Investment property recovery gathers momentum

A number of reports out this week suggest the recovery evident in the investment market in the second quarter of 2013 has gathered momentum in the third quarter with year-end turnover forecasted to be around €1.5 billion.

Savills's latest Investment Market Update reports investment property turnover has now reached €1.09 billion so far in 2013. It said there were 22 investment property sales in the most recent quarter generating turnover of €480 million. This compared to €110 million in Q3, 2012.

Top deals in Q3 included Kennedy Wilson's acquisition of the so-called Opera Portfolio for €306 million (this included Merchant's Quay Shopping Centre in Cork, KPMG's Dublin office on St Stephen's Green and the Bank of Ireland headquarters on Mespil Road); the sale of New Century House in the IFSC for around €28 million; Irish Life's purchase of 87-89 Pembroke Road, Ballsbridge, for €15.5 million; and CAPREIT's acquisition of four Dublin multi-family assets for a combined price of about €43 million.

According to Lisney's latest Office Market Update, take-up in Q3 was 41,900sq m (451,000sq ft). This was the strongest quarter in 2013 and brings total activity for the year-to-date to 103,200sq m (1.11 million sq ft). With at least 60,000sq m (645,834sq ft) under negotiation, according to Lisney, the uptick in the demand for office space seems set to continue. Lisney's Paul Hipwell said that at the end of Q3 there was 665,650sq m (7.165 million sq ft) of modern office accommodation available in the Dublin region. "This is marginally lower than the previous quarter and consequently, the vacancy rate fell slightly, to 18.8 per cent."

Obsolete space
About 84 per cent of this available space is modern grade, while the remainder is obsolete space and in normal market conditions would be demolished and replaced. Over half the available space is within the city region, with the remainder spread across the suburbs.

“Vacancy rates in these regions,” said Mr Hipwell, “range from 16.9 per cent in the city to 18.5 per cent in the south, 19 per cent in the north and 34.7 per cent in the west. In spite of the high vacancy rates there is occupier demand for the better suburban office parks.”

Savills report that Irish and American buyers dominate the investment market, accounting for €350 million (32 per cent) and €485 million (45 per cent) respectively of turnover to date. The majority of demand is for offices – it accounted for 31 per cent of turnover in 2013. Investors are after well located third generation offices and, given the paucity of such schemes in the pipeline, Savills expects prime office rents will increase in the next few years. There is also increasing demand for apartment blocks, with some €225 million of turnover to date this year.

Savills said larger lot sizes attracted institutional and private equity investors. There were six transactions in the €50 million plus category – three by US investors, two by Irish institutional investors and the other by a private Irish investor. Eight investments were completed in the €20-€50 million category while, of the remaining transactions, seven involved lots of between €10-€20 million and 11 deals were for lots of between €5-€10 million.

Lisney reports that rents are now moving in favour of the landlord, most notably for grade A city centre space where rent-free periods are falling back to more sustainable levels. Rental growth in Q3 was significant at 7.3 per cent for the Dublin market overall and 7.6 per cent in the city region.

For the year-to-date, overall rents in Dublin had increased by 13.4 per cent. “This was expected,” according to Lisney, “although the extent of the increases was surprising. During the downturn the market over-corrected and the current rise is rectifying that situation and bringing rents back closer to normal economic levels that would justify construction.”

Hipwell said the ideal time to start “refurbishments has already arrived” but landlords “need to be aware of the increasing sophistication of international corporate occupiers”.

The outlook, according to HWBC's latest Dublin office review, is for take-up to be similar to 2012 in the range of 130,000 to 150,000sq m with an expected pick-up in letting activity for the final two quarters of the year.

'Shortage'
"If the number of large transactions in advanced stages of negotiation complete before year end," according to HWBC, "there will be a shortage of prime CBD space for requirements over 2,000sq m and this is expected to drive rental growth at the top end of the market. There is now evidence emerging of tenants agreeing to pay up to €375 per sq m headline rent in certain circumstances, and we expect this level to become more established over the coming months."

Savills notes that there is some €550 million of investment product available and an additional €600 million coming to the market before year end. This means year-end turnover could exceed €1.5 billion – a level not reached since the highs of 2007.

Fergus O'Farrell of Savills said: "We are seeing scale returning to the market, with significant demand for lot sizes from €100 million to €400 million. Kennedy Wilson bought the Opera portfolio, the first deal of this scale in the current cycle for €306 million, which was competitively bid. Several other portfolios of scale are on the market or coming to the market in the short to medium term and are keenly anticipated by investors. We see a trend where investors are increasingly looking to deploy large equity cheques. This is driving competitive bidding for large scale assets and portfolios leading to premium prices being achieved."

Meanwhile, CBRE's latest retail market review points to positive signs in the hard-hit sector. Marie Hunt, executive director at CBRE Ireland, said: "Although retail sales data remains volatile, there has been considerable leasing and sales activity occurring in the Irish retail market during 2013, particularly in the Dublin market, with a number of retailers actually now finding it difficult to secure stores in their preferred high street and shopping centre locations. However, this is clearly not the case in provincial locations where conditions remain difficult."

Cost of rates
CBRE says the cost of rates "is prohibitive relative to the rental payments payable" around the country. Hunt said prime zone A rents on Grafton Street fell further to around €4,000 per square metre during the first half of 2013 and are now 60 per cent down on peak values which prevailed between 2006 and 2008. Prime zone A rents on Dublin's Henry Street are in the order of €3,500 per sq m, while rents in Dublin shopping centres range from €1,500 per sq m in St Stephen's Green to €3,000 per sq m in Dundrum Town Centre.