Dublin is back on the map for global opportunistic investors. Michele McGarry explains the resurgence of activity
Over the past 12 months we have observed that Europe is very much back on the global cross-border investor’s radar. Interest in European commercial real estate is not only coming from the continent, but further afield with investors from Asia, the Middle East, and the US in particular, expanding their requirements as the EU economy begins to look brighter. We expect these buyers will be key drivers of the market in 2013.
The latest research from Colliers International has shown that inward investment in Ireland continued to rise in 2012, despite continued economic challenges, and investment activity more than tripled to €600m from €155m in 2011. Investment levels are projected to top €1bn by the end of 2013. We attribute the 2012 figure to increased foreign investment in the market and an abundance of private equity targeting prime offices and, increasingly, residential markets.
Contributory factors were the reduction in commercial stamp duty from 6% to 2%, and capital gains tax relief (for seven years), which was introduced for properties acquired before the end of 2013. This has resulted in a flurry of recent deals (by Kennedy Wilson, Blackstone, Delancey, Lone Star, CarVal Investors, Centerbridge Partners, Apollo Global Management, Pepper, Northwood, AM Alpha, GLL Real Estate Partners and others) in a mixture of single-asset, portfolio and loan-book transactions.
Last year was a turning point in Ireland’s investment market. The majority of the deals were completed in the final quarter as stock levels diminished. Interest in secure prime assets continued to buoy values, while secondary and tertiary assets have seen further declines as occupational markets remain very weak.
Offices are easily the most popular, accounting for approximately 75% of transactions, and interestingly, residential block (multi-family) sales now are emerging as the second most popular sector in this market. We expect the shortage of good stock to continue to drive values throughout 2013 in both the residential and office sectors, indicating investment levels should exceed €1bn by the end of 2013.
There are in the region of 50 significant international players in the market, spurred on by loan-book sales in 2012 from the likes of Projects Pittsburgh, Pittlane, and Kildare and, most recently, Project Aspen (at final bid stage at time of writing). The large quantify of international money chasing prime assets has led to the tightening of yields in office and multi-family, in particular, and to a lesser extent retail and industrial.
The sale of River Island, Graton Street provides a new benchmark for prime retail yields at sub-7%, bought by GLL Real Estate Partners, which also owns the adjoining building let to AIB. The two larger €50m-plus deals were both offices; State Street Bank and the adjoining site (approximately €105m) was purchased by US company Kennedy Wilson, while AIB Bank Centre at €70.5m was purchased by private Irish investors Davy.
The investment market for Q1 2013 has been less active than the previous quarter; however, the total value of transactions signed was in the region of €340m, of which a considerable chunk relates to deals agreed but not concluded in Q4 2012. Some notable deals include:
• Bishops Square, Dublin: office asset sold to US investor King Street for €65m at a 9.8% net initial yield
• River Island, Grafton Street, Dublin: retail asset sold to Germany’s GLL Real Estate Partners for €40m at a 7% net initial yield
• SAP, CityWest Business Park: office asset sold to US fund for €14m at an 11.2% net initial yield
• Temple Chambers, Dublin: office asset sold to Irish investor for €11m at a 7.23% net initial yield
• River Lee, Cork: hotel asset acquired by tenant/related party for €24.5m at a 7.97% net initial yield.
Given the relatively limited choice of prime assets currently on the market, the volume of transactions for Q2 could be considerately less than that for Q1. There is a notable shortage of all assets at all levels to satisfy the quantity of demand from both the domestic and international investor.
Demand remains strong for multi-family investments with international investors chasing the larger lot sizes – Sandford Road (€40m) and The Alliance (€27m) were both acquired by Kennedy Wilson – while local investors look at opportunities worth up to €10m.
Uninterrupted blocks continue to command strongest interest. Demand is quite location sensitive, with city centre and proximity to good public transport links (together with the quality of build) commanding strongest interest and more competitive pricing. Occupancy rates are 90% and above for good quality developments. Shortage of prime stock suitable for the international market is the real issue here.
Investors will continue to closely monitor the occupier markets in the office sector, in particular, in terms of the rental levels being achieved, incentives, levels and source of enquires in the market.
The first three months of 2013 demonstrated strong take-up in the CBD and the south suburbs, approximately 75% up on the same quarter in 2012. Total take-up was in the region of 46,500sqm, which has been the highest per quarter since 2008.
The Dublin office market has now bottomed with rents rising for prime stock. With no measurable new supply coming on stream in the past four years, we expect to see continued moderate rental growth and a reducing level of incentives on offer for prime space in the medium term.
The overall vacancy rate now stands at 20%, broken down to (approximately) 13% in the city centre and 23% in the greater Dublin area. Approximately 25% of the vacant space in the centre is, however, obsolete. City centre continues to be most popular with occupiers, with D2/D4 accounting for approximately 45% of take-up in 2012. The outlook for poorer locations and secondary buildings is likely to remain bleak.
Available office stock is now some 8m sqft throughout the entire Dublin area, which is split almost equally between the city centre and the suburbs. The most active sectors are IT and financial services, accounting for some 45% of 2012 transactions, followed by the financial services sector where we have recently seen some substantial deals concluding as well as a number of new requirements coming to the market. Pharmaceutical companies continue to expand into Ireland as well.
Current active requirements in the market are believed to be in the region of 1.5m sqft, although it is unlikely that all these will conclude in the next 12 months. There are now only seven grade-A buildings available in the city centre capable of facilitating requirements of more than 75,000sqft, with virtually no development pipeline.
Michele McGarry is a director at Colliers International