Tuesday 22 August 2017

Market back to normality with €1bn of property sold

Hines' €37.7m acquisition of the Montrose Student Residence was one of the most valuable transactions in the first half of 2017
Hines' €37.7m acquisition of the Montrose Student Residence was one of the most valuable transactions in the first half of 2017

Donal Buckley

More than €1bn worth of property deals were completed in the first half of this year in Ireland. These included more than €770m worth of commercial properties bought by investors, as well as €75m worth of hotels sold by hotel operators and there were also almost €269m worth of development land deals.

Marian Finnegan, chief economist with Sherry FitzGerald, says that based on preliminary data about €319m worth of deals were done in the second quarter of this year, bringing the total worth of deals in the first half to about €770m. This compares to €2.8bn in the same period last year, of which €2.1bn was in Q2 2016, including €950m for Blanchardstown shopping centre.

Hannah Dwyer, head of research at JLL, says that while the first six months of 2017 are down on 2016, last year was an exceptional year and was in fact the second strongest year ever recorded in the investment market.

"Half-year volumes of €770m are in line with the activity for a more 'normal' market. The 15-year average H1 take-up volume is €760m, which includes the peak years when volumes achieved as high as €2.8bn in the first half of the year.

Ms Finnegan says the largest investment transaction in the first half of this year was the Irish Life deal to forward fund the development of a new office block at 13-18 City Quay, Dublin 2. It is being developed by Oaktree's associate company TIO (Targeted Investment Opportunities) and has been pre-let to Grant Thornton.

The second biggest deal was Dalata's acquisition of the Clayton Hotel on Cardiff Lane, Dublin 2, which traded for about €40m. The third largest transaction was the sale of the Park Office Portfolio by Michael Cotter's Park Developments for €38.6m to an investment syndicate.

Hines' purchase of the Montrose Student Residence in Dublin 4 for €37.7m from Ziggurat Student Living was fourth, while Irish life's purchase of Unit Q1, Aerodrome Business Park, Dublin 24, for €28m from a private Irish investor was fifth.

Ms Dwyer is expecting increased activity "in the second half of the year, with over €1.3bn of assets either currently on the market or due to come to the market in the next few weeks. We are confident that our initial forecast of €2bn for year-end volumes will be reached. Demand remains steady from both domestic and overseas purchasers, but some are being more selective, depending on the investor and product type. We continue to see new entrants to the market which is encouraging."

Marie Hunt of CBRE says: "The scarcity of core product to match volumes of underlying demand is continuing to frustrate investors and in turn is seeing some investors move up the risk curve in terms of asset allocations.

"This is manifesting itself in increased interest in alternative investment options such as Build-to-Rent (BTR) and student accommodation as well as increased appetite for forward-funding opportunities. With up to €1bn of investment transactions in play at present, we are expecting a relatively healthy volume of transactional activity to be recorded in 2017, albeit the make-up of this spend will be quite different to that of recent years.

"We expect to see some sizeable assets being launched for sale over the coming months, meaning transactional activity will be heavily skewed towards the second half of the year as we had anticipated. However, 2017 turnover will ultimately be dictated by the number of these transactions that sign by year-end with some of them potentially falling into 2018."

Sarah Winters of TWM concurred with that view, noting that the year-end figure for 2017 will very much depend on a few bigger ticket sales coming to the market, which there have not been so far this year.

"Typically the top five deals account for 35-40pc of the market," Ms Winters said, adding that these deals are needed if investment volumes are to exceed the market's 12-year average.

In tandem with a busier second half, the values of Irish commercial properties look set to resume their upward momentum after slowing down during the last 12 months. Indeed, growth in Irish commercial values may well outpace those in many European markets, thus enticing international investors to compete for Irish properties.

At the beginning of this year, CBRE had forecast that prime commercial yields would remain stable in 2017 but that secondary yields would soften.

Now, however, Ms Hunt says: "Although yield compression has run its course in many markets across Europe, there is still potential for yields to compress a little further in the Irish market, which in turn is attractive to investors who are encouraged by Ireland's economic backdrop, rental growth potential and the underlying strength of occupier markets.

"With evidence of increasing appetite for alternative investment, it is not surprising that we have already started to see yields for multifamily residential and student accommodation starting to harden."

She also sees yields tending to be stronger for retail high street property, which have been at 3.25pc for more than 12 months, and offices, which have been at 4.65pc over the same period.

Others point out that, over that period, rising rents have underpinned the growth in capital values but it looks like competitive bidding by investors will provide a further boost to growth rates for capital values in the coming months.

CBRE also reports that 18 hotel properties, totalling almost €75m between them, sold in Ireland during the first six months of 2017. This compares with 29 hotel sales totalling €136m in the same period last year. Those figures do not include hotels which were sold as investments, as those were included in the €770m figure. There is currently up to €60m of hotel transactions under active negotiation.

In addition a total of 50 development land transactions worth almost €269m between them, completed in Ireland during the first half of 2017. This compares with €489m generated by 53 sales in the same period of 2016 when a number of large transactions occurred.

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