The real estate market in Ireland is back on the radar for investors. Lynn Strongin Dodds looks at its prospects
Two years ago Dublin was the pariah of the real estate investment world, having plunged 65% in value after the financial crisis. Today, the city is firmly back on the map with institutions clamouring over its prized assets. The big question is whether there will be enough properties to satisfy the swelling demand.
“There are more assets being released by the banks and the National Asset Management Agency (NAMA), but there is still a lot of pent-up demand in the market, with nine to 10 bidders for some of the prime assets that are being brought to the market,” says Marie Hunt, executive director, head of research & consultancy at CBRE. “We are seeing the same polarisation in the US and the UK with investors more interested in prime office properties than secondary provincial assets.”
This is substantiated by IPD/SCSI Ireland Quarterly Property index, which noted that outside the Dublin office sector, roughly 39% of Irish commercial property, the recovery still seems a distant prospect. Performance is slowly improving but both occupier demand and investor sentiment remains muted. “The danger is that Ireland will undergo a two-tier recovery, much like that seen in the UK between London and the regions,” the report said.
The central bank recently cut its growth forecast for the year to 0.7% from 1.2% on the back of weak exports and it is encouraging the government to stay the austerity course to meet the strict budget constraints. However, prospects for the property market in Dublin, which attracts 92% of total investment capital, remain strong. It is benefitting from a combination of factors including successful sales from distressed bank loan books, a stamp duty cut from 6% to 2% and temporary relief on capital gains tax. Equally as important is the reversal of the government’s controversial plan for legislation to allow commercial tenants to remove upward-only rent review clauses from their leases.
Investors have also cheered the country’s first real estate investment trust – the Green REIT – which raised €310m, 30% more than expected. The aim is to invest as much as €450m of equity and debt into commercial property in the next two years and start distributing dividends in the second year after listing.
Activity so far this year has been brisk, with 50 transactions worth €610m changing hands in the first half. This exceeds last year’s final tally of €576m and represents a more than three-fold increase over the €170m reached in the first six months of 2012. If the pace continues, Domhnaill O’Sullivan, investment director at Savills Ireland, predicts the industry could hit the €1.5bn mark.
One of the biggest differences is the composition of the investor base. “It has been one of the most interesting trends,” says O’Sullivan. “Last year, private equity investors dominated Irish commercial property investment but this year we have seen more institutional and core buyers. The Irish accounted for 51%, or €312m, of the turnover in the first half, up from 31% last year, while the Americans comprised 27% or €161m, down from 40%. Europeans accounted for around 13% or €81m.”
The most notable deals included US-based Kennedy Wilson’s €80m purchase of Clancy Quay, a multi-family asset providing a net initial yield of approximately 6.5% as well as the UK’s Comer Group’s €65m acquisition of the Gemini portfolio, comprising three multi-family assets located in Dublin and Cork. Also on the list was the sale of retail shops in Dublin occupied by River Island and Wallis to German fund GLL. The €40m price tag represented a steep discount to the €115m paid for the investment by Dublin property developer David Daly in 2007.
Investors have been compensated by returns rising to their highest level in six years – 2.3% in the second quarter, according to IPD/SCSI. This may not seem impressive but it compares favourably against the -4.8% of equities and 1% generated of bonds for the same period.
Breaking it down, offices in Dublin enjoyed a 1.2% hike in value in the second quarter, although the city’s Docklands area, which is being slated for redevelopment, rose at a more impressive 5%. Overall, prime office yields in the city come in around 6.25% to 6.5% while the equivalent retail shops fetch 5.75%.
Most market participants believe there is still steam in the market, although many agree that investors should ideally have made their move last year. “The most opportune time was six to nine months ago,” says Kim Politzer, head of Invesco’s European Research team. “Yields in the office market have moved in a fair amount this past year. However, Dublin is still reasonably attractive [in relation] to other European cities if investors are comfortable with the lack of liquidity.”
Chris Urwin, global research manager for Aviva Investors, also agrees that six months ago would have been the optimal time to take the plunge. He believes the recovery still has a long way to run and there is more scope for yield contraction. “I also see healthy rental growth of 5% or more on the best quality assets in the next two to three years as the dynamics between demand and supply becomes more balanced since there has not been any new development since the crisis.”
Another positive, according to Dr. Marcus Cieleback, head of research at German company Patrizia Immobilien, is that “Dublin is not reliant on the European Union and is more connected to the US. The fact that the economic situation in the country is stabilising will help the city. The problem is that investors, with higher yield expectations, may leave as yields come in.”
As O’Sullivan puts it: “Capital can be fleet of foot and if there are opportunities out there that present better value, capital will move. The Spanish are around two years behind the Irish market but it is bigger and there is more liquidity. We need to see more supply being released to satisfy the demand.”
Investors need to be patient and take a long-term view, according to a recent report from DTZ that predicts double-digit returns across all sectors over the next five years. “There is great opportunity in prime offices but limited supply,” says Patricia Ward, director at DTZ Sherry FitzGerald Ireland. “We see an increased appetite for retail and a mix of retail and residential assets in good locations with strong covenants.”