Friday 24 May 2019

Sherry Fitz commercial deal puts market in focus

Average rents in Dublin are far ahead of those in many European cities, causing would-be tenants to stall, writes Dan White

The post-crash rise in Dublin office rents stalled in the first half of the year and prime office rents remain stuck at about €65 per square foot. Stock image
The post-crash rise in Dublin office rents stalled in the first half of the year and prime office rents remain stuck at about €65 per square foot. Stock image

Dan White

Last Monday Sherry FitzGerald announced the sale of the remaining 80pc of its commercial property business to US group Cushman & Wakefield. The links between Sherry FitzGerald and Cushman & Wakefield go back a long way. Sherry FitzGerald has been the Irish partner of DTZ, which merged with Cushman and Wakefield in 2015, since 1998.

While this was no shotgun marriage, with the Irish commercial property market red hot, the timing of the deal inevitably raised questions. When your broker sells should you follow suit?

"It (the sale) had been in the offing for some time, since we rebranded (the commercial property arm) as Cushman & Wakefield in 2016. They (Cushman & Wakefield) have announced plans for a flotation and wanted to rationalise the ownership structure. It is by no means calling the peak," says a Sherry FitzGerald spokesman.

The sale (for an undisclosed price) to Cushman & Wakefield does not include the Cork and Belfast offices, which are majority-owned by local directors of Sherry FitzGerald's commercial arm. However, the Sherry FitzGerald shareholdings in these offices will transfer to Cushman & Wakefield, according to the spokesman.

The Sherry FitzGerald sale comes at a time of continuing strong activity in the commercial property market. Tenants signed leases for more than 80,000 sq m of office space in Dublin in the second quarter of 2018. This brings the total for the year to date to almost 164,000 sq m, compared to almost 150,000 sq m in the first half of 2017.

While demand for Dublin office space remains strong, the hoped-for Brexit bonanza, as financial services fled London for Dublin, doesn't seem to have been as strong as had been originally expected, with nine of the 10 largest lettings in the second quarter involving the expansion of existing companies, with only one being a new tenant.

"Most growth is coming from the expansion of existing companies. While there have been some new entrants, their take-up has been quite small," says Marie Hunt, director of research at CBRE.

She calculates that US companies accounted for 58pc of the space leased in the second quarter, with technology and computer companies taking 42pc.

In other words, it is the Amazons and the Googles of this world who are by far the biggest players in the Dublin office market.

Despite the continued strong take-up of new office space, the post-crash rise in Dublin office rents stalled in the first half of the year and prime office rents remain stuck at about €65 per sq ft (€699.40 per sq m).

What seems to have happened is that, having risen from a low of just €27.50 per sq ft (€295.90 per sq m) after the crash, would-be tenants are looking at rents in other European cities and baulking at paying more in Dublin, with Hunt predicting "a pause for breath".

According to figures compiled by Cushman & Wakefield, while average Dublin rents of just under €700 per sq m are still well behind average City of London (€813) or Paris (€810) rents, they are way ahead of rents in other second-tier European cities including Frankfurt (€504), Amsterdam (€450) and Brussels (€305). These are all cities with which Dublin is competing for Brexit refugees.

"Tenants are not going to pay €70 per sq ft. We have got to a natural inflection point where tenants feel comfortable," says Hunt.

Faced with higher city centre rents many tenants are heading to the suburbs, where prices are much lower. Hunt estimates that office rents are averaging €306 per sq m in Dublin's south suburbs, €210 in the northern suburbs and just €188 in the western suburbs.

"With office rents in the suburbs of Dublin remaining at levels that are at least half that prevailing in the central business district, there is now tangible evidence of occupiers looking to move from the city centre to more cost-effective locations such as the suburbs," she says.

Despite the increasing reluctance of tenants to go much beyond existing rent levels, Hunt remains optimistic about the future.

"Prime rents and yields in all sectors remain relatively stable at this juncture although further rental and capital value growth is anticipated in all sectors of the market in the second half of 2018."

Others are less sanguine. At this year's Davos conference Denis O'Brien, the largest shareholder in INM, the publisher of this newspaper, described the Irish commercial property market as "a bubble".

He went on to say: "Every time I come back to Dublin I'm staggered because there is a new crane going up for some new development and now a lot of these office developments are being funded by hedge funds with very expensive money - 12pc to 14pc (interest rates) money - with an Irish developer mixed in to it. I actually think that we're over-building offices and there won't be enough people to put in them."

While many property market insiders may disagree with O'Brien, the Sherry FitzGerald sale does have at least the whiff of history repeating itself.

Way back in January 2007, when it appeared as if the good times would roll forever, the Irish Times paid a group of estate agents up to €50m for property website myhome.ie. Eighteen months later the boom turned to bust and the Irish Times ended up writing off most that investment.

And who was the largest shareholder in myhome.ie? Surprise, surprise it was Sherry FitzGerald, with a 23.5pc stake that could have yielded it up to €11.75m.

Will a similar fate befall Cushman & Wakefield? The Sherry FitzGerald spokesman says that things are different this time.

"Cushman & Wakefield are a very smart global company. They would not be investing in the Irish market if they didn't see a bright future."

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