Grand Canal Harbour, Dublin 2
Q4 witnessed stronger than expected economic activity and increased momentum in terms of both the volume and value of commercial property transactions.
Ireland successfully exited the Troika’s three year programme on 15th December. This allowed for a return to the long term bond markets with € 3.75 billion of sovereign debt issued. Moody’s upgraded Ireland’s rating in January acknowledging the progress made on the public finances and the overall improved economic and market conditions. The labour market in particular has shown improvement with employment growth exceeding expectations, but without wage pressures to date. Inflation remains very subdued – largely as a result of weaker energy prices. The public finances remain on track with the government aiming to reduce the general government deficit to 4.8% in 2014, slightly ahead of what is required. GDP growth for 2013 as a whole is expected to come in at 0.4%. Given the increased momentum in activity evidenced in recent
months, the expectation is that GDP will increase by 2.1% this year and by 3.2% in 2015, driven by a continued improvement in external demand and a gradual increase in domestic demand. GNP growth is expected to remain positive, between 2-2.5% for the 2013 - 2015 periods.
Overall the underlying conditions driving Ireland’s property market have proved more than favourable in 2013, particularly in the latter half of the year. The cautious return of investors to the market seen at the end of 2012/early 2013, quickly gained momentum allowing for a significant increase in demand from a wider pool of investors, including Irish investors who made up 47% of total spend in 2013. Increased prime supply has been quickly absorbed allowing for upward movement in values and a considerable tightening of yields. As expected, Dublin’s office sector is driving the recovery in values and rents with IPD data showing an increase in office values of 10.4% in 2013 and an increase in office rents of 10.1%.
Investment market turnover totalled €2 billion for the year as a whole (excluding loan sales). This is the highest level of turnover since the peak of the market in 2005/2006. A key difference between the level of turnover in 2005/2006 and last year is the number of transactions. 2013 saw a record high volume of transactions (145) compared to 104 in 2005 and 107 in 2006, arguably reflecting a healthier marketplace.
Prime office opportunities continue to dominate overall investor spend (42% of 2013 spend) followed by mixed use developments (34%). Retail investment spend remained relatively low (8%) in 2013 but investor appetite for prime retail opportunities is expected to result in an increase in retail spend as a proportion of total turnover in 2014.
Demand has intensified with foreign investors, new Irish REIT’s, domestic institutional investors and small Irish buyers all active. US investor firm, Kennedy Wilson spent €400 million (c. 20% of total spend) in the Irish market in 2013 while IPUT invested €280 million (c. 14% of total spend).
Strong occupier demand continues to support investor sentiment. 176,000 sq m of office space was let in Dublin in 2013; prime rents have clearly moved with headline rental levels of € 400 sq m per annum for absolute prime space likely to be achieved during 2014. The emerging shortage of Grade A space continues, refurbishment continues to be attractive option while construction on new office space is now on the horizon, albeit likely to be led by pre-letting requirements rather than speculative development. Vacancy rates will continue to be eroded throughout 2014.
The retail sector is expected to see an upturn this year. Consumer sentiment has improved and coupled with a clear recovery in economic activity retail is starting to attract the attention of investors.
The pace of activity in the industrial sector similarly continued to improve in Q4 resulting in a strong annual take-up close to 300,000 sq m (levels equating to 2007/2008). While industrial rental values remain too low to make new development viable the expectation is that some upward pressure on prime industrial rents will emerge.
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