Dublin is set to enjoy the highest retail rental growth in Europe but the relative value of prime retail assets in the Irish capital for new investments has been eroded by the weight of investor demand which has led to tightening yields, according to Richard Gwilliam, head of research at M&G Real Estate.
Dublin is set to enjoy the highest retail rental growth in Europe but the relative value of prime retail assets in the Irish capital for new investments has been eroded by the weight of investor demand which has led to tightening yields, according to Richard Gwilliam, head of research at M&G Real Estate.
Research published by M&G forecasts average rental growth of between 4% and 6% for Dublin prime retail property compared with growth rates of between 2% and 4% for cities such as Amsterdam, Berlin and Paris. The potential for growth in the Irish capital’s retail sector is now setting the bar for the rest of Europe, the report said.
Ireland suffered a severe economic drop after the financial crisis but is now heading the bounce-back among countries on the edges of Europe. GDP growth in Ireland came to 4.8% last year and the outlook is for 3.75% growth in 2015 and 2016. Retail rents, as in the office sector, are rising fast in the Irish capital, though they are 50% below their record highs.
The upward trend is likely to continue, according to M&G. But rental growth is not the full story as the clamour for Irish property among international investors over the last two years has driven up pricing levels considerably.
Gwilliam: 'The outlook for Ireland is looking pretty strong. However, yields have already moved in quite significantly. Prime yields in the shop sector in Dublin which stood at 6.5% just two years ago have moved in to 4% or even lower in some cases. There is a similar story in the office sector, so quite frankly we are no longer seeing as attractive value in the Irish market as we had seen until relatively recently.'
'Two years or even 18 months ago Ireland would have been right at the top end of a European ranking by value. Since then investor interest in Ireland has been so strong that the 2014 IPD index gave a performance of 40%. That has actually eroded a significant part of the value and Ireland has slipped down the ranking quite rapidly towards the lower end in terms of value on offer.'
Yields on Grafton Street - the prime shopping street in Dublin city centre - are moving inwards sharply, but starting from an incredibly high level 2-3 years ago. However they are still far off the sub-2.5% level recorded in 2006-7.
Lucky laggards
Spain and Portugal on the southern periphery of Europe have been highlighted by M&G Real Estate as offering 'quite attractive value'. Italy is another situation entirely. 'A lot of the bounce-back in Ireland, Spain and latterly Portugal has been driven by significant structural reform. Italy is way, way behind the curve in that regard so the outlook for the economy and for the property market in general is not quite as strong.'
That said, Milan is a case apart, according to Gwilliam. 'It's a global city and one of the top-10 markets in the world for luxury goods.' Like London, Paris and New York, Milan attracts a lot of tourism from overseas, and this group is encouraged to consume more due to the weakness of the euro currency.
M&G Real Estate recently announced the acquisition of a 3,745 m2 prime retail asset at the junction of Via Torino and Via Della Palla in central Milan. The area is one of Milan’s prime commercial locations, and home to a mix of national and international retailers.