2018 IRELAND REAL ESTATE MARKET OUTLOOK
REAL ESTATE MARKET OUTLOOK
WELCOME TO CBRE IRELAND’S MARKET
Enda Luddy, Managing Director CBRE Ireland
WELCOME TO CBRE IRELAND MARKET OUTLOOK 2018
Review of 2017 -
2017 was a very positive year for economic growth across most of Europe with Ireland outperforming other European countries for the fourth consecutive year.
2017 also proved to be extremely busy in most sectors of the Irish commercial property market although returns and transaction volumes returned to more normalised levels following three years of out-performance.
Key highlights included:
The occupier markets continued at pace with the office sector being the star performer
There was a notable increase in planning applications for new industrial &logistics buildings during 2017
We continued to witness strong investor demand for Irish real estate with many new entrants emerging throughout the last 12-month period
A notable increase in residential
properties being sold for investment purposes with particularly strong demand emanating for Build- to -Rent opportunities
I do hope you enjoy reading our Outlook 2018 report and please do get in touch with CBRE's research team for further information.
"CONTINUED STRONG INVESTOR DEMAND FOR IRISH REAL ESTATE WITH MANY NEW ENTRANTS"
Market Outlook 2018 - Marie Hunt
Marie Hunt, Executive Director, Head of Research CBRE Ireland
The Irish CRE market is now approaching late cycle in many respects. However, occupier activity remains robust, development is controlled, the market is priced attractively compared to the rest of Europe and there are still considerable opportunities for both occupiers and investors alike.
While the direction of the Irish commercial property market is largely a function of domestic economic and
demographic drivers, it is also heavily influenced by global trends. There is no doubt that both global and local economics, tax and politics will have a significant bearing on the performance of the Irish real estate sector again in 2018.
"CONTINUED FLOWS OF CAPITAL INTO ALTERNATIVE SECTORS DURING 2018"
There has been a notable improvement in the availability of bank funding for good income -producing commercial and residential real estate.
In addition, several new sources of alternative funding have emerged, with non - Irish banks, insurance companies and non - bank alternative funders all looking to grow their share of the Irish lending market. During 2017, we expected two main market trends, (i) a significant wave of refinances from the loan books
purchased by funds and other entities over the last number of years and (ii) thr re - emergence of commercial and residential development finance, possibly on a speculative basis. To an extent, fuelled by a competitive funding environment, both occurred.
Preferred Transaction for Alternative Lenders
The Year Ahead in Brief
- Increase in risk appetite of certain lenders
- Myriad of different funders seeking viable resi & commercial projects
- Investors seeking private rented schemes prepared to forward fund well-located development swith credible counterparties
- Growing participation of non-bank lenders in resi development sector
- Traditional banks targeting the more established housebuilders
- On -going evolution of a more corporate type debt funding market in the resi & multi-family sector
Patrick Phelan, Director Capital Advisors, CBRE Ireland
"INCREASING COMPETITION BETWEEN BANK & NON - BANK LENDERS IN THE DEVELOPMENT SECTOR"
Considerable expansion activity is expected to support another strong year of take - up in the Dublin office market in 2018 following a record performance last year, which was boosted by a number of Brexit - related moves.
There is potential for further rental growth in many parts of the market including secondary and provincial properties in particular
Office Outlook in Brief
Approximately *240,000 m2 of new office stock to be delivered in Dublin - a sizeable proportion of which has been pre-let
Dublin prime headline rents, currently at €700 psm, to remain relatively stable, at this level throughout 2018
Buildings in secondary & provincial locations will offer the best prospects for rental growth
A scarcity of prime Dublin office stock will continue to prevail
*Figure updated as @ 8th January 2018
Tech & Financial services occupiers to again dominate in 2018
Increasing proportion of Dublin leasing activity to occur in the suburbs, in turn encouraging additional suburban office development
Growing number of BREXIT - related mandates to solidify, plus an increasing shadow - BREXIT effect likely to occur
Increasing collaboration between landlords & tenants in relation to flexible working trends and co working spaces
Long leases & a relatively low level of incentives & inducements continuing to prevail
Escalation in office development outside of Dublin- with planning permission in place for a number of significant schemes in Cork, Limerick & Galway
A significant volume of 2018 office occupier activity to be primarily expansion led vs. new tenants / FDI market entrants
"SCARCITY OF PRIME OFFICE STOCK WILL CONTINUE TO PREVAIL"
"CONTINUED STRONG DEMAND FOR PRIME HIGH STREET & RETAIL SCHEMES"
With retailers, increasingly focussing attention on a relatively small pool of core locations and schemes, we expect to see rental growth in the most sought - after streets and schemes but rents remaining relatively flat elsewhere during 2018 as the sector reacts to structural changes.
A Retail Outlook in Brief
A scarcity of premises in the most highly sought - after locations likely to continue to frustrate retailers in 2018
Signs of new retail supply coming on stream, both in terms of new development commencing and new planning applications being lodged
Continue to see existing shopping centres expanding their footprint
Increased focus on place making to increase dwell times & boost footfall
Several planning applications for new retail schemes to be lodged in 2018
May see some movement this year on the long awaited Clery’s redevelopment on Dublin’s O’Connell Street
Limited new retail supply will be planned for locations outside of Dublin
Increase in rental growth in the most sought - after prime high streets & schemes & remaining relatively flat elsewhere
Expect to see break options in leases continuing to move out over the course of the year with landlords seeking longer term certain leases & reducing incentives for prime units
Omnichannel / Multichannel strategies to become increasingly important with physical stores focussing on customer experiences
Increasing proportion of consumers shopping online in addition to shopping in -store
Further blurring of the lines between retail & industrial property
INDUSTRIAL & LOGISTICS OUTLOOK
INDUSTRIAL AND LOGISTICS OUTLOOK
"INDUSTRIAL & LOGISTICS SECTOR LIKELY TO OUT - PERFORM OTHER SECTORS IN 2018"
Occupier demand for logistics property across Europe continues to grow strongly. This is clearly evident in the Irish market with strong demand for modern industrial & logistics properties and development sites in core locations, particularly around Dublin’s M50 and Little Island in Cork.
This sector will firmly move into the development phase of the cycle during 2018 with new facilities due to be delivered and a corresponding uplift in transactional activity anticipated.
Industrial & Logistics Outlook in Brief
- Prime headline industrial rents in Dublin are expected to rise by approx. 11% in 2018, reaching €110 psm or €10.25 psf by year end
- Substantial increase in speculative development is anticipated as is an increase in owner-occupiers developing their own facilities
- Several older industrial locations, close to Dublin’s city centre, likely to be redeveloped for higher value alternative uses such as BTR
- New development likely to be concentrated in the northern section of the M50 motorway around Dublin airport & along the N7 motorway
- Increased eaves heights & substantial capital expenditure focussed on increasing mechanisation & automation within logistics facilities
- We expect most leases signed during 2018 to be of at least 10 yrs as opposed to 5 yrs, which has been commonplace in recent years. Incentives & inducements will also become less significant in prime locations
- Increasing proportion of demand will emanate from the supply chain sector with a particular focus on last mile delivery
- Continued appetite is anticipated for suitably serviced data centre sites to accommodate hyperscale occupiers
- While we expect Cork to emerge as a new date centre market, Dublin is firmly viewed as ‘the hyperscale capital of Europe’
We expect to see continued appetite for prime investment opportunities in the Irish market in 2018 with investors increasingly focused on good income-generating opportunities in the office, industrial & logistics and residential sectors in particular.
EU institutional investors are likely to be particularly acquisitive during 2018 and we likely to see some further new entrants to the market this year. Additionally, we expect to see more capital from Asia with Korean investors likely to be targeting any core office investments that emerge.
"DEPLOYING CAPITAL WILL CONTINUE TO BE THE BIGGEST CHALLENGE FOR INVESTORS"
2018 transactional activity will be broadly similar to last year’s outturn, as the market returns to a more normalised level of trading.
Investment Outlook in Brief
- Increased investor appetite for prime opportunities in cities such as Cork, Limerick & Galway over the next 12 mths
- Little room for significant yield compression leading to increased investor focus on income-generation potential
- Limited supply of stock will drive further rental growth in the industrial & logistics investment sector throughout the year
- Continued institutional capital targeting opportunities to partner with local developers in the emerging residential investment sector
- Thinner pool of investors focussing on secondary & provincial retail opportunities
- Investment sales likely to emanate from investors seeking to capitalise on the yield compression witnessed over the last 12 mths
- Some long-term owners may seek to rebalance their portfolios by disposing of older assets to redeploy capital
With a clear need to release more land for sale, now is the optimum time for landowners to bring sites to the market and capitalise on the depth of demand that prevails for well-located zoned and serviced sites.
We believe that there will be considerable depth to the market in 2018 with developers and promoters of private and public residential developments, purpose-built student accommodation (PBSA), Build-to-Rent (BTR) and various types of commercial accommodation all actively competing for well-located sites.
Development Outlook in Brief
- 2018 development land transactional volumes to be broadly similar to last year
- Sourcing product is likely to continue to be the biggest challenge for most developers
- The sector is becoming increasingly professional - last year saw new listed vehicles targeting development opportunities and we may see some further new entrants
- Build-to-Rent (BTR) to gain considerable traction in Dublin & other Irish cities
- Expect to see increased evidence of collaborative models such as Joint Venture & Licensed Agreements as holders of land seek to unlock strategic sites
- Continued improvement in the availability of development funding - with the sector no longer reliant on one form of capital via a myriad of different funders & non-bank lenders becoming increasingly prominent within the sector
- Budget 2018’s change to Capital Gains Tax may see some additional sites being brought to the market over the next 12mths
- Site Value Tax (payable from 2019) may also encourage some landowners & some local authorities to fast track the sales of certain land holdings during 2018
- In addition to prime sites in Dublin with good access to public transport, we expect to see continued strong appetite for land in commuter towns & key regional cities
"INCREASING VOLUME OF INTERNATIONAL CAPITAL CHASING BTR OPPORTUNITIES"
Although some high-profile Irish hotels changed hands in 2017, there was a notable year-on-year decline in overall transactional activity in the Irish hotel sector last year as the market returned to more normalised trading levels following several years of exceptional deleveraging.
Unlike 2017, we expect to see a number of Dublin hotels coming to the market during the next 12 months. If this materialises, we could see up to €500 million of Irish hotels changing hands in 2018, with a sizeable proportion of these transactions occurring off-market.
"UP TO €500M OF IRISH HOTELS COULD TRADE IN IRELAND IN 2018"
Hotel Outlook in Brief
- Increased focus on forward-funding over the course of the next 12mths, but many projects that have applied for or obtained planning may never proceed
- Approx. 1,400 new bedrooms to open in Dublin during 2018 & approx. 1,800 due for delivery in 2019
- Further increases to tourist visitor numbers expected (10.6 million in 2017)
- Some strategic hotels sales likely to occur in 2018 as vendors capitalise on the strength of underlying demand for good hotel properties
- Changes to Capital Gains Tax expected to lead to a greater number of sales by vendors who acquired between 2011 & 2014. However, the significant stamp duty rate increase, from 2% to 6% will ultimately affect pricing
- Increasing investor appetite for hotels operated under operational lease agreements & more Irish hotels leased & sold as investment assets over the next few years
- International buyers & private equity investors likely to be the most dominant buyers in the Dublin market in 2018
- Domestic hotel groups and individuals - particularly those growing an existing platform - are likely to be most active in the provincial hotel market
- Multiple new hotel brands to enter the Dublin market in 2018, with particularly strong demand from budget brands and from hoteliers looking to develop micro-rooms
After a year in which transactional activity was disappointingly low, we believe we will see an escalation in the number of Dublin pubs offered for sale over the course of the next 12 months, which is good news for the many specialist operators seeking to secure new premises in the capital.
According to our research, 20 Dublin pubs totalling approximately €22 million sold during 2017, compared to 30 transactions totalling €43 million the previous year.
Dublin Pubs Outlook in Brief
- Good trading conditions during 2017 boosted turnover & profitability, leading to a corresponding uplift in the value of the underlying asset, which encouraged many publicans to continue trading
- That said, we expect to see an increase in the number of Dublin pub properties being offered for sale in 2018 on the basis that some publicans will want to take advantage of the considerable pent-up demand for Dublin licensed premises and use it as an opportunity to take profit & in some cases, exit the trade
- Demand is primarily expected to emanate from groups that are already active in the sector and looking to grow their licensed property portfolios
- Pubs in the city centre will be most highly sought after, although many buyers will also be interested in good suburban pubs that are offered for sale
- The sector will see an increased focus on investment over the course of the next 12 months with several Dublin pubs expected to kick-start significant capital expenditure programmes in order to refurbish and modernise their premises
- We may also see some new pubs emerging in due course as part of some of the many hotel projects that are now under construction in the capital
"INCREASED FOCUS ON INVESTMENT & CAPITAL EXPENDITURE PROGRAMMES"
With room for some further yield compression and above average rental growth, we expect to see strong appetite for prime opportunities that come to the market in Cork during 2018. We expect to see increased evidence of development activity across a range of sectors in the Cork market over the next 12 months.
With improved visibility on new stock in many sectors, there was a noticeable increase in occupier focus on Cork city and region, resulting in an uptick in office and industrial leasing activity and some improvement in the volume of retail leasing activity.
"AN ACTIVE YEAR IN PROSPOECT FROM OCCUPIERS & INVESTORS ALIKE"
Cork Outlook in Brief
- Expect a number of Cork office schemes that have planning permission, to obtain funding & movie to development stages
- However, new office supply won’t materialise until 2019 & beyond, which will see continued upward rental pressure being experienced
- As a result, prime Cork office rental values are expected to grow by as much as 10%, reaching approx. €350 psm / €32.50 psf by year-end
- Given such rental growth prospects 2018 will see an increase in the number of international investors focussing on Cork’s office investment & funding opportunities
- Evidence of healthy demand for modern industrial & logistics accommodation is also expected to kick-start some speculative development in Cork’s industrial sector
- Prime office yields in Cork, currently at 6.0% have potential to sharpen by at least another 25 basis pts, while prime industrial yields have potential to sharpen by at least 50 basis pts, from 8.0%
- Prime retail yields are expected to remain relatively stable, with a thinner pool of investors focussing on this sector of the Cork market
- Expect to see strong appetite for BTR opportunities, as evidenced by the strength of demand for the Elysian investment opportunity currently being marketed
- 2018 will also see a good volume of Cork hotel activity, with a number of assets expected to trade now that the sector is performing well & has an ability to service debt commitments