pubs were sold in 2016, totalling more than €43 million between them. This was a lower volume of pub sales than anticipated as improved trading conditions made some vendors reluctant to sell.
- The average Dublin pub price in 2016 was €1.44 million and this is expected to rise further this year.
Up to 40 pubs are expected to change hands in Dublin in 2017.
Limited supply in the city centre is expected to drive demand for suburban pubs over the next 12 months.
- Office take-up of more than 245,000m2 was achieved in Dublin in 2016 in 264 individual transactions. 147 of the transactions in 2016 were to Irish companies while 58 were to US companies and 33 were to UK companies.
Prime office rents in Dublin are expected to reach the peak of the current cycle in 2017.
First meaningful improvement in new office supply in more than 5 years to become evident this year.
Almost 225,000m2 of new office stock is due for completion in Dublin in 2017 of which 25% has already been pre-let.
Any deterioration in office demand from the USA in 2017 should be compensated for by an increase in Brexit relocation activity from the UK.
Industrial & Logistics
- Industrial take-up of almost 290,000m2 was achieved in Dublin in 2016 in 183 individual transactions – a third less than the record volume of take-up achieved in this sector in 2015, due to a shortage of modern accommodation to satisfy demand.
- Prime rents rose by 25% last year and there is potential for prime industrial rents to rise by another 14% in 2017.
Notable increase in speculative development activity expected in this sector in 2017 as viability of development improves.
Considerable appetite from distribution and logistics operators and data centres in particular.
- Potential for further rental growth on high streets, shopping centres and retail schemes in 2017 due to strong competition albeit the pace of rental inflation will be more subdued than in 2016.
- More new entrants to the Irish retail market expected this year following a large number of new entrants last year.
- Notable increase in planning activity in this sector in 2017 with some new retail development commencing also.
- 109 development land sales were completed in 2016 totalling almost €795 million between them.
Transactional activity in 2017 likely to be broadly similar to last few years in the absence of any large land banks being offered for sale.
Expect to see some semi-state organisations offering sites to the market over the course of the next 12 months.
A meaningful improvement in residential delivery from this year onwards is expected following a range of housing market interventions in 2016.
Increased appetite for sites for PRS and student accommodation will dominate in 2017.
Regardless of the economic or political backdrop, returns from Irish commercial real estate have been slowing for some time now following the extraordinary growth experienced in 2014 and 2015. This easing is expected to continue in 2017, particularly considering the unexpected tax changes announced in Budget 2017, which are likely to impact negatively on pricing this year. While we are likely to see some restructuring occurring as a result of the tax changes, we are not expecting significant change in the composition of investor capital flows into Irish real estate in 2017 with both Irish and European institutional investors expected to be most active again this year and Irish REIT’s focussing primarily on development and asset management.
Although the pace of rental inflation has eased and we are now approaching the peak of the current rental cycle at the prime end of the office sector, good rental growth is still forecasted to be achieved in some sectors of the market this year. Indeed, rental growth in all sectors in Dublin is forecast to be considerably higher than the European average in 2017.
Prime yields are expected to remain relatively stable in 2017 and as a result returns from Irish real estate will be largely generated from income from this point forward. Although total returns are, for the most part, likely to be in single digits in 2017, the return profile will continue to compare well with alternative forms of investment. As the New Year starts, there are certainly more clouds on the horizon than heretofore. However, as pricing normalises and we move further into the development phase of the current cycle, this will also give rise to opportunities. Irish real estate remains a sought after investment class although considering the more uncertain backdrop, from this point forward, investors will be focussed on achieving safe, reliable returns as opposed to putting capital at risk.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
In Ireland, with offices in Dublin and Belfast, CBRE is the country’s largest commercial real estate services company, now employing over 165 employees and offering a full range of property services including property sales and acquisitions, leasing and management, investment, corporate services, debt advisory, project management, consultancy, business rates and compulsory purchase, valuations and research. Please visit our website at www.cbre.ie or www.cbre.ie/ni.