The economic outlook for 2018 and beyond continues to look optimistic, with forecasted growth of 4.4% for Ireland for 2018 (Central Bank). Unemployment is now at 5.8% (CSO May 2018) predicted to fall to 5% this year which is regarded as full employment, not experienced here since 2007. In the main, favourable economic prospects are predicted and I believe demand for each of the sectors of the Irish commercial property market will remain strong, from investors and occupiers alike.
Investment volumes saw a remarkable start to the year with over €930m worth of investment transactions taking place in Quarter 1 2018 which is more than double that recorded during the same period in 2017 (CBRE). While we saw an incredibly strong period in terms of investment volumes at the start of the year, we do not expect this pattern to continue throughout 2018. New investment opportunities are expected to be brought to market as a result of the expiration of the capital gains tax exemption hold period requirement. Regional markets are expected to experience higher volumes from those seeking higher yields.
In terms of prime income yields, Ireland continues to look attractive relative to our European counterparts, and provides an attractive spread relative to Government bonds. Prime yields remained stable across the retail (3.2%), office (4%) and industrial (5.5%) sectors in Quarter 1 (Lisney). Yields in alternative, fast growing sectors such as Hotels (6% +) and Build to Rent (BTR) (4.25%) will continue to strengthen during the year. (CBRE)
Rents and Yields
All Property Rental Index Quarter 1 2018 – Lisney
As has been the case in recent times, investment returns continue to be mainly driven by income. I expect capital appreciation to continue but at a slower pace than in recent years. There will be higher capital appreciation in certain sectors of the market, such as industrial, which is expected to outperform the national average in 2018 as will be the case for ‘alternative’ sectors. All sectors remain significantly below peak levels, although I do not expect values to get back previous heights.
All Property Capital Index Quarter 1 2018 – Lisney
Prime Dublin city centre office yields remained stable at 4.0% and prime headline office rents in the city centre were coming in at €646 per sq m (€60 per sq ft) in Quarter 1, exceeding previous peak levels. I believe that rental levels in the city centre will begin to level off in the short term, when the supply/demand imbalance is addressed. As new leases typically have upward and downward rent reviews (rather than the historic “upward only” approach), this may lead to potential softening of the market at future rent review dates and tenant break options.
Outside Dublin’s central business district, South Dublin suburbs such as Sandyford, Leopardstown and Blackrock continue to achieve the strongest rental levels up to €323 per sq m (€30 per sq ft).
Despite the continuing evolution of e-commerce and its perceived negative impact on the retail sector, the Dublin market remains resilient with the better performing shopping centres, retail parks and high street shops driving rental levels and showing very little vacancy. Prime retail yields are running at 3.15%. Prime high street retail rents achieved up to €6,997 per sq m (€650 per sq ft). The Lisney Retail Index has shown that prime rents on Grafton Street have increased by 5.5% in the 12 months to the end of March but are still well below peak levels reached in 2007.
Big name retailers are feeling the impact of the e-commerce evolution and continue to adapt to changes in the sector with trends towards opening strategically located stores, and closing smaller provincial and secondary stores in favour of larger, well-branded, experiential offerings.
Prime Industrial yields for Quarter 1 2018 remain unchanged at 5.5% making the sector attractive to investors. There is however a continuing shortage of modern units which will drive further rental increases within that sub-sector in 2018. Despite the narrowing yields according to the latest European Fair Value Index Dublin Industrial is amongst the most ‘under-priced’ European Markets in Quarter 1 (ranked third).
With the continued expansion of online shopping, the demand for logistics units is increasing, both from occupiers and investors. I expect we will see further speculative development and ‘built for use’ developments in this space in the coming months with further yield compression.
Investors in pursuit of yield are being forced out of standard commercial sectors and are looking more and more at ‘alternative’ real estate options including hotel, private rental, student accommodation etc. I expect with new planning legislation introduced to fast track residential developments, PRS and student accommodation sectors will see further growth in 2018 and 2019 driven by occupier demand and a ready supply of foreign investors seeking attractive yields.
Senior Manager – Property Fund Management
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Analysis based on data available up to June 2018.
The views and opinions expressed in this article are those of the author.