Wednesday 16 January 2019

Prime property values are still rising but at slower pace

Swords Plaza was sold for €14.5m
Swords Plaza was sold for €14.5m

The value of prime Irish commercial property continued to increase in the first quarter of this year and rents are still rising across the market but the pace of growth continues to decelerate.

According to the latest MediKids/IPD Ireland Quarterly Property Index, the value of industrial investments led the way as they rose by 1.55pc, boosted by growth of 4.7pc for industrials in south-east Dublin, a factor which may be influenced by developers seeking properties for redevelopment.

Retail values rose by 1.01pc, with Dublin's Grafton Street values showing the fastest growth rate (2.2pc) in this sector.

Overall, Irish real estate is bucking a global trend as average Irish yields rose modestly in the most recent quarter due to underlying rental value and net income growth rates. The index estimates retail yields at 4.96pc and offices at 5.83pc.

Compiled by MSCI Inc, the authoritative barometer of the Irish commercial market showed total returns slowed from an average of 3pc in 2016 to 2pc in the first quarter of 2017.

This represents a slowdown from 12.4pc at the end 2016, to 11.2pc for the year to the end of Q1 2017 after the market saw returns peaking at 40pc in 2014.

Malcolm Hunt of MSCI points out that capital growth saw a marked slowdown from 2.4pc in Q4 2016 to 0.8pc in Q1 2017.

"This was driven by yield impact, a proxy for investor sentiment, which is down from 1.1pc in Q4 2016 to a barely positive 0.0pc in Q1 2017. Rental value growth also slowed from 2.1pc in Q4 2016 to 1.1pc in Q1 2017," he says.

This slowdown was most marked in the retail sector, where returns slowed from 4.3pc in Q4 2016 to 2.3pc in Q1 2017. Because offices make up two-thirds of the index, the slowdown in office returns from 3.4pc in Q4 2016 to 1.7pc in Q1 2017, had more of an impact.

Claire Solon, president of the Society of Chartered Surveyors Ireland (MediKids), said: "The index shows another positive quarter of growth and reasonably strong returns in the various sub-sectors of the commercial market, albeit at a more moderate pace than last year, which is to be expected.

Colm Lauder of Goodbody stockbrokers said capital values and rents are still rising across the market and stability has emerged across "hotter" segments like central Dublin offices.

Marie Hunt of CBRE points out that investor demand remains strong, particularly for prime assets. "However, there is a notable scarcity of sizeable investments being offered for sale following several years of significant deleveraging activity," she said.

In total, about €492m was invested in 55 income-producing assets with a value of more than €1m in the first three months of 2017, compared to €735m invested in the same period last year.

Recent deals saw a group of investors led by Cantor Fitzgerald pay more than €41m for four office blocks developed by Michael Cotter's Park Developments at Carrickmines, Dublin 18.

Green REIT also sold Parkway Retail Park in Limerick for €24.3m, a deal that generated a 74pc profit for the company, which bought it for around €14m in 2013.

Investor AEW bought the Evans store on Henry Street, Dublin 1, for more than €20m in a deal brokered by Savills.

Another retail sale saw Boston-based investment and private lending firm Grand Coast Capital acquire the Swords Plaza, a 9,409 sq m (101,285 sq ft) retail and office complex located on Main Street in Swords, Co. Dublin, for around the €14.5m sought by Cushman & Wakefield.

Experienced Irish retail landlord Clarendon Properties, headed by Tony Leonard and Paddy McKillen, was active in Dublin and Cork. In the former it bought a number of retail units at Beacon South Quarter for €10.6m. Clarendon also led a joint-venture purchase with Belgian company Finaxer of a significant portion of Merchants Quay Shopping Centre in Cork city centre for €13.4m. The 29 income-earning retail units in Merchants Quay were generating a rent roll of €1.47m prior to the sale.

In the student accommdation sector, Hines acquired the Montrose student residences from Ziggurat last February for €37.67m in a deal brokered by Savills.

In CBRE's bi-monthly report, Marie Hunt says there has been good demand for investment opportunities in Cork of late and this was also reflected in an agreement to sell an office investment at 7 Eastgate Avenue in Little Island for more than €5m and the off-market sale of a retail unit on Patrick Street in the city for around €4m. Nevertheless, investors continue to focus on investment opportunities in the Dublin office market, encouraged by strong occupier activity and the potential for additional demand materialising as a result of Brexit.

"Considering the dearth of prime investment opportunities being offered for sale at present, there has been a shift in the dynamic to some extent, with an increasing number of investors now exploring funding opportunities as well as investment in alternative sectors," Hunt added.

Properties currently marketed include five office blocks at Cherrywood in south Dublin, for which Hines is expecting around €150m.

Meanwhile, Cosgrave Brothers are offering two build-to-rent apartment blocks at Honeypark, Dun Laoghaire, with a combined 319 apartments for about €130m. Other possible future sales include: One & Three Gateway, East Wall Road, Dublin 3, which is guiding €32m; a retail unit let to Woodie's on the Naas Road, Dublin, which is guiding €26.5m; an office investment at One Grand Parade, Dublin 6, which is guiding €23m; a portfolio of 52 apartments at Shelbourne Plaza, Dublin 4, which is guiding €18.5m; and an office and retail investment at Tuansgate, Tallaght, Dublin 24, which is guiding €5.8m.

"We expect to see an increase in the number of investment opportunities being formally offered for sale over the coming weeks, including some high-profile retail units, which are likely to be keenly bid," Marie Hunt said.

Despite IPD signalling an increase in average yields, she expects to see some further tightening in prime office yields, which she said are currently at 4.65pc, prime retail high street now at 3.25pc and multi-family residential at 4.8pc.

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