Challenging Outlook For Ageing Office Stock
Despite eurozone annual inflation coming in at 4.1% in October, the signal from the European Central Bank is that it has no intention of raising interest rates in 2022. Not all investors believe that, but institutional capital holds the view that the Private Rented Sector is the place to be for yield.
In its interim results statement, Hibernia REIT plc reported that there is €3.5bn of capital looking to deploy into PRS in Ireland. PRS accounted for 54% of commercial property investment through the first nine months of 2021, with an estimated €1.9bn invested across a range of schemes. The lure is yields of 3.65% to 4.25%, which are more attractive than the negative or tiny yields on sovereign bonds.
Average unit prices paid by the cuckoo funds this year is substantial. Estate agent Knight Frank calculates €460k per unit at Royal Canal Park in D15; €450k at a Dwyer Nolan development in North Dublin; €520k at Griffith Wood in Drumcondra; and €430k at Clay Farm in Leopardstown.
In the Dublin office market, Hibernia notes a divergence in the performance of prime and secondary assets. Prime office rents average €57.50 per square foot, and yields are stable, at 4.0%. However, the yield in secondary properties has drifted by 50 basis points in the past six months, to 5.25%, as occupiers increasingly favour more modern and sustainable buildings over secondary alternatives. Hibernia REIT has taken note. Its 160,000-square-foot development at 1-6 Sir John Rogerson’s Quay – a six-storey office building with retail at ground level – is constructed to a LEED platinum standard.
Dublin office take-up in January to September 2021 was c.30% lower than in the same period in 2019, though CBRE reports that leasing activity in Q3 was on par with the volume of transactions recorded two years previously. Including traditional, redbrick space, Hibernia believes the office vacancy rate in the capital is 10.5%, up from 8.9% in September 2020. The Grade A vacancy rate in the city centre is 11.1%, compared to 9.1% a year ago.
Coming down the tracks in Dublin is 7.3m sq. ft of gross new office space, to be delivered between 2021 and 2024. Hibernia notes that 3.1m sq. ft under construction will be looking for tenants.