CBRE sees further growth in prime property values

Despite the slow start to the Dublin investment market this year, CBRE has raised its outlook for prime investment property values. At the beginning of the year its director Marie Hunt had been forecasting that prime yields were expected to remain stable this year.

Now, however, the firm’s latest bi-monthly report says that yields for prime high street and prime office assets may harden – in other words, further rises for prime commercial property values could be on the cards.

She attributes this improved outlook to a noticeable intensification in the appetite for prime investment opportunities in the Irish market over recent months with international core capital, mainly German and French institutions, remaining active buyers.

“The market is well supported by the underlying strength of occupier markets, which is continuing to drive rental improvements in all sectors,” Ms Hunt says.

“What we have seen recently is that there are more long-term investors focussing on prime and less focussing on secondary. This polarisation has meant that we now expect to see some slight hardening in prime office yields, say from 4.65pc to 4.5pc, as new transactional evidence emerges. Prime high street retail yields could move from 3.25pc to 3pc, probably by mid-year,” she adds.

All other prime sectors are expected to see stable yields ranging from 4pc for super-prime shopping centres up to 5.5pc yields for both industrial and student accommodation.

Interestingly, prime multi-family residential yields are averaging 4.8pc, which is almost on a par with the traditional trophy assets of prime shopping centres, now at 4.75pc. Retail warehouse yields, meanwhile, stand at 5pc.

On the other hand, a separate analysis for all types of office investments shows that the highest equivalent gross yield at the end of 2016 was the 8pc generated in the north Dublin suburbs. This survey by MSCI in conjunction with BNP Paribas Real Estate showed the lowest gross yield at 5.1pc was recorded in Dublin’s south docklands. This suggests that office prices are higher there than those in Dublin 2 and 4, where gross yields average 5.7pc across all grades. North docks and IFSC yields average 6pc and Dublin 1 at 6.2pc.

Dublin’s south suburbs, which includes Sandyford and Leopardstown, is generating 6.5pc while Blackrock and Dun Laoghaire are out at 7.8pc.

But Marie Hunt advises that there is currently less appetite for secondary properties due to a heightened perception of risk in a more uncertain backdrop, which could affect their pricing as the year progresses.

“We could see yields on other assets softening as opposed to hardening, so the gap between prime and secondary could widen as appetite for prime intensifies,” she adds.”The occupier markets continue to perform well, buoyed in particular by the strength of continued employment generation in the Irish economy.”

She has noticed an increase in active requirements for office accommodation in Dublin over recent months, with several mandates in play at present including some that are specifically Brexit-related.

“Once Article 50 is officially triggered, demand is expected to escalate further. Following what has been a relatively slow start to the year, we expect to see a meaningful improvement in activity in the Irish commercial real estate sector over the next couple of months, assuming sufficient product comes available to match underlying volumes of demand,” she says.

Nevertheless, last year’s record €4.5bn of investment spend is not expected to be matched in 2017 now that deleveraging activity has slowed and in the absence of a significant number of trophy sales, which were prevalent in 2016.

Among the investment transactions currently in the pipeline is Irish Life’s forward-funding of the new Grant Thornton headquarters at 13-18 City Quay, Dublin 2. While yet to be completed, this deal is expected to be valued at more than €125m and, with a possible rent roll of more than €6 million, is expected to generate a net initial yield of about 4.65pc.

The same institution also bought the Velasco office building in Dublin 4, which Ardstone Capital is redeveloping in conjunction with Hardwicke.

Separately, Ardstone also sold 2 Harbourmaster Place in the IFSC to German investor Real I.S. AG for €53.75m.

Another IFSC office building, the Dublin headquarters of JP Morgan, sold for a sum in the region of €40m.

Hines purchased the Montrose student accommodation scheme near UCD in Dublin 4 for €37.7m. Meanwhile, in west Dublin, investment firm Carysfort Capital, headed by Michael Looney, is expected to generate a net initial yield of 6.75pc from the purchase of a multi-family investment of 160 apartments and 167 car spaces at St Edmund’s, Liffey Valley, west Dublin, for over €36m.

In the industrial sector, a distribution facility at Aerodrome Business Park, Rathcoole, Co. Dublin, was sold for €28m, while an office complex at Fumbally Square, Dublin 8, was sold for about €24m.

While there are six properties currently being marketed separately with a combined value of €138m, Ms Hunt says the current biggest frustration in the market is the scarcity of prime product.

Partly in response to this shortage, she reports a notable increase in investors seeking forward-funding opportunities and also looking for investments in what she refers to as ‘alternative’ sectors.

“Indeed, investors the world over are becoming increasingly agnostic about what specific sector they are targeting and focussing more on long-term income generation potential in a myriad of new sectors.”

These sectors include residential blocks for the rental market, purpose-built student accommodation, hotels and healthcare.

She also expects supply of investment opportunities to improve over the coming months as the market approaches the traditional selling season.

There has also been an increase in the number of private investors bringing assets to the market for sale over recent months, which will hopefully alleviate pressure to some extent.

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