Friday 28 April 2017

Reality of real estate: property experts on the prospects for 2017 after a boom year

Next year is gearing up to be a transformational one for the Irish market, senior figures in the industry tell our commercial property Editor

The Blanchardstown Centre was sold for a record €950m in 2016
The Blanchardstown Centre was sold for a record €950m in 2016
Ronald Quinlan

Ronald Quinlan

When one considers the tumult wrought by Brexit and the election of Donald Trump as US president, Ireland's expected out-turn for 2016 of €4.3bn in commercial real estate transactions is all the more remarkable.

Given the extent to which this performance was driven by three major deals - the sales of Blanchardstown Shopping Centre to Blackstone for €950m, One Spencer Dock to international investment group AGC Equity Partners for €242m and Liffey Valley Shopping Centre for €630m to Germany`s largest public pensions group, Bayerische Versorgungskammer - it's a figure unlikely to be matched, let alone surpassed in 2017.

The city’s One Spencer Dock was bought for €242 million
The city’s One Spencer Dock was bought for €242 million

As the post-crash era of major portfolio sales draws to a close, the coming year is set to see a consolidation of the participation of long-term institutional investors in the Irish market while the private equity players who bought into Ireland at bottom dollar prices continue to sell up, take their profit and move on to cheaper, distressed markets.

The next 12 months is also likely to see a further uptick in the number of cash-rich domestic investors looking to secure assets with the potential to deliver good returns, but which fall below the institutional investors' collective price radar.

In seeking to identify and analyse the potential opportunities of 2017, the Irish Independent assembled a panel of experts from the country's leading commercial real estate agents. Their views on the prospects for the office, hotel, retail, development land and industrial market follows below.

Offices

Marie Hunt, CBRE executive director & head of research: "Last year saw record volumes of office take-up being recorded, boosted by strong FDI flows. It now seems likely that we will see an increase in UK requirements for office accommodation in Ireland, particularly in Dublin, over the next 12 months.

The Temple Bar Hotel was acquired by Singapore-headquartered The Ascott Limited
The Temple Bar Hotel was acquired by Singapore-headquartered The Ascott Limited

This would be welcome considering that we may well see slower economic growth domestically and a softening in demand from US multinationals in 2017 as some US occupiers delay decision-making in light of the result of the US election.

Having built no office stock for more than five years and with only a limited amount of office development having completed in 2016, next year will be the first year that we will see a meaningful improvement in office provision in Dublin, with more than 2 million square feet of new office stock expected to be completed in the city centre during 2017.

As new supply comes available, the pace of rental growth for prime offices will ease. Although prime rents are only expected to rise by low single digits in 2017, higher rental growth is projected for secondary and suburban buildings.

The trajectory of prime rents will continue to have a bearing on both occupier and investor decision-making throughout 2017, particularly considering the upward and downward rent review regime prevailing in Ireland. We also expect to see increased demand for office accommodation in provincial cities, which in turn will boost rental values and improve development viability prospects in these locations.

Dublin is poised to get more than 2 million square feet of new office stock
Dublin is poised to get more than 2 million square feet of new office stock

While there is certainly a large number of office schemes in the planning process, access to development funding remains elusive and supply is therefore well-controlled in this cycle. The delivery of office accommodation in 2018 and 2019 will depend on the speed at which new schemes let up and will, in some cases, be dependent on pre-lettings being agreed to unlock funding and enable these schemes to commence.

The focus for the Government now firmly needs to be on the provision of schools, transport and broadband infrastructure and, in particular, to ensure that Ireland's main cities have sufficient affordable housing to accommodate any additional demand that may materialise as a result of Brexit relocations as this is a key priority for potential occupiers.

While we are expecting a busy year in the Dublin office market in 2017, we expect that activity will be primarily concentrated in the second half of the year considering the time it will take for current requirements to convert into completed lettings and taking into account that many of the office buildings that are due for completion this year are not expected to be ready for occupation until later in the year."

Hotels

Daniel O'Connor, senior vice president at JLL Hotels & Hospitality Group and head of JLL's Irish hotel team: "Chinese conglomerate HNA Group's acquisition of 25pc of Hilton for $6.5bn was one of the most important global hotel deals in 2016. The deal illustrates the sheer firepower which Asian capital has at its disposal to invest in the global hospitality sector.

‘It now seems likely that we will see an increase in UK requirements for offices in Ireland, particularly in Dublin’
– Marie Hunt, CBRE
‘It now seems likely that we will see an increase in UK requirements for offices in Ireland, particularly in Dublin’ – Marie Hunt, CBRE

The good news is that Ireland is a destination which now features on active Asian hotels investors' Christmas wish list.

JLL's Trinity Lodge and Temple Bar Hotel transactions, both announced last week, are live examples of two new long-term Asian hotel buyers entering the Dublin market. The Trinity Lodge was acquired by Unlisted Collection, a boutique hotel group headquartered in Singapore, while the Temple Bar Hotel was acquired by Singapore-headquartered The Ascott Limited, which is ultimately part owned by Temasek, one of Asia's largest sovereign wealth funds.

But what does 2017 hold in store for Irish hotel owners, both new and old? Between Brexit, the election of Donald Trump as US president and with heightened global terrorism risks, no one can deny the hotel market is facing into serious headwinds in 2017. However, despite these potential threats, the underlying fundamentals still point towards another positive year.

So what should we expect to happen in the Irish hotel market in 2017?

I anticipate Irish hotel values will increase by around 10pc, with Dublin RevPAR increasing by 8pc across the city in 2017.

Total Irish hotel investment volumes meanwhile will stabilise coming in at around €550m, which is below the €800m level that will be achieved in 2016. As new hotel supply increases in Dublin city centre, some Dublin hoteliers, inevitably, are going to feel an impact.

However, negative supply impacts won't rock the boat in 2017 as I expect only 500 new rooms to open in Dublin City Centre during the year - an increase of less than 3pc.

Outside of Dublin, there is considerable value left in provincial cities such as Limerick, Kilkenny and Galway, so expect to see more investment activity in these markets in 2017.

The Irish hotel market will remain a "sellers' market" in 2017, but, as values increase and buyer profiles change, hotel deals will become more complex.

In 2016, we brokered more share sales/corporate transactions than ever before, a deal structure which was rarely seen in the Irish hotel market just a few years ago. Many of these transactions involve complex warranty and indemnity insurance packages, allowing the seller to maximise proceeds and the buyer to insure against transaction risks. The hotel deals of 2017 will involve different buyer types both structurally and culturally; so expect to see new deal structures and more longer-term investors.

As the market climbs higher in 2017, these complex hotel transactions will require both a delicate touch and creative thinking to ensure everyone stays on course."

Retail

Larry Brennan, Savills Ireland director of retail: "Economic and political uncertainty arising from Brexit and the US election result may drag somewhat on sentiment in 2017. In the immediate future this means we may see more volatility in short-term indicators such as the consumer sentiment and retail sales indices. Additionally, ongoing Sterling weakness may lead to further leakage of consumer demand from the Republic of Ireland.

However our retail economic dashboard remains in positive territory and we see continued jobs growth and the return of growth in consumer borrowing as being key to supporting the ongoing retail recovery.

This will translate into continued strong demand for retail property, with an ongoing focus on the prime high streets and malls and main regional cities and shopping centres. Rents will continue to grow - albeit at more moderate rates than those that were experienced in the early recovery phase of the economy as base effects are now beginning to dampen annual percentage increases.

The first impacts of the Section 132 upwards and downwards rent review clauses will kick in as certain tenants seek downward adjustment on their rents for what will be their first rent reviews under these provisions. It is also likely that premium or key money value may return to leasehold properties on our key high streets, particularly where the leaseholder has the benefit of an upward and downward rent review provision, and where restricted uses or special use planning consents exist.

Tenant sources will also change. The opening by Missguided, the until now 100pc on-line fashion chain, of their first 'physical' flagship store in Westfield Stratford City, will turn landlords and their agents' focus away from the US or Australia and on to the internet, as other online brands migrate to a multi-channel platform that will include flagship stores.

Finally, the growth of food and leisure brands will continue at pace. The best way of getting an online shopper off the internet and into your development is to feed and entertain them.

We will continue to see the percentage of developments allocated to catering and leisure growing as new brands and concepts around not only food and drink but also fitness, entertainment, lifestyle and even education appear in our malls and retail parks."

Development Land

Ross Shorten, director of development agency Lisney: "In the latter part of 2016, there were signs that the supply of new residential property was gaining momentum, with a number of developers commencing on-site works. This momentum will gather pace, with a number of large multi-phase developments due to get under way.

The Government's introduction of the 'Help to Buy' scheme, combined with the reduced Central Bank deposit requirements, will dramatically improve the ability of first-time buyers to access the new homes market.

However, it is important to note that while the reduced deposit requirements will increase the number of eligible purchasers and enable many to bring forward their house purchase plans, the Central Bank's loan-to-income requirements at 3.5 times gross income are still in place. This places a cap on potential purchasers' buying power and will consequently continue to affect the viability of developments in certain parts of Dublin and the commuter belt.

New apartments in the mid to upper section of the market will re-emerge strongly in 2017. A number of large apartment schemes including Marianella, Rathgar; Lansdowne Place, Ballsbridge; Mount Argus, Harold's Cross; and several developments in the docklands are due to come to the market. These schemes will attract strong interest from all categories of purchasers.

Private investors have been largely absent from the market in recent years, however there has been a significant increase in enquiries from this sector in buy-to-let units. This trend will increase in 2017.

The build-to-rent residential sector emerged in Dublin in 2016 and looks set to expand significantly in 2017. This is a well-established asset class in cities in the US, UK and continental Europe. Various international pension funds and investors have identified Dublin as an ideal location for such opportunities. Minister Coveney has instructed planners and local authorities to prioritise the facilitation and delivery of these schemes and we expect this sector to be one of the fastest-growing asset classes in Dublin in 2017

The cost of construction remains too high however and a strong argument remains for the temporary reduction of VAT on new homes and a reduction in the cost of local authority development levies. Such measures would increase the economic viability of many projects and ultimately help to increase supply. We expect continual lobbying of the Government in relation to these issues in 2017.

The recent measures introduced in the Finance Bill to change the tax treatment of firms using ICAV (Irish Collective Asset-management Vehicle), QIAIF (Qualifying Investor Alternative Investment Fund) and Section 110 structures will also have an impact on the market. Many international firms active within Ireland have utilised such measures when purchasing development sites in recent years. These firms will now have to reassess their business plans as they will incur significant tax liabilities."

Industrial

Kevin McHugh, director of industrial property specialists

William Harvey & Co: While take-up for 2016 may not exceed much more than half that of last year's record, this will be as a consequence of the lack of supply of good-quality, modern stock, rather than any lack of demand. In terms of the type of current demand, purchasers still outnumber tenants, although some would-be purchasers are being forced to lease as the options in the second-hand sales market are so few.

Speculative development has now recommenced on a very small scale through Green REIT in north Dublin. IPUT and Rohan Holdings are also expected to begin speculative development in 2017. Given that this type of development will probably be very measured going forward, it is unlikely that an oversupply will arise any time in the foreseeable future.

Prime rents in the second-hand market have reached €7.50 per sq ft with rent-free periods down to three months or less in many cases. Rents for well-specified new build warehousing are at €9.50 per sq ft. New build pricing ranges from €130-€160 per sq ft depending on size. Prices for the best second hand stock now range from €70-€90 per sq ft.

With supply set to remain constrained and rents and prices in the second-hand market yet to reach economic replacement levels, value recovery looks set to continue in 2017."

Irish Independent

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