Demand is continuing to outstrip supply for the investment property sector
The Irish property investment market continues to perform well, with some €1.926 billion trading up to the halfway point of 2018.
Of this volume, almost half, about €862 million, was accounted for by office investment, which continues to be the driving force of the investment market and is currently well ahead of the five-year average of 36 per cent.
This strong level of demand is emanating from the usual active market participants such as State Street, Credit Suisse, SW3, Friends First, Irish Life and Iput among others.
We are, however, continuing to see new entrants to the market. Kookmin Bank recently acquired the Beckett Building for €101 million, while another South Korean investor secured 2 Dublin Landings for €105 million. European institutional money is also in the game, in the form of Triuva, the Patrizia affiliate, which acquired 1 Dublin Landings for €164 million.
As well as these three high-profile transactions, which represented the first acquisition in Ireland for each party, we saw other new entrants KGAL and Spear Street Capital, which acquired 31-36 Golden Lane and eight office blocks in Cherrywood respectively.
A notable trend, as evidenced in the above transactions, is the sale of prime office investments prior to completion with pre-let agreements in place. These sales incorporated leases to blue chip tenants WeWork, Facebook and NTMA.
Elsewhere we have seen high-profile pre-lets to Google (Velasco Building, Grand Canal Street) and Grant Thornton (13-18 City Quay), with Irish Life emerging as the purchaser in both cases.
We are also seeing a trend whereby lot sizes of €50 million to €100 million plus are being pursued primarily by Asian/sovereign wealth funds and European institutional investors, while a mix of Irish and European institutional investors have a strong appetite for lot sizes in the €25 million to €50 million range. Private investors, for the most part, are being priced out of the prime office market.
With significant yield compression and capital appreciation over the course of the last five/six years, it is worth asking the question: can investors find value in the office investment market?
Depending on the investors’ requirement, this could be so.
Alternatively, it could be argued that, while prime office yields are now in the region of 4 per cent, the underlying occupational market is strong.
This can be seen through the provision of straight 25-year lease terms or with break options in years 12 to 15; tenants with triple “A” covenants; rents in the region of €60-€65 per square foot, reducing landlord incentives; and, in some instances, CPI-linked rent reviews providing investors with protection on potential substantial rental fluctuations at subsequent reviews.