Entering The Final Straight Of What Has Been Another Busy Year In The Irish Commercial Property Market
Dublin, November 1st, 2017 - Commercial property specialists CBRE today released their final bi-monthly report for 2017 focusing on recent trends and transactions in all sectors of the Irish commercial property market as the market enters the final straight of what has been a busy year despite the fact that absolute returns and transaction volumes moderated year-on-year.
The Autumn season has been particularly busy as is generally the case with many assets having been formally launched for sale during September and October and negotiations now ongoing in an effort to conclude many of these transactions before Christmas. Activity in the occupier markets has been strong in 2017 with the Dublin office market being an exemplar performer, boosted by strong job creation figures and continued healthy volumes of foreign direct investment. Investors continue to cite Ireland’s strong economic backdrop, levels of occupational activity and the potential for further rental growth and yield compression as rationale for investing. Considering the weight of capital chasing limited investment opportunities, we saw some hardening of prime yields over the course of the Autumn. Needless to say, the decision by the Irish Government to increase the rate of stamp duty on non-residential property sales from 2% to 6% in last month’s Budget has not been well received considering the impact it will have on property valuations and pension fund values in Q4.
Take-up in the Dublin office market during the first nine months of 2017 reached 183,630m2 - an impressive result considering annual average take-up in Dublin in recent years has generally been in the order of 200,000m2 per annum. The fact that there was an additional 100,000 square metres of office stock reserved at the end of the third quarter bodes well for take-up volumes in Q4 and indeed for the year as a whole.
Several large mandates that have been in the market for some time have now reportedly shortlisted buildings, which will boost take-up over the next few quarters. Brexit-related activity continues to add an additional layer of demand with several more companies having recently announced their intention to relocate or expand their existing Irish facilities as a direct result of Brexit.
With pre-lettings accounting for approximately one quarter of take-up in the Dublin office market at present, it is likely that all of the more than 270,000m2 of new office stock delivered in the capital during 2017 will have been leased by year-end, which demonstrates that new supply is being delivered in a very measured fashion.
Prime office rents in Dublin have now risen to €681 per square metre (€63.50 per sq. ft.) and are expected to reach €700 per square metre by year-end. Meanwhile, prime rents in the suburbs of the capital have also increased recently. Prime rents in the south suburbs are now in the order of €306.66 per m2 or €28.50 per sq. ft. while prime rents in the north and west suburbs are now €200 per m2 and €188.30 per m2 respectively. A busy few weeks are now ahead with several large office leasing transactions due to sign before Christmas including a number of notable transactions in the south suburbs of the city as well as in the south Docklands.
Industrial & Logistics
Take-up in the Dublin industrial and logistics market in the first three quarters of 2017, at approximately 170,000m2, was down 20% year-on-year. This is somewhat disappointing considering the volume of demand for modern industrial and logistics accommodation in and around the capital.
Over the last couple of years, the industrial market has been characterised by a significant shortage of modern accommodation in locations preferred by end users, leading many potential industrial occupiers to opt for ‘design and build’ solutions. However, now that prime rental values have reached a level that justifies new development, we expect to see this situation alleviated. It is therefore not surprising that there has been an increase in demand for well-located sites capable of accommodating modern industrial and logistics facilities over recent months, particularly against a backdrop of increased appetite as a result of Brexit.
Industrial and logistics developers are encouraged by the volume of active requirements in the market at present with more than 117,000m2 of active demand prevailing at the end of Q3 and at least one live requirement for more than 18,587m2 (200,000 sq. ft.).
- Having increased by 6% in the first half of 2017, prime industrial rents in the capital remain stable at €99.50 per square metre as we approach year end while rents for secondary and provincial properties have increased to approximately €61.87 per square metre and €53.80 per square metre respectively.
Retailers are now fully immersed in their Christmas trading programmes and as a result CBRE expect to see less focus on securing premises and concluding property transactions in this sector until after the New Year.
The primary focus for retailers over the next two months is capitalising on the underlying strength of consumer appetite in the Irish market, maximising footfall and growing retail sales activity, both in-store and online. With Sterling still weak, it remains to be seen to what extent these efforts will be challenged by leakage to Northern Ireland and indeed to UK websites as the now traditional Black Friday and Cyber Monday sales approach.
With uncertainty around Brexit continuing to hamper the expansion and relocation plans of many UK retailers, much of the activity in the Irish retail market is currently being driven by indigenous retailers with a scarcity of new entrants very much in evidence.The majority of the retail leasing deals being negotiated at present are emanating from a distinct cohort of retailers with those involved in the food and beverage sector being most active.
- CBRE expect to see strong Christmas trading in Dublin and other dominant retail locations over the next two-month period with Dublin city centre trading patterns likely to be particularly boosted by the welcome completion of LUAS construction work.The opening of the long-awaited Victoria’s Secret store and the re-opening of Bewley’s on Grafton Street later this month will also boost footfall on the capital’s main thoroughfare in the run-up to the festive season. Prime retail rents remain stable at present.
- The recent unexpected hike in stamp duty for commercial property in Budget 2018 from 2% to 6% will have a one-off hit of approximately 3.8% to property valuations and pension fund values in Q4. This will see the 2017 annualised return from Irish commercial real estate easing back to single digits albeit the rate of return remains attractive compared to returns being achieved in other European locations.
- Demand still remains strong regardless with core and core plus investors chasing a limited supply of product. Going forward, CBRE believe we may see some assets being sold through Special Purpose Vehicles as was the case when the rate of stamp duty was at or higher than 6% previously.
- Approximately €1.3 billion of investment transactions (exceeding €1 million) completed in the Irish market in the first nine months of 2017. The likely outturn for 2017 is expected to be in the order of €2.25 billion. However, estimating annual investment spend is difficult with several large transactions ongoing, some of which will complete before year-end and others which now are likely to fall into 2018.
- Prime office yields hardened in the last month on the back of new transactional evidence with prime yields in the sector now trending at 4.25% and likely to strengthen further over the coming months. Prime yields for multifamily investments are also trending at 4.25% at present. Meanwhile, prime high street yields are steady at 3.15% with prime industrial at 5.5%.
- Based on transactions that are expected to complete before the end of the year, CBRE expect the overall volume of spend in the development land sector to be broadly similar to last year’s outturn of approximately €800 million. With a few notable exceptions, transactional activity continues to be dominated by relatively small land parcels. The property consultants say this is obviously disappointing considering the pent-up demand for development sites in the market at present, particularly in the residential sector in core cities including Dublin, Cork, Limerick and Galway.
- One of the more encouraging announcements of late was one from the Minister for Housing that intimated that Government are prepared to consider reviewing urban building heights in Dublin, relaxing car-parking ratios in schemes within 1km of a Dart/LUAS line or urban rail and facilitating co-living options in urban locations. While this many of the other policy announcements made over recent weeks and months have been welcome and offer solutions that have the potential to unlock much-needed supply, we now need clarity to enable these plans to be put into action to facilitate timely delivery.
- Transaction volumes in the Irish hotel market in the first nine months of 2017 were somewhat disappointing with only 23 hotel sales, a capital volume of €87 million between them, having completed in the year to the end of September. The final outturn for the year will however be considerably stronger with several significant transactions including Carton House Hotel in Maynooth, Co. Kildare, and The Knightsbrook Hotel in Trim, Co. Meath now nearing completion and Galway’s Radisson Blu Hotel having recently changed hands for a reported €50 million. Meanwhile, negotiations are nearly concluded on the investment sale of The Gibson Hotel in Dublin Docklands - the largest Dublin hotel to trade in 2017.
- The hotel sector has welcomed the Irish Government’s decision to retain the 9% VAT rate in last month’s Budget although the four percentage points increase in the rate of Stamp Duty on non-residential property sales took the market by surprise and is certain to have influence on future hotel purchases. Meanwhile, the relaxation of the Capital Gains Tax (CGT) relief hold period from 7 years to 4 years for assets purchased up to the end of 2014 may lead to an increase in hotel property re-trades from next year onwards.
- Activity in the Cork market has been relatively strong over the Autumn with a good volume of investment stock released for sale over recent months. Investor appetite for opportunities in Cork has increased noticeably, buoyed by the strength of underlying occupational activity and comparatively more attractive rents and yields than in Dublin.
- Considering the weight of capital seeing investment opportunities in the Cork market, prime yields have hardened a little of late with prime high street retail and prime office yields now at 5.75% and 6.0% respectively and yields in all sectors potentially trending stronger over the coming months.
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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
CBRE U.C., (CBRE Ireland) registered in Ireland, no. 316570. PSRA Licence No. 001528 is the country’s largest commercial real estate services company with offices in Dublin and Cork. Currently employing over 135 employees, we work with occupiers, investors and developers of office, industrial and logistic, retail, hotel and healthcare property, providing strategic advice and execution for property sales and leasing; tenant representation, corporate services; property and project management; appraisal and valuation; development services; investment management and debt advisory; business rates and compulsory purchase and research and consulting. Please visit our website at www.cbre.ie