BREXIT Vote Takes Irish Commercial Property Market By Surprise
Irish commercial property market has experienced a strong first half but now faces some uncertainty in light of the Brexit vote
Dublin, July 1st 2016 - Commercial property specialists CBRE today released their latest bi-monthly report for 2016 focusing on recent trends and transactions in all sectors of the Irish commercial property market at the mid-year point. Within the regular CBRE July bi-monthly report, the property consultants also share some initial thoughts on the potential implications last week’s Brexit vote may have for the commercial real estate market in Ireland specifically.
Click here to download full report: CBRE Ireland | Bi-monthly Research Report July 2016
Anything that creates uncertainty is unwelcome in the property market and to say that the Brexit vote has created uncertainty is clearly an understatement. However, it will be some time before there is clarity on how the Irish economy and in turn the real estate sector will be affected by this unexpected development. In the short term, it is likely that some decisions will be delayed as occupiers and investors take time to consider the implications of the Brexit referendum vote. One of the only positive outcomes for the Irish commercial property market is a potential increase in demand for Dublin office properties in the medium to long term as some financial services, technology and other firms seek to relocate from London to alternative Euro-denominated capitals. If this materialises in due course, Dublin will need to have a ready supply of modern office stock and more importantly affordable residential accommodation to cater for this increased appetite
- The volume of office take-up signed in the last three months (while impressive at over 40,000 square metres) is not representative of underlying activity with several sizeable office transactions currently in negotiations and due to sign over the next few months, thereby only manifesting as take-up in the second half of the year.
Potential occupiers are obtaining better terms for refurbished office accommodation as opposed to new buildings in the current climate, which is easing rental pressures to some degree.
- Prime office rents in Dublin appear to have stabilised at current levels of €19 per square metre (€7.50 per sq. ft.) for now but are expected to rise again in the Autumn as new transactional evidence emerges.
- At this stage, it appears that several schemes that originally had target completion dates of 2018 will now not be completed until 2019 or beyond.
Industrial & Logistics
- Industrial take-up during Q2 2016 (and indeed in the first half of 2016) has been somewhat lower than the record volumes of activity achieved last year. However, this is reflective of a severe scarcity of modern industrial and logistics accommodation in core locations, as opposed to a weakening in demand levels.
- With prime industrial rents continuing to edge upwards, the viability of new development will ultimately improve. Prime headline rents in Dublin are now in the order of €5 per square metre and are firmly on target to reach CBRE’s forecast of €4 per square metre during the second half of 2016.
- There has been a notable improvement in demand for good industrial sites in the first half of 2016. There are a number of active requirements for industrial land and this is likely to continue in the second half of the year.
- Industrial and logistics occupiers who are net exporters to the UK and potentially exposed to fluctuations in Sterling as a result of the Brexit vote are unlikely to make large expansion or relocation decisions in the short term until the landscape is somewhat clearer.
- Retailers continue to report severe shortages of good quality accommodation in certain schemes and locations, which is frustrating their rollout and expansion plans in the Irish market and in turn fuelling rental growth as competition for the best pitches escalates.
News that John Lewis has agreed a partnership deal with Dublin city centre department store Arnotts, which will see the brand trading in the Irish market for the first time, has been broadly welcomed.
- The retail park market around the country has experienced increased demand of late although much of this activity is emanating from a relatively small pool of retailers, many of which are furniture and household sector specialists.
- Up until the end of June, the only obstacle to higher volumes of activity in the retail sector of the Irish market in the second half of 2016 was a shortage of prime units in the locations that retailers are specifically targetting. However, Britain’s vote to leave the European Union has the potential to lower Irish GDP expectations and dent consumer confidence to some degree.
- Over the long term, the potential implementation of tariffs on goods being imported into Ireland from the UK would undoubtedly create a significant administrative and financial burden on retailers and impact on their competitive position. Of more immediate concern however, is the potential leakage of shoppers from the Republic into Northern Ireland and a potential reduction in UK tourists into Ireland spurred by currency movements in the aftermath of the Brexit vote.
- The Irish commercial property market is on course to outperform most, if not all, other European countries again this year. However, total returns from Irish commercial real estate in 2016 are expected to be somewhat lower than the record returns achieved in the last two year period.
- Buoyed by a number of recent transactions including the acquisition of Blanchardstown Town Centre for €50 million and the PWC headquarter office building in Dublin Docklands for €42 million, investment spend in Q2 2016 has been impressive with total spend in the first half of the year now comfortably in excess of € billion.
Even before the Brexit vote was announced on June 24th, annual investment spend for 2016 was expected to be somewhat less than that recorded in the Irish market in 2014 and 2015 when deleveraging activity was at its peak. However, the unexpected result in the referendum has created uncertainty that may delay some investment decisions in the short term until a clearer picture emerges as to the potential implications of Brexit on transaction volumes and values.
- A total of 15 hotel properties changed hands in Ireland during Q2 bringing the total number of hotel sales completed in the first half of the year to 29, totalling more than €136 million between them. This is a considerably higher volume of H1 spend than had been anticipated, particularly when you consider that it excludes some of the larger transactions that have dominated the headlines in the last few months including the 4 star Gresham Hotel in Dublin city centre, the Doubletree in Dublin 4 and the Lyrath Estate in Kilkenny, all of which are now at advanced bidder stage but have yet to conclude. The H1 spend also excludes many hotels that have changed hands as part of recent loan sales such as Projects Ruby and Emerald, which were acquired by Oaktree/CR in recent weeks.
- There is approximately €00 million of hotel transactions currently in negotiations which suggests that annual transaction volumes will match, if not exceed, last year’s record.
- The depth of buyers and strong pricing achieved for the hotels that have traded in recent months is encourging other willing sellers to bring their properties to the market. With many of the prices that have been guided for hotel assets in the first half of the year having been comfortably exceeded, we expect to see more hotel properties being launched for sale around the country over the course of the coming months to satisfy buyer appetite.
- According to CBRE’s research, there is potential for the delivery of up to 9,000 additional hotel rooms in Dublin if all of the schemes in the planning process are delivered. Against this backdrop, we expect to see a number of sites that have the benefit of planning permission for hotel projects to be offered for sale over the coming months.
- In the short term, the drop in the value of sterling following the surprise Brexit vote has the potential to have severe repurcussions for the hotel and tourism sector in Ireland considering that more than 40% of tourist activity in Ireland each year is typically generated from visitors from the UK and Northern Ireland.
- While a number of Dublin pubs have recently been launched for sale, the stock of properties coming to the market in the first half of the year was somewhat less than had been anticipated. This is expected to change in the second half of the year as licensed premises that traded as part of loan portfolios are brought to the market.
- Demand for well-located pub premises remains strong with evidence of increased appetite for pubs in suburban as well as city centre locations over recent months.
- The trading performance of pubs has improved considerably and has undoubtedly been boosted in recent weeks by good weather and the Euro 2016 tournament. Just as in the hotel sector, there are concerns about the potential impact the drop in the value of Sterling will have for licensed premises.
- According to CBRE, there were 23 land sales totalling €29.5 million signed in the Irish market during Q2, bringing total spend in the first half of the year to €89 million in 53 sales. This compares with €76 million in 54 sales in the first half of 2015.
- CBRE expect to see increased appetite for alternative uses including student accommodation and nursing homes over the coming months, both of which are defensive sectors in this post-Brexit referendum universe.
- With new development plans coming into force, the viability of developing purpose built ‘multifamily’ or PRS schemes will improve as the year progresses.
- Until there is clarity on the ramifications of the Brexit vote, developers are likely to proceed with caution. However, if Ireland experiences increased appetite from office occupiers seeking to relocate to Dublin over the medium term as anticipated, there will clearly be a need to ensure that we have sufficient office and residential accommodation to satisfy these requirements, which bodes well for the development sector.
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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.