Sustained demand driving up values – but innovative solutions are needed to fix supply shortages
This has been another strong year for Irish commercial real estate, with investment turnover exceeding €2.5 billion at Q3 and an expectation it will surpass €3.5 billion by year end.
The ESRI expects GDP growth of 8.9 per cent for 2018 (forecast was 4.7 per cent) and growth of 4.5 per cent in 2019. With a population increase of almost 1.35 per cent per annum and unemployment rates down to 5.4 per cent, there is an overall increase in earnings and spending – although the KBC/ESRI consumer sentiment index shows that Irish consumers are worried about hard Brexit risks.
Serviced offices accounted for about 14 per cent of the CBD office take-up by Q3 in 2018, and this will be a sector closely watched when assessing the market dynamics.
The shortage in supply of prime office and residential property in certain hotspots has driven up values and in turn is driving development. The affordability of housing, however, is a major concern and a significant increase in supply is urgently needed to meet existing and future demand. Demand for accommodation drives growth and when there are no further requirements for new space in a sector then growth is expected to be limited, and investors need a high yield to compensate for the risk which sees values fall.
Timing will be key for developers, and with a long lead-in for delivery of a new development there is a constant review of the supply pipeline and competition.
Large office and residential deals which comprised new build, land, refurbished accommodation or accommodation that had the potential to be redeveloped have attracted strong interest.
Key deals this year included the acquisition of four new office buildings at Dublin Landings in the IFSC to a mix of investors and the Central Bank. No 1 Dublin Landings is let to NTMA and was acquired by Patrizia/Triuva for €164 million (net initial yield of 3.94 per cent) in Q1 followed by the reported acquisition of No 2 Landings let to WeWork by Hana Financial Group for €107 million (NIY 4.2 per cent) in Q3.
Hana Financial Group also acquired WeWork’s tenanted building at Charlemont Exchange in Dublin 2 for €130 million. The acquisition by Kennedy Wilson of the PRS scheme at the Grange Stillorgan for €126 million, the Elysian in Cork for €87.5 million and the forward purchase by Irish Life of Fernbank in Churchtown for €138 million showed the confidence and demand from investors in the residential investment sector.
The retail sector has suffered in 2018, and the impact of Brexit and web shopping are among the unknown risks for investors. However, landlords with retail expertise who are continuously innovative and provide shoppers with a great ‘experience’ and offering are likely to benefit in the medium to long term.
Kildare Village is an example of a regional retail centre that continues to attract consumers, with its Phase II extension completed in 2015 and Phase III planned providing more than 25,000 square metres in total on completion. Investors shied away from retail as a sector in 2018; by Q3 retail accounted for only 11 per cent of turnover compared to 32 per cent in 2017 and 50 per cent in 2016.
We expect demand from occupiers to continue growing in 2019, with further growth in rents while the construction supply pipeline tries to meet demand.
Irish real estate remains the best medium-term asset class performer (12 per cent annualised returns over three years – MSCI Q2 2018) compared to equities and bonds. Investors need to drill into the fundamentals of each property, regardless of location, and whether it is fit for purpose and works for the occupier.
Michele Jackson is a director at TWM