Irish commercial property returns rose to 2.3% in Q2, their highest in almost six years, as capital values stabilised and the nascent Irish recovery gathered momentum. Property values, which have fallen by over 65% for 21 consecutive quarters, finally saw a degree of stabilisation, falling by just 0.01%, according to the IPD/SCSI Ireland Quarterly Property Index.
Ireland’s commercial property assets, which have seen the largest declines of any market measured globally by London-based IPD, are responding to growing demand from international and domestic investors, attracted by the improving local economy, government incentives, and massive income and value add opportunities.
The last twelve months has seen successful sales from distressed bank loan books, increasing interest from a swarm of private equity buyers, and the first successful launch and capital raising of an Irish REIT. All of this has translated into improving property market performance and sentiment.
The performance compared favourably with other asset classes. Equities delivered -4.8% in Q2, and bonds 1.0% (MSCI Ireland, JP Morgan Ireland 7-10 year).
However, this interest has focused almost exclusively on Central Dublin offices and it is this improvement that is driving the overall market turnaround.
Offices values rose by 1.2% overall in Q2, but in Dublin’s Docklands this increased to 5.0%, and 0.6% in Central Dublin (excluding Docklands). Outside of the capital, or even just in less central areas, values continued to decline, albeit at a reduced rate.
Improvements in the lettings market have been instrumental in driving this growth. For the last 18 months large international tenants have been relocating to Ireland, due to government tax incentives, while local TMT (Telecoms, Media and Telecommunications) and financial sector improvements have also led to growing demand.
Rents for central Dublin offices grew by 0.3% and in the Dockland’s by 1.0%. This has given investors the confidence to return to Dublin’s offices, where income returns are in excess of 10.3%, provided tenants can be secured.
However, outside of the Dublin office sector, which accounts for roughly 39% of Irish commercial property, the recovery still seems a distant prospect. Though performance is slowly improving, both occupier demand and investor sentiment remain muted. The danger is that Ireland will undergo a two-tier recovery, much like that seen in the UK between London and the regions. In the beleaguered retail market, which returned 0.5% in Q2, values fell by a further 1.5%, and even the prime shopping streets of Dublin continued to see further write-downs in value.
Shops and shopping centres returns remain dented by poor consumer sentiment and low occupier demand for space. Rents have fallen by another 2.2% for retailers, due to the difficulties of securing tenants. They have now fallen by nearly 49% in the retail sector since Q4 2008. In the industrial market, which returned 1.9% in Q2, there is a more promising outlook, though values continued to decline by 1.0%.
Ireland’s manufacturing workforce is rated extremely highly (IMD World Competiveness Yearbook 2013), and though values may be in decline there is growing occupier demand for space, particularly in the periphery of Dublin, as improvements emerge in the Irish manufacturing sector (Investec Purchasing Managers Index). Industrial rents increased by 1.0% in Q2, the highest rental growth of any main sector.
Phil Tily, executive director & head of UK and Ireland, IPD, said: “It looks like the recovery is well underway for prime offices, but the difficulty now is encouraging this to spread out of core Dublin stock. In the UK, the ‘recovery’ of 2009 to 2011 was essentially restricted to London and the South East, and years later, we are still waiting for regional improvements.
“Much will depend on the ability of the Irish economy to improve, which in turn will lead to increased consumer spending and business growth outside of Dublin and in the retail and industrial sectors.”
Roland O’Connell, Society of Chartered Surveyors Ireland, said: “Demand continues unabated for good quality investment product of all types, from multi-family through to prime offices. Office rents have turned a corner, but there continues to be uncertainty among investors as to when the same will be said about retail and industrial rents.
“Demand is also strong for older office buildings in prime locations capable of refurbishment or redevelopment, but again supply is limited as much of this type of product is held by institutional investors, who, in the absence of new product in the market will aim to refurbish and retain these buildings.”
“The pool of assets being chased by buyers is for the moment quite small, and this could lead to more considering value add opportunities outside of the office markets.“
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