2018 has been another very strong year for the Irish Commercial Property market. During the year a changed property market landscape has emerged, industrial assets are increasingly in demand and the retail environment continues to evolve, although not to the same extent or as adversely as in the UK or parts of Europe.
While global stock markets and the ISEQ (-20% year to date to 14th December) continue to experience a high level of volatility, the domestic economy’s main economic indicators continue to perform strongly. As a result commercial property markets, which are not correlated to stock markets but are reliant on the wellbeing of the general economy, are following suit and are generating strong single digit returns.
Prime yields (a yield in simple terms is the passing rent for a property as a percentage of the capital value of the property) for Office, Retail and Industrial and are now running at 4%, 3.2% and 5.5% respectively (Lisney).
I believe the prospects for 2019 remain positive. The Irish Economy continues to perform well and the Economic and Social Research Institute (ESRI) expects GDP growth of 4.5% in its outlook for 2019. They do warn however that a no deal Brexit could have a significant impact on the Irish Economy.
A recent PwC/ULI ‘Emerging Trends Europe’ report is ranking Dublin as number 3 out of 31 to watch in relation to overall investment and development prospects for 2019 with rents and capital values expected to increase by nearly 4%.
The office sector has undoubtedly seen the most activity year to date. As a result of increased demand, new builds, development and refurbishment activity have gathered momentum. Due to high rental levels in the city centre there has been a notable increase in activity in the suburbs. Lettings to computer and technology companies made up about 40% of demand this year buoyed by one particularly large transaction.
With demand remaining strong for office space, the sector should continue to perform well into 2019. Although still in growth phase, I believe the office rent cycle returns will slow down over the coming year into 2019/2020.
The retail sector is receiving negative publicity at present predominantly on foot of the continued expansion of e-commerce. The pace of retail sales growth in Ireland nevertheless has improved over the past 12 months, coming in at a healthy 5.8% year on year (October 2018, CSO). Certain sectors are performing considerably better than others and during the year spending on hardware, homeware, food and beverage have seen very strong demand. Read our “Retail Sub-Sector” paper here.
The industrial sector continues to remain in high demand, with levels in line with strong activity seen in 2013 and 2014. With demand gathering there is again an increase in developers progressing new build plans both pre let and speculative.
There was strong growth in provincial markets over the course of the year. Supply constraint is limiting growth in some of the regional markets however planning permission and building activity is beginning to catch up with demand providing much needed office and industrial space in particular for the regions.
At this point is difficult to gauge the full impact ‘Brexit’ will have on the Irish economy in general, given our reliance on the UK. If exports to the UK are negatively impacted in the long term this could have a knock on impact on the property market with demand for manufacturing, distribution and industrial space being at risk.
To date however we have not seen a significant impact in the commercial property space other than the positive effect of increased office take up in the Dublin office market.
I believe that if there is a resulting economic fall-out from a no deal Brexit, property funds will need to be well positioned to weather this. A well-diversified portfolio is one such defence. A strong reliable rental income profile and reliable rent collection mechanisms will also come to the fore. Lease terms and break clauses will be key. Read the “Importance of Income” paper here.
Expectations for 2019
Looking forward to 2019, capital returns are likely to moderate and a reliance on income stream will continue to increase in importance. As demand continues for ‘non-traditional’ sectors, they are expected to experience further investment flows over the course of 2019.
GDP growth forecasts for 2019 are positive and interest rates are expected to remain stable for at least the next six months; both should support a healthy commercial property market. Brexit may emerge as a threat or an opportunity to property markets in 2019 and we should be prepared for either outcome.
Senior Manager – Property Fund Management
Read the full Irish Property Market Outlook – December 2018.
For more information on the Irish Commercial Property fund, please contact your Financial Broker or visit the Irish Commercial Property fund section in our fund centre.
Analysis based on data available up to December 2018.
The views and opinions expressed in this article are those of the author.