How 2016’s deals played out, sector by sector
For a detailed analysis of the trends and transactions in the commercial real estate industry in 2016, we asked some of the leading authorities from the hotel, offices, retail, industrial and development land sectors to give their views on their respectiv
Hotels
THE Irish hotel sector recorded sales of some €700m representing 55 hotels in 2016 including the Gresham Hotel and former Burlington Hotel (now trading as the Clayton Burlington Road). This followed an active 2015 with 63 trading hotels sold for €710m. These figures do not include investment sales or loans associated with hotel properties which also changed hands as part of loan portfolio sales.
Other significant transactions in 2016 included the Dublin Lifestyle Collection (The Morgan, The Spencer and The Beacon Hotels), Lyrath Estate and Hotel, Kilkenny, Farnham Hotel, Cavan, The Hilton Dublin Airport and the Travelodge Hotels Portfolio.
Trading performance in the hotel sector, especially in Dublin and the other main cities, continues to strengthen, as seen by the most recent hotel data from STR and Trending.ie which shows significant year-on-year improvement. Dublin hotel year-end forecasts in occupancy are expected to be 83.7pc — up 2pc on last year. Average room rates are up 17pc to €131.40 resulting in RevPar (Revenue per available room) of €109.93 — an increase of 19.8pc. Other contributory factors to the heightened interest in hotels are the increased level of tourism and volume of traffic through Dublin Airport. Overseas visitor numbers are up 11.6pc year-on-year for the first 10 months of 2016 to 8.28 million. There is demand for all hotels in Dublin and around the country, from a range of different buyers.
Over the past few years, there has been frustration at the shortage of Dublin hotel accommodation. New Fáilte Ireland regulations significantly reducing minimum hotel bedroom sizes will improve the viability of hotel development. In Dublin, a number of hotel developments have been announced, while budget brands including Premier Inn, Motel One, Bloc, Citizen M and Yotel are reportedly looking for opportunities.
Investor confidence remains strong despite Brexit and we continue to see new entrants — especially from the eurozone and from global investors who trade in dollars or are headquartered or based in the US.
The five-year extension to the successful Irish Short Stay Visa Waiver Programme, which allows non-EU nationals to travel from the UK to Ireland without an additional visa requirement, has been welcomed by the hotel industry — as has the retention of the 9pc Vat rate for the hotel sector in the Budget. As 2016 comes to a close, we can look forward with optimism to 2017. Although we expect to see a significant number of hotel transactions concluding next year, we are unlikely to see hotel spend matching the record volumes of 2015 and 2016.
John Hughes Director CBRE Hotels
Offices
THIS year as another strong one for the Dublin office market. We’re heading for more than 2.5m sq ft in take-up, well above the long-term average of close to 2m sq ft, albeit slightly down on the record 3m sq ft seen in 2015. Absorption has been strong and those with space have clung to it — given CBD Grade A vacancy rates now stand at below 2pc. Absorption on paper belies the truth on the ground due to the emergence of two trends — ‘intra-quarter re-lets’ where the space is not recorded as vacant at either end of a period and secondly, increased pre-let volumes (when the take-up is counted yet the occupation has not occurred). Both are symptoms of low availability. We estimate 41pc of on-site office space (4.1m sq ft in 42 buildings) is pre-committed. Notably, over 60pc of space delivering in the first half of 2017 is pre-committed.
The most active sector again has been ICT but professional services have been prevalent in the CBD. The State has re-entered the market after a long embargo, marking a welcome return for a properly functioning office market in a capital city. Naturally, the ‘FIRE’ (Finance, Insurance and Real Estate) sector will be in focus in 2017 as the impact of Brexit materialises, or not.
Brexit is causing international uncertainty which is not good for the office markets. The ‘on-off’ nature of the ‘Hard Brexit’ date has an impact in Dublin. The type of Brexit delivered will determine what effect it has, but it is reasonable to expect some relocation from London to Dublin.
Average letting size has risen slightly though remains at 10,000 to 12,000 sq ft, re-emphasising the fact that buildings in Dublin need flexible floor plates. The preferred location among take-up and active requirements remains strongly CBD-biased with more than 90pc of requirements (by size) including Dublin 2 in their search areas. This is being amplified by the competitive HR environment on foot of reducing unemployment. That said, the winner this year has been Dublin 3 in terms of share of overall take-up.
We have quantified occupier demand for Dublin for the past two years and despite high volumes of take up and volatility as a result of Brexit and the US election, we note unfulfilled demand is on the rise. The rise has been much more incremental in the final half of this year but it represents the depth of demand in the Dublin office market. Unfulfilled office demand is estimated to be in the region of 3.6m sq ft.
The key threat to Dublin offices is competitiveness. Both office rent levels and more particularly residential rents which in turn drives wage demand should be more in focus. Wages have a much greater impact for large corporates.
A figure of €60 per sq ft has emerged as the headline rent for Grade-A space for immediate delivery. The pace of headline growth in 2016 slowed but effective rents grew. This was a product of funders changing aspirations to solidify cash flows against upwards and downwards rent reviews. It also reflects the changing nature of landlords from opportunist traders of stock to long-term holders. Given Tenant Incentives (“TIs”) have now been squeezed considerably, it would not be surprising if headline rental growth for CBD Grade A stock returned In the short-term (H1 2017) for immediate delivery. We expect the tone of headline rents to hit €63-64 per sq ft by the end of 2017.
Andrew Cunningham, Director of Offices, Savills Ireland
Industrial
WHILE take-up for 2016 may not exceed much more than half that of last year’s record, this will be as a consequence of the lack of supply of good quality, modern stock, rather than any lack of demand. In terms of the type of current demand, purchasers still outnumber tenants, although some would-be purchasers are being forced to lease as the options in the second-hand sales market are so few.
Speculative development has now recommenced on a small scale through Green REIT plc in north Dublin. IPUT plc and Rohan Holdings are also expected to begin speculative development in 2017. Given that this type of development will probably be very measured, it is unlikely that there will be any oversupply.
Prime rents in the second-hand market have reached €7.50 per sq. ft. with rent free periods down to three months or less in many cases. Rents for well specified new-build warehousing are at €9.50 per sq. ft. New build pricing ranges from €130— €160 per sq. ft. depending on size. Prices for the best second hand stock now range from €70 — €90 per sq. ft.
With supply set to remain constrained and rents and prices in the second hand market yet to reach economic replacement levels, value recovery looks set to continue in 2017.
Kevin McHugh, a Director of William Harvey & Co, Industrial Property Specialists
Development land
THE development land market performed well in 2016, with a relatively strong volume of sales achieved. Prime city-centre sites suitable for hotels and offices were well sought after and it was notable that there was particular demand for sites suitable for student accommodation and ‘build-to-rent’ multi-family residential projects. Land values continued to increase, particularly on sites with planning permission.
From a residential point of view, there continued to be extremely strong demand for infill development sites in mature parts of Dublin, particularly those with full planning permission. Simultaneously, there was a limited supply of large sites in secondary areas, which were zoned for housing but with many lacking essential infrastructure. With larger development sites, purchasers were primarily international private equity firms, often in partnership with Irish developers. Conversely, smaller infill sites attracted mainly domestic purchasers.
The ‘Rebuilding Ireland’ action plan released by the Government in July seeks to identify major urban housing sites. These must be zoned and have the potential to deliver significant numbers of additional homes close to key areas of demand. Sites have been identified within the four Dublin local authority areas and will be provided with the necessary infrastructure to enable the construction of both private and social housing.
In light of the difficulty many developers are experiencing obtaining development finance for residential schemes, Nama has adopted a licensing model to aid the construction of new homes. This sales method allows developers to gain possession of housing sites on the payment of an initial fee and then reimbursing Nama once the houses are sold. Last year a site in Maynooth was offered to the market on this basis and a deal was completed with Anthony Neville Homes. A site at St Edmunds in Liffey Valley was offered to the market this autumn and a preferred bidder has been selected. Another site at Ballycullen is on the market and a bidder will be selected in early 2017.
This will go down as the year when meaningful value recovery finally emerged in the Dublin industrial and logistics property market. A significant improvement in consumer demand in the previous year was one of the main drivers of occupier space requirements which led to the highest take-up on record of some 5 million sq ft in 2015. The resulting decrease in supply coupled with continued strong demand saw a significant increase in both rental and capital values throughout 2016.
Ross Shorten, Director of Development Agency at Lisney
Retail
THE retail market saw substantial changes in the ownership of major retail centres throughout the country. Preliminary figures suggest some €1.6bn was invested in the sector, exceeding 2015’s total by 60pc. Notably, this figure does not include the sale of Liffey Valley, which has not yet transacted. The majority of 2016 retail investment sales were single assets, in contrast to previous years where portfolio transactions predominated.
The remarkable level of retail investment can largely be attributed to the sale of Blanchardstown Town Centre, which was acquired by Blackstone in Q2 for a reported €950m. This is the largest single asset sale in the history of the State. More recently it has been confirmed that BVK (Bayerische Versorgungskammer), one of Germany’s largest pension funds, has contracted to buy Liffey Valley Shopping Centre from HSBC Alternative Investments, Grosvenor and Hines. The largest retail transaction of note outside Dublin was the sale of Whitewater Shopping Centre in Kildare. The centre was sold to German-based fund, Deka Immobilien GmbH, for a reported €180m and will add to its Irish portfolio which includes Cork’s Mahon Point Shopping Centre.
Overseas capital at approximately 85pc continued to be the largest investor in the retail market. This capital will strengthen Irish retail development. In terms of shopping centres, the green shoots include Liffey Valley’s opening of phase two this year, comprising Penneys, a reconfigured cinema and restaurant quarter, while the Crescent Shopping Centre in Limerick is due to complete its latest extension shortly. The proposed development and extension of other shopping centres is robust following a hiatus of almost five years without new floor space.
Our recent Cushman & Wakefield Main Streets Across the World 2016-2017 report highlighted strong retailer demand for Dublin, and the Grafton Street area particularly. Grafton Street is now ranked 13th, in rental positioning by country internationally, with a current Zone A rent of €6,500 per sq m. The street has seen a 4.8pc rental growth year-on-year to June, with high profile new entrants, ‘& Other Stories’, opening recently and Victoria’s Secret to open in the former BT2 store in 2017. Henry Street has also seen a sharp rise with prime rents, with Zone A levels now standing at €4,685 per sq m. Demand for prime retail pitch in Dublin city centre has seen development extend beyond the traditional streets, to Suffolk Street, Nassau Street and Dawson Street.
Occupier trends in the retail market are promising, with new entrants and expansion plans for a number of existing occupiers. The Food & Beverage (F&B) sector has continued as a key trend in 2016, with demand far outweighing supply. Among the new entrants to the market were Five Guys and Prezzo, while operators such as Carluccios, Chopped, Starbucks and Costa remain active in the market.
Overall the outlook for the retail market is positive, with consumer sentiment trending upwards, despite a slight decline in recent months.
Karl Stewart, Director, Retail, Cushman & Wakefield