CBRE Ireland Outlook 2016

Dublin, 12th January 2016 - Commercial property specialists CBRE today released their OUTLOOK 2016 annual report containing their final year figures for transactional activity in each sector of the Irish commercial property market in 2015...

Review of 2015

2015 proved to be an exceptionally busy year in the Irish commercial property market following what was a record performance in 2014.

  • ENDA LUDDY - Managing Director, CBRE Ireland

2015 proved to be an exceptionally busy year in the Irish commercial property market following what was a record performance in 2014. Transaction volumes in the occupational and investment sectors of the market were impressive with annual average volumes of activity exceeded well before year-end in most sectors. Activity continued at pace throughout the year with several significant portfolios and assets launched for sale during the traditionally quieter Summer months and in the run-up to the Christmas period, which was unusual.

Investors were particularly encouraged by underlying activity in each of the occupier markets as well as the broad-based improvement in the domestic economic outlook as 2015 progressed.  The availability of investment product was also a significant positive, with supply coming from continued deleveraging activity on behalf of NAMA and various banks as well as the secondary trading of assets and loan portfolios purchased over the last number of years.

A significant volume of property assets were traded by way of loan sale during 2015. Indeed, the largest commercial real estate transaction of the year (the sale of Project Jewel to Hammerson plc. & Allianz for €1.85 billion) was a loan sale as opposed to an asset sale and was therefore counted separately. As a direct result, the overall volume of asset sales (of over €1 million in value) declined year-on-year from some €4.5 billion in 2014 to a more normalised level of approximately €3 billion last year. Meanwhile, more than €7 billion of loan sales occurred during 2015.

There was a notable shift in the investor profile over the course of the last 12 months with evidence of more long-term institutional investors seeking exposure to the Irish commercial real estate sector during 2015 than was the case in 2014 when private equity investors, retail funds and domestic Real Estate Investment Trusts (REIT’s) dominated. Encouragingly, a significant proportion of the long-term institutional buyers acquiring assets in the Irish market during 2015 were Irish. However, many of the high-profile commercial property assets that traded last year were acquired by US and European investors with German institutions particularly acquisitive during the year. Several of these buyers were new entrants to the Irish market.

Irish commercial property values continued to recover during 2015 albeit at a lesser pace than during 2014. Capital values still remained well below peak levels in all sectors of the market at year-end suggesting there is room for further growth. Although yield compression occurred over the course of the year in line with movements in other EMEA markets (primarily due to the weight of capital chasing real estate investment opportunities), for the most part, value improvements experienced in Ireland during 2015 were largely on the back of rental growth movements.  In the case of the office sector, a severe supply shortage of Grade A office accommodation in the Central Business District saw prime headline office rents in the capital rise by more than 50% during 2015. We also saw the first signs of rental growth emerging in the retail and industrial sectors of the market last year. However, investors appear to have already built rental growth expectations into their pricing and as a result the pace of yield compression began to stabilise in the latter half of 2015.

Although the majority of transactions in the Irish CRE market last year were equity transactions, there were clear signs of an improvement in the availability of debt for viable propositions over the course of the year. Although debt funding for speculative development remained elusive and is likely to do so for some time yet, 2015 saw the beginning of the next development cycle in some sectors of the Irish commercial property market with several schemes commencing in the Dublin office sector and to a lesser extent in the Dublin hotel sector.  Several new projects commenced construction or entered the planning process last year, which will in time help to address many of the severe supply constraints in these sectors of the market.

Enda Luddy, MD, CBRE Ireland
"Offices of the Future" Presentation.

On the back of continued high volumes of Foreign Direct Investment (FDI) and strong momentum in job creation in the Irish market during the year, the office occupier market had a remarkable year despite underlying shortages of accommodation in prime districts. 2015 also saw increasing evidence of a firm recovery in the retail sector of the Irish economy culminating in what proved to be one of the busiest Christmas trading periods for Irish retailers in many years.  The recovery in consumer sentiment and retail sales fuelled considerable occupier and investor activity in the retail property market during the last year, which encouragingly was evident throughout the country and not just in Dublin and other major cities.  The industrial & logistics sector also experienced very significant volumes of transactional activity during 2015 led in no small part by the expansion of data centres and logistics & distribution facilities.

We also experienced a very strong year in the hotel & licensed sector of the market in 2015 with trade improving on the back of improving economic conditions, favourable currency movements and record tourism numbers. In turn, this supported an improvement in property values in this sector.  Albeit skewed by a number of large portfolio transactions, there were a record volume of hotel sales recorded during 2015, primarily on the back of continued deleveraging efforts, secondary trading of assets and an increase in consensual sales. We also saw a large number of hotel and licensed properties changing hands by way of loan sales during the year.

Following a busy 12 months in the development land sector, the year ended with the standout Project Clear transaction whereby almost 1,700 acres of land traded by way of a loan sale. The demand for this unique portfolio was clear evidence of the appetite for development land considering the severe housing shortages that became increasingly topical in the Irish market over the last 12 month period. Unfortunately, due to uncertainty around new mortgage affordability rules imposed by the Central Bank in early 2015 and residential rent control and housing supply measures announced towards year-end, the supply of much-needed housing in Dublin and other major population centres did not materialise at the pace required over the last 12 months and will remain a pressing issue for Government in 2016.

On reflection, 2015 had many ingredients, that combined were supportive of strong CRE activity including a considerable weight of Irish and overseas capital chasing investment opportunities; strong occupational activity across all sectors; a supportive economic backdrop; strong job creation; rental growth; yield compression; muted development activity and very low interest rates.  Although some of these components will change over the course of the next 12 months and the outlook is constantly evolving, CBRE Ireland are confi dent that 2016 will be another good year for the Irish commercial property market and we look forward to working with you, as your preferred property advisor.

Outlook 2016

Following two extremely busy years, the volume of transactional activity in most sectors of the Irish commercial property market is likely to ease a little in 2016.

  • MARIE HUNT - Executive Director & Head of Research, CBRE Ireland

Following two extremely busy years, the volume of transactional activity in most sectors of the Irish commercial property market is likely to ease a little in 2016. In the investment and hotels sectors, this will occur due the deleveraging activities of NAMA and various banks starting to wind down. Meanwhile, in the occupational markets, although demand is expected to remain strong, the scarcity of modern accommodation in prime locations will compromise ability to match the record transaction volumes of the last number of years.

2016 will see the Irish property market moving to the next stage of recovery with a significant escalation in development activity becoming increasingly evident, most notably in the residential, office and hotels sectors in Dublin where several new schemes are expected to commence construction over the course of the next 12 months. The office sector is at a more advanced stage of the cycle than the retail and industrial sectors. However, we expect to see an increase in the number of retail and industrial projects entering the planning process during 2016 as the viability of new development improves in line with rental value improvements. Considering the greater emphasis on development, we expect that there will be an increase in forward funding transactions in 2016.

A small volume of new office stock is scheduled to be delivered this year but many of the larger schemes won’t be completed until 2017/2018 at the earliest, which will continue to put upward pressure on rental values in this sector until there is a meaningful improvement in supply. We believe that prime headline office rents in Dublin will reach €700 per square metre by year-end 2016. However, developers seeking to de-risk new schemes by securing pre-lettings may be in a position to offer more competitive terms. We also expect to see prime office rents in suburban locations increasing significantly over the course of the next 12 months.

While we expect to see some further growth in retail rents in prime shopping centres and high streets this year, the highest proportional increase in retail rental values in 2016 could well occur outside of the core Dublin market with signs of retail recovery increasingly filtering down to provincial locations. The biggest challenge this year will be securing stores for retailers in many of the most highly-sought-after schemes and high streets considering that many of these are now close to, or at, full occupancy.

With only one speculative industrial scheme currently under construction in the Dublin market, shortages of modern accommodation will prevail for some time yet, which in turn will put significant upward pressure on rental values in this sector over the next 12 month period.  Indeed, we expect to see prime industrial rents rising by as much as 25% to €94 per square metre by the end of 2016, which in turn will render new development viable and kick-start the development cycle in this particular sector. Meanwhile, an uplift of some 10 - 15% could be achieved in hotel values in prime locations including Dublin, Galway and Cork during 2016.

Although returns from Irish commercial real estate won’t be as spectacular in 2016 as those achieved during the last two year period, we are anticipating very strong returns to be achieved this year. We are now entering a period where the Irish investment market will be more focussed on generating returns from income and rental growth as opposed to yield compression. The stability this offers is ultimately more attractive to long-term institutional investors than a cyclical market driven by the weight of capital.

As deleveraging efforts wind down, it is inevitable that a greater proportion of transactional activity in the Irish market will emanate from secondary trading, as some recent buyers such as private equity firms implement their exit strategies and many of the assets and portfolios purchased over the last number of years are re-traded or re-financed. In addition to acquiring assets, investors will now broaden their focus to maximise income generation from existing assets and concentrate on potential development opportunities. We expect to see more long-term institutional investors, including many new entrants from overseas, being particularly active in the Irish market this year. CBD and suburban offices, prime high street retail properties and prime industrial assets are likely to offer the most attractive returns in 2016 considering the potential for rental growth in these sectors. We also expect to see increased focus on investment in sectors including healthcare, student housing and hospitality.

A strong domestic economy will be hugely supportive of stability in the Irish commercial property market over the next 12 months, with an additional 50,000 new jobs expected to be created this year and employment expected to reach 2 million during 2016. With the Irish economy firmly on target to outperform the rest of Europe again in 2016, the biggest potential threats at this juncture are external with macroeconomic conditions and geopolitical risks of particular concern. Although we will have a General Election this Spring, few commentators see this having any discernible impact on the commercial real estate sector. Indeed, elections in other jurisdictions including the European Referendum on BREXIT in the UK, which is expected to take place in 2016 and the US Presidential Election in November are likely to have a greater bearing on the Irish commercial property market over the medium term. We also need to be mindful of proposed changes to corporation tax in Northern Ireland in April 2018, which could ultimately pose a threat to Foreign Direct Investment (FDI) in this jurisdiction, particularly if competitiveness is not kept in check.

While efforts are now underway to address shortages of office accommodation and hotel stock in the capital, it is essential that our ability to attract FDI and in turn create additional employment is not compromised by a scarcity of housing, so we urge the Government to prioritise this issue as a matter of urgency over the next 12 months.

OUTLOOK 2016 VIDEOS

Click a video below to view

Enda Luddy, MD, CBRE Ireland
"Offices of the Future" Presentation.