By Business & Finance 
CBRE’s Marie Hunt discusses the commercial property market’s return to form and outlines some of the major trends in the market over the past 12 months.
Last year marked a major turning point for the Irish commercial property market. Having bottomed out in 2012, the first tentative signs of recovery emerged in this sector over the course of 2013 and this has strengthened further over recent months.
This manifested itself in significantly higher volumes of transactional activity in occupier markets (particularly in prime locations) and the emergence of some rental growth in locations where demand is outstripping supply.
All sectors of the market, including development land, experienced a year-on-year improvement in transactional activity and values last year and this momentum has carried forward well into 2014.
The most notable trend is the increase in demand from investors, particularly from outside the jurisdiction, for loans, individual assets and portfolios, that have been offered to the market over the course of last 18 months. This, coupled with rental growth expectations, led to significant yield compression being experienced during 2013 and this also has continued into 2014.
Although there are several legacy issues still to be tackled and our economy remains susceptible to macroeconomic developments, 2014 is already shaping up to be an even busier year for the Irish commercial property market than last year, fuelled to a large extent by improving domestic economic indicators and by some improvement in the availability of debt funding.
Activity in all sectors of the Irish commercial property market has been buoyant since the beginning of 2014. Indeed, we have experienced the busiest January and February in the Irish commercial property market in many years.
In addition to a number of new assets being released for sale since the beginning of the year, there was a significant carryover of transactional activity from last year in many sectors.
Demand in the investment sector continues at pace with no let-up in demand from domestic and international investors for the various assets and loan portfolios being released to the market for sale.
There is now an expectation that the number and value of loan and asset disposals will increase significantly over the coming months as NAMA and financial institutions such as Ulster Bank (who recently appointed Eastdil to dispose of €1bn of their Irish assets) accelerate their deleveraging activities to match current demand levels.
2014 is already shaping up to be an even busier year for the Irish commercial property market, fuelled to a large extent by improving domestic economic indicators.”
Retail
Following the recent acquisition of a 72% interest in the Liffey Valley Shopping Centre in West Dublin – the first major shopping centre to sell in Ireland since 2007 – we also expect to see an increase in the number of retail properties being traded over the coming months, particularly as some of the large loan sales currently on the market such as Project Drive include considerable retail assets.
Other entities are also expected to release some shopping centre assets for sale in 2014.
Prime office yields in Dublin are now in the order of 5.25%; prime retail yields are 5.25% also while prime industrial yields are in the order of 8.0% which remain competitive relative to those prevailing in other jurisdictions.
Supply v demand
Fuelled by improving occupier markets and an imbalance between supply and demand in the Dublin housing market, there has also been considerable momentum in the development land sector during the first two months of 2014, following the completion of 75 development land sales totalling almost €200m last year.
Occupier markets continue to perform well on the back of improving economic circumstances, with the office and industrial sectors being beneficiaries of continued FDI, which has been a major driver of demand for well-located sites.
However, in the residential sector, a severe shortage of supply of housing in prime markets such as Dublin is also fuelling demand for good sites.
Although in many instances, development is once again feasible now that rental and capital values have started to increase, development funding remains difficult to source. In any event, development cannot proceed in locations like Dublin Docklands until the Strategic Development Zone (SDZ) for that region has been formally adopted.
New developments
A rapid improvement in rental values in Dublin’s Central Business District is encouraging the first phase of new office development in the capital with new office schemes now on site at Canada House on St Stephen’s Green, Dublin 2 and at the former veterinary college site in Dublin 4.
Elsewhere, there are a number of new home developments commencing in the capital and it is expected this will increase following the introduction of a stimulus plan by Government to increase the volume of new house building in the capital over the coming months.
There has been a significant carryover of transactions from last year in the hotel sector with several hotel sales agreed in the first two months of 2014.
Demand for prime properties remains robust and while some new hotels have been brought to the market during the first few months of 2014, there are clearly not enough
Dublin properties available to satisfy the volume of demand from international investors. We expect the process of deleveraging to pick up pace considerably over the coming months with several well-known hotels due to come available for sale, albeit, with the exception of the investment sale of the five star Westin Hotel in Dublin city centre, most of these hotels are outside of Dublin.
Investment properties
In addition to the underlying economic indicators, investors in the Irish market are attracted by the fact that property assets are attractively priced, are for the most part being sold for less than their replacement cost and offer rental and capital appreciation potential considering that no new stock has been built in Ireland for more than five years which is leading to supply demand imbalances in some sectors.
Prime office rents in Dublin actually rose 25% in 2013 and are on target to rise by a further 15% in 2014. Rents in other sectors of the occupier markets are stable and although we are not predicting any growth in retail rents in 2014, we expect to see prime industrial values edging upwards as the year progresses.
According to the Investment Property Databank (IPD), total returns in the Irish commercial property market rose to 12.7% in 2013 (compared with a 30-year annual average return of some 10.2%) with a 5.7% total return achieved in the last three months of 2013 alone.
This demonstrates the extent to which Irish commercial property prices have started to recover over recent quarters.
Ireland’s first REIT, Green REIT plc which was only established last summer is now almost fully committed having recently partnered with Pimco in the acquisition of a prime investment at Central Park in South Dublin for €311.5m.
Meanwhile, Hibernia REIT plc has also now announced the completion of their first transaction while Kennedy Wilson has successfully launched a £910mi real estate IPO on the London Stock Exchange which will target distressed real estate in Ireland, the UK and Spain.
In addition to the plethora of international funds, loan buyers, Irish REIT vehicles and domestic funds vying for investment opportunities in the Irish commercial real estate market at present, new investors from a range of jurisdictions continue to emerge.
Encouragingly, a number of these investors appear to be getting more confident about opportunities outside of the core Dublin market on the basis that the clear recovery experienced in the prime market is now starting to filter out somewhat.
Occupier markets continue to perform well on the back of improved economic circumstances, with the office and industrial sectors being beneficiaries of continued FDI.”
Northern Ireland
In comparison to the flurry of transactional activity in the Republic of Ireland over the last 12 months, activity in Northern Ireland is more muted although there is strong appetite from UK institutional buyers for good quality investment stock that comes available for sale in this jurisdiction considering the attractive yields on offer in comparison to regional UK cities.
News that NAMA has appointed Lazard on the sale of its entire Northern Ireland property portfolio, following an approach by a potential investor, is set to dominate the headlines over the coming weeks considering the potential impact a large-scale sale would have for the Northern Ireland market.
