Thursday 27 October 2016

Rapid growth rate in office rents is cause for concern

Donal Buckley

Published 11/08/2016 | 02:30

Google has made a base in Dublin, but the rise in office rents could put some investors off
Google has made a base in Dublin, but the rise in office rents could put some investors off

Rents for Dublin offices and industrial property are showing some of the fastest growth rates in Europe according to a CBRE survey of 50 countries.

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However, the office rent increases signal a drop in competitiveness which will not help IDA Ireland in its efforts to compete with those other European cities which are also seeking to attract office employers from London following Brexit.

Over the last 12 months prime Dublin office rents rose by 15.04pc to €618.90, which was the fastest growth rate among more than 50 cities in Europe, the Middle East and Africa (EMEA).

Consequently, Dublin office rents are practically back to their pre-crash levels, having risen 99.5pc from the trough, the strongest recovery rate of any of European cities in the latest CBRE survey.

Dublin office rents are now the eighth most expensive, which puts them well ahead of rents in Frankfurt at €474 per sq m, Berlin at €312 per sq m, Amsterdam at €355 per sq m and Brussels at €285 per sq m.

From an investor's perspective, Dublin offices still look like relatively good value, with yields at 4.65pc ranking them 22 in the league table and close to the median.

Meanwhile, Dublin logistics and industrial rents are also among the fastest growing in EMEA. An 8.97pc increase in these during the second quarter of the year was the second fastest increase during the quarter.

Over the 12 months to June their 21.43pc increase was the fastest in EMEA and at €85 per sq m they are the twelfth most expensive in CBRE's EMEA Rents and Yields Market View.

From an investor's perspective, Dublin industrial values have shown the second strongest recovery with yields contracting by 375 basis points to 5.75pc, which suggests industrials are the fourteenth most expensive to buy in EMEA.

Rising industrial rents and prices are not such a major issue in terms of Ireland's competitiveness because their peripheral location means that Dublin logistics property could never compete with a continental city when it comes to choice of locations. On the positive side, rising industrial values should help to encourage developers to begin to build modern logistics buildings to meet future demand, which they have been slow to undertake.

In contrast, Dublin retail properties are not trending as strong relative to their EMEA counterparts. With prime retail rents in Grafton Street stabilising during the first six months of this year at €2,679 per sq m, Dublin retail has slipped down the rankings from the fourteenth most expensive rents in EMEA during the first quarter of this year to seventeenth most expensive in the second quarter.

Compared to the almost total recovery in office rents, prime retail rents have recovered less than 40pc of the losses suffered since the crash.

When it comes to buying, competing investor bids have halved the yields on prime Dublin property since the crash to 3.25pc, the sharpest yield recover in the 50 EMEA cities.

However, Dublin retail yields are still higher than many European cities as they are ranked 22 in the league.

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