Investors from Asia and Middle East to drive Dublin office market
The office markets in Dublin's north and south suburbs are attracting increased attention from investors and occupiers and this is reflected in the Dublin Office Investment Market Analysis 2019, published by BNP Paribas Real Estate Ireland (BNPPRE).
Total Dublin office returns of 9.2pc in 2018 "represents a notable strengthening, compared with the total return of 6.2pc recorded in 2017", said Kenneth Rouse, managing director BNPPRE, when commenting on the analysis.
"These 'stellar investment returns' bode well for liquidity in the investment market in 2019. Returns like this will see the Dublin office market attracting another wave of new investors, most likely from the Far East and Middle East, as well as a continuation of European investors looking for euro-denominated assets," he added.
Prepared in conjunction with market analysts MSCI, the report analyses the performance and outlook for eight key city and suburban office markets and it shows that some suburban locations recorded stronger returns than some city centre locations.
Last year investment turnover across all sectors increased 43pc to €3.6bn with offices accounting for more than 40pc of this higher than expected out-turn.
Capital growth for the 'All Dublin Office' sector was put at 4.5pc and this increase in the value of Dublin offices was also reflected in a 13.7 basis point decline in equivalent yields during the 12 months to stand at 5.4pc last December. Yield compression has been recorded across six of the eight office sub-markets over the year with just the Blackrock and Dún Laoghaire markets showing a slight increase to 7.8pc.
The lowest equivalent yield was seen in South Docks at 4.9pc while initial yields in this area hardened to 3.9pc. These yields continue to outperform Dublin 2, the traditional home of Dublin prime offices, where equivalent yields compressed from 5.4pc in 2017 to 5.2pc in 2018. Both of these areas saw slower rental inflation - from 4.6pc to 1.8pc for South Docks and from 3.5pc to 1.4pc for Dublin 2.
The strongest returns were seen in the North Suburbs which recorded a total return of 12.5pc. Stretching from Dublin Airport and Swords, it includes East Point Business Park, which some might have considered part of the city's north docklands. Its top performance comes for the third consecutive year and was driven by "stronger relative performance both in terms of income returns and capital value growth".
While the area's rents increased by only 2.2pc, its capital values increased by 4.6pc and consequently, combined with other factors, its initial yields fell from 7.4pc to 6.8pc.
Only three areas saw rental growth accelerate last year with Blackrock-Dun Laoghaire leading the way at 6.4pc.
BNPPRE separates that area from the South and Southwest suburbs which stretches from Cherrywood to CityWest, and this sub-market enjoyed a doubling of total returns to 11.9pc for 2018 making it the second strongest performer, partly on the back of capital value growth of 5.7pc.
With lower rents than the centre city, it was also one of the few areas to show an acceleration in rental growth, albeit by a still modest 3pc. Much of this sub-market is dominated by modern offices, such as One South County and Termini which are currently under construction and which offer large floor plates in the Sandyford Business District (SBD).
While rental growth in Dublin 4 slowed to 3.5pc this was still the second strongest growth rate. Also, with capital values increasing by 4pc, it achieved overall returns of 9pc for 2018. Following on from the Comer Group's Number One Ballsbridge development, developers and investors are recognising the appeal of Dublin 4 which looks set to benefit from the expansion of Silicon Docks. Indeed Ballsbridge saw some of the city's largest lettings, notably Facebook's 75,000 sq m (807,293 sq ft) take-up at Johnny Ronan's Fibonacci Square.
The regeneration of Dublin 1, which runs from Smithfield to the Custom House, and improved transport links via the new Luas Cross City line, has enhanced the city centre location. More competitive rents and significant new mixed-use schemes, including Clerys' re-development and 17-21 Foley St, are making Dublin 1 increasingly attractive for major corporates who wish to locate in new offices close to retail and leisure offerings. Dublin 1 rents and capital values strengthened by 1.3pc and 4.7pc respectively, boosting overall returns to 9.9pc - up from 6.9pc in 2017.
North Docklands and the IFSC also recorded increased returns, up from 7.1pc in 2017 to 9.8pc last year on the back of capital growth of 4.5pc, although its rental growth slowed to only 0.8pc. Nevertheless, the report states that as rents are now near 2008 peak levels, it is only natural growth should ease at this point.
"Significant levels of pre-letting activity and new supply being delivered in nearby locations also explain this moderation in rental growth to some degree," it adds. The fresh supply includes Dublin Landings in north docklands.
Overall, Dublin's offices saw the strongest recovery of all asset classes. With €1.5bn invested across 79 office deals, five out of the top 10 transactions in 2018 were offices.
"Market returns remain underpinned by robust economic fundamentals and record levels of foreign direct investment, which are likely to continue through 2019, albeit potentially at a slower pace due to Brexit uncertainties," says Keith O'Neill, executive director of office agency at BNPPRE Ireland.
Investor focus in 2018 was predominantly on prime office developments with five 'mega-deals' of more than €100m. The largest of these was the sale of Heuston South Quarter (HSQ), Dublin 8.
"This highlights investors' confidence in Ireland, and also the fact that we are developing world class office stock," says Kenneth Rouse.
"What is also notable is that three of the five largest deals were acquired by Asian Investors.
"These new Asian investors may be an upside to the Brexit disquiet, where Ireland represents a viable alternative.
"We have the same language, a similar rule of law to the UK, and Dublin is well recognised for its strong technology, media, telecoms occupiers.
"Add in our positive economic fundamentals driven by net exports and consumer demand and we are likely to see more Asian and Middle Eastern property ownership in Ireland," Mr Rouse predicts.