Tuesday 25 October 2016

Office rents now over 90pc higher than worst of crash

Donal Buckley

Published 29/10/2015 | 02:30

The Dublin office market has been resurgent in recent years
The Dublin office market has been resurgent in recent years

The pace of recovery of the Dublin property market is one of the fastest in Europe in terms of both property values and in some sectors for rental growth.

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Furthermore investment in Irish property outperformed the Irish stock market both in the third quarter of this year and over the last 12 months. Indeed over the three years to September the overall IPD/SCSI index showed annualised returns of 23.3pc, practically on a par with the 23.5pc returns achieved by the ISEQ. Indeed returns from investment in Dublin offices at 27.7pc outperformed the ISEQ over the three years.

Over five years the ISEQ is still ahead with 20.2pc returns versus 13.1pc for overall property returns according to the IPD/SCSI Index published by MSCI.

While the pace of growth of Irish office values and rents slowed in the third quarter of this year nevertheless it continued to show growth generating returns of 6.1pc. In contrast returns from the ISEQ suffered a fall of 3.3pc in Q3.

Meanwhile separate data from CBRE shows rents for prime Dublin offices have rebounded 90.88pc since the property market crash. This is the strongest rebound in any of the 54 cities in the Europe, Middle East and Africa survey according to CBRE's latest monitor of EMEA rents and yields.

Consequently Dublin's prime office rents at €565 per sq m are now the eight most expensive in EMEA with London's West End office rents leading the way at €1,784 per sq m.

Belfast offices have risen 28pc from their trough to almost €243 per sq m and risen up the ranks to thirty eight most expensive.

Meanwhile according to the latest IPD/SCSI Index Dublin office rents rose 3.8 per cent in Q3. This index, shows capital values for Dublin offices grew 5.2pc.

According to CBRE yields for Dublin offices have shown the second fastest recovery in EMEA as a contraction of 285 basis points (BPS) from their trough to 4.65pc suggests these are the twentieth most expensive offices in EMEA for those investors wishing to buy.

As this puts them well into the top half of the table these yields are at a level that are likely to deter vulture funds.

Colm Lauder, senior associate, MSCI, said: "The IPD/SCSI Ireland Quarterly Property Index shows a continuing strong performance. In many key markets, such as central Dublin Offices, the main driver now is rental value growth. Encouraging economic fundamentals have fuelled the demand for business space pushing rents upwards, while the low level of supply struggles to keep pace with resurgent occupier demand."

Belfast office yields at 6pc are ranked 38 most expensive among EMEA cities while Zurich office yields at 3.2pc are ranked as the most expensive to buy.

Meanwhile rents for prime Dublin shops, mainly Grafton Street Zone A, at €5,500 per sq m have shown the second fastest rental growth in EMEA this year up 22.2pc according to CBRE. Only Barcelona showed stronger growth at 22.95pc but rents in the Catalonian capital at €2,700 per sq m are only half those of Grafton St.

While CBRE's survey shows no change in prime Dublin retail rents in Q3, the IPD/SCSI Index shows Grafton Street rents rose 5.3pc and Henry and Mary Street rents grew by 0.4pc in Q3.

Marie Hunt, director of research at CBRE's Dublin office says "we are now firmly at the cusp of rental growth in the retail sector of the Irish market and we believe that recent market evidence will see that €5,500 per square metre level increasing over the coming months."

Furthermore according to IPD Grafton Street's investment property outperformed all other Irish property precincts in Q3 with 8pc capital growth.

On a yields basis prime Dublin retail at 3.5pc are the fourth most expensive in EMEA behind London's West End, 2.25pc; Paris 3pc and Zurich 3.1pc. At the other end of the league, prime Belfast retail rents at €802.91 per sq m are ranked 42 in the EMEA table.

CBRE's survey also shows the effects of the Ukraine crisis on Russian and Kiev properties as retail yields range from 13.5pc in Kiev to 10pc in Moscow.

Even though St Petersburg's yields stand at 12pc and rents at €619 per sq m, nevertheless the city has beaten Dublin into second place for the honour of the strongest rebound from trough. Dublin retail yields shifted 300 bps while St Petersburg contracted 500 bps.

CBRE estimates that Dublin industrial rents showed the fourth fastest rebound from trough to stand at €72.50 per sq m making them the nineteenth most expensive in EMEA.

IPD estimates that Dublin industrial rents rose by 1.9pc in Q3 2015 but CBRE estimates stronger growth of 3.57pc in the quarter.

While CBRE shows industrial yields unchanged at 6.5pc in Q3, IPD reckons that capital values for the sector rose 2.8pc in the quarter.

At those yields Irish industrials are ranked 24 in the EMEA league. London industrial yields top the league at 4.5pc.

The EMEA table also provides further evidence of the need to increase prime Dublin office supply in order to prevent a bubble in office rents and to ensure that Dublin offices remain competitive with other European cities.

With the risk that Dublin may lose some of its tax advantages in the bid to attract foreign direct investment, and as it is also losing its competitiveness in terms of residential rents, these add to the urgency for Nama and other investors to bring office supply on stream quickly.

There is little advantage in comparing our office rents with those in more expensive cities such as London and Paris. To be competitive in attracting jobs and sustaining economic growth Dublin needs to compare its office rents with cities such as Amsterdam at €350 per sq m, Berlin €276 at per sq m, or those English cities which are attracting businesses away from London such as Birmingham €438 at per sq m.

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