Ireland is the top performing Eurozone economy for three consecutive years, and if the GDP forecast of >3.5% comes to pass for 2017, we expect this will see Ireland claim the accolade for a fourth year running which is an exceptional performance. Key economic indicators such as the GDP growth and the unemployment rate of 6.1% (a nine year low) are also underpinning a very strong property market performance.
While the pace of investment volumes has slowed in 2017, this is in comparison with the exceptional trading year of 2016. The 2016 investment level of €4.5 billion was driven upwards due to some very large, one off deals, with 66% of the total investment coming from international equity sources. Blanchardstown Shopping Centre was bought by Blackstone for €950 million and Liffey Valley was bought by Germany’s largest pension scheme group for €630 million. The first half of 2017 has seen lower levels of transactions (€775 million), with the expectation that volumes will come in at about €2 billion for the full year 2017 (which is above the long term average of €1.8 billion). This transaction volume is a function of there being fewer large individual properties for sale in the first half of the year. There is still a significant amount of capital on the side-lines (both foreign and domestic), waiting for the right product of an appropriate size to come on stream. The average lot size in Quarter 2, 2017 was €5 million and as a result, domestic investors outweighed international investors as the international investors seek much larger lot sizes, typically in excess of €50 million.
It is expected that some of the new developments, which are under construction at present, may be placed on the market when closer to completion and partially or fully pre-let. This should bring a new flow of deals to the market over the coming 12-24 months, aimed at long-term, “hold for income” investors. In addition, the first batch of properties that were eligible for the Capital Gains Tax (CGT) tax break (those purchased between Dec 2011 and Dec 2014) are just over a year away from tax relief realisation. Friends First expect that this should bring with it a supply of stock to the market.
Letting Activity, Rental Levels and Occupancy
Rental levels are at varying stages of recovery across the different commercial sectors. Prime Dublin office rent is now at or above peak levels, at €645+ per square metre (€60+ per square foot). Our view is that these rental levels are unsustainable and not accessible or affordable for the mass market. We expect office rental growth to taper when additional new or refurbished stock becomes available in the city centre. This is being driven by the supply/demand imbalance of prime office space in Dublin city centre, which is currently being addressed through construction and redevelopment projects. In the suburbs, however, there is more available space and rental levels are more palatable. As such, there are now institutions considering the Dublin suburbs as a viable office location.
Recent transactions such as Barclays’ pre lease of 398,000 square metres (37,000 square foot) at 1 Molesworth St at €667 per square metre (€62 per square foot) and Jet.com (part of the Walmart Group) taking 322,290 square metres (30,000 square feet) of 40 Molesworth St at €645 per square metre (€60 per square foot) demonstrate the demand for space in the Central Business District remains very strong. Once the supply/demand imbalance is addressed and the market begins to settle, we expect rental levels will return to more normalised, sustainable levels which still represent a very good return from an investors’ perspective.
Interestingly, only 44% of office take up in 2016 was from Irish companies. 33% was from US companies, 11% from the UK and the balance was a mix of other European countries (source:CBRE, Sept 17). Ireland remains a very attractive destination from an occupancy perspective, due to the strength of the economy, skilled labour force, positive corporate tax structure and accessibility. While at a local level, Ireland considers its office rental levels to be expensive, the country remains relatively competitive when compared with our EU counterparts. See chart below.