Dublin office rents remain third highest in Eurozone
Dublin office rents are improving their competitiveness in the European market despite maintaining levels of €646 per sq m. During the six months to the end of March, Dublin office rents have slipped from being third highest in Europe to being seventh highest.
While this slippage could help the Irish capital in its efforts to attract post-Brexit leavers from London, when it comes to the Eurozone cities, Dublin rents are still the third highest. That's according to the latest European Quarterly Commercial Property Outlook from agents Knight Frank.
Another factor is that office rents in other key competing cities moved upwards. Paris saw its rents rise to €770 per sq m while Stockholm was the second most expensive of the Eurozone countries at €659 per sq m. Other cities that are competing for financial services passport seekers are also seeing rent increases but they are still well below those in Dublin. These include Amsterdam, where rents are €365 per sq m; Barcelona, which is demanding €261 per sq m; and Berlin, where the rate is currently €360 per sq m. Key German cities such as Frankfurt at €462 per sq m, Munich €432 per sq m and Hamburg €300 per sq m, also saw their rents stabilise.
The report recorded a strong level of occupier activity in Europe in the first quarter but nevertheless most rents notched up only modest rises, with the Knight Frank Prime Office Rental Index reflecting an increase of only 0.2pc in the first three months of the year.
"However, there is the potential for rental growth over the rest of the year, as the diminishing availability of prime space in European CBDs [central business districts] is creating increasingly landlord-favourable markets. Prime rental growth prospects are strongest in key cities in France, Germany, Ireland, Spain and Sweden," it adds.
Indeed this is reflected in recent comments by Declan O'Reilly, director of Knight Frank's Dublin office, that Dublin office rents could rise to between €673 and €700 per square metre by next January. Knight Frank's recent letting of 557 sq m (6,000 sq ft) of space at Connaught House on Burlington Road to the US pharmaceutical company Theravance, at a rent of €672.74 per square metre, would appear to support that prediction.
London office rents have peaked and continued to fall in the city's West End to €1,311 per sq m, while those in London's City financial services district have stabilised at €874 per sq m.
Knight Frank identifies the technology and media sector as the key driver of Dublin's office demand and instances Facebook's lease of around 100,000 sq ft (9,300 sq m) at the Beckett Building in Dublin 3.
A slowdown in investment activity across 14 European countries was also recorded in the survey, which showed that investment across all Irish commercial property fell by 35pc to €469m in the three months which was the third sharpest fall in Europe. Sharper investment falls were seen in Belgium and Italy. Six countries including Spain, Germany and Russia recorded increased investment spend. Prime Dublin office yields also stabilised during the quarter at 4.5pc, which places them in 16th position, suggesting that Irish commercial office investments offer a better return than 15 others in the group of 25.
Regardless of the decrease in overall European investment volumes in Q1, investor demand for European real estate remains strong and it continues to drive yield compression.
An increase of €250 per sq m to €3,500 per sq m in prime shopping centre rents has pushed Dublin up from being third to being second most expensive in Europe. Furthermore, these increases have continued to narrow the gap between Dublin and London, where, despite a fall of €58 per sq m, prime retail rents are still the highest in Europe, at €5,556 per sq m. Unchanged yields for Dublin shopping centres at 4.5pc has seen them slip from ninth to tenth place in investment rankings. John Ring of Knight Frank Ireland points out that the figures relate to average zone A rents for the major Dublin shopping centres.
In the retail warehousing sector, Dublin rents, at €290 per sq m, are ranked fourth in Europe, while yields in this sector at 5.25pc are ranked fifth. Green REIT's pre-letting of a building at its Horizon Logistics Park on Dublin's northside to the UK furniture retail chain DFS at €98 per sq m has lifted this sector in the European rankings from being ninth to eighth most expensive in Europe. From an investor perspective, the survey shows that Dublin prime industrial yields have stabilised at 5.25pc. German logistics investments are seeing increasing demand as yields are falling in a number of their cities including Frankfurt and Munich. Consequently, Irish logistics yields have slipped from third place to a slightly more realistic fifth place in the European rankings.
Commenting on the broader European investment market, Knight Frank says that following a strong end to 2016, investment volumes eased to €44.2bn in Q1 2017, an 8.3pc decrease compared with the corresponding quarter of 2016.
On a year-on-year basis, Q1 investment activity was down in France by 33.2pc and the UK by 22.1pc. The slowdown in France reflected investor caution in the run-up to the presidential election. UK investment activity continued to be influenced by uncertainty following last year's Brexit vote. The report adds: "However, the overall decrease in UK volumes belied an upturn in the London office sector, driven by overseas buyers from Hong Kong, China and Germany."
The German investment market maintained the strong momentum which has seen it overtake the UK as Europe's most active market in recent quarters. Q1 investment volumes increased by 27.3pc year-on-year, and were boosted by Blackstone's completion of its acquisition of the €3bn Office First portfolio.
A strong start to the year was also observed in Spain, where an improving economy and rental growth prospects fuelled international investor demand. Unusually, Madrid overtook Paris to become the second most active European city investment market in Q1, behind only London.