Wednesday 25 April 2018

The right moves: Institutional investors 'positive' over Ireland and industrial markets

The right moves...

Across Europe, Standard Life does not see Brexit as a
Across Europe, Standard Life does not see Brexit as a "game-changer"

Paul McNeive

Brexit, and its effects on our economy and property market, is never far from our thoughts. Whether they get it right or wrong, the attitude and actions of institutional investors will have a considerable impact on our market. I spoke with Euan Anderson, a real estate investment specialist with Standard Life in the UK, and his colleague Craig Wright, a real estate research analyst covering Europe, for their views on international investment, particularly in the context of Brexit.

On the likely impact of Brexit on Irish property, Wright said that although it was difficult to predict, one should firstly step back and look at how well the market was performing.

The MSCI figures show total returns from real estate of over 40pc in 2014, 56pc in 2015 and 12pc last year. Whilst one would have expected the growth rate to slow further, Wright suggests that it had stabilised at around 10pc per annum. He attributed this strength to positive sentiment on the strong demand from office occupiers.

In the UK, they are hearing more about UK banking divisions looking at Ireland, and investors are pricing that growth in. Consequently, Standard Life sees the prime office yield hardening to 4pc within 12 months.

In assessing the outlook, Wright points to the very low vacancy rate (6.5pc) and the fact that this has fallen quickly from a peak of 24pc. They will, however, be keeping an eye on any risk attaching to the supply side. There is over 200,000 sq m under construction, and the bulk of this is speculative.

From 2019, Wright will be wary of any weakening in demand, as part of the normal economic cycle, or a lack of more Brexit-related office deals.

Overall, the Irish economy looks very healthy, Wright told me, with a debt-to-GDP ratio of 75pc and the lowest unemployment for nearly 10 years. "These factors make Ireland more attractive to long-term investors" he said.

As a result of Brexit, Anderson told me that "we have moved to an underweight position on central London office property".

This, he said, was part of the economic cycle, but also because London was the most vulnerable city in the UK to Brexit effects.

Also, partly as a result of sterling weakness, there has been a surge in overseas buyers in London and 95pc of all investment purchases in the City of London this year (the area known as the 'Golden Mile') have been by overseas investors.

Across Europe, Standard Life does not see Brexit as a "game-changer", noting that if all the jobs that might relocate between Amsterdam, Frankfurt and Paris were divided up, they would not significantly affect the dynamics of the local markets. The exception to that is Dublin, where even a few large office deals could strongly affect the local economy and property market.

Anderson and Wright see the European retail market as "very polarised", with some stronger retailers with a good online presence doing well, but secondary high street shops struggling. As investors, they favour better quality retail assets, and ideally, the dominant player in a strong location.

They referenced the dramatic effect of online retailing on the markets, and cited the astonishing fact that in 2016, 80pc of all industrial/logistics space becoming available in the UK was taken up by retailers, predominantly Amazon, or a logistics company doing "last-mile delivery" for a retailer. I suspect that trend will also support further rental growth in Ireland.

Both are bullish on industrial property, and not just logistics, as increasing mechanisation is driving a worldwide trend whereby manufacturers are repatriating jobs from cheap labour markets, driving demand for space.

Overall, whilst the UK is past yield compression, Anderson and Wright see another 12 to 18 months of hardening yields and decent returns in Ireland.

"We are by no means forecasting a sell-off then, but we will be staying dynamic and flexible, and investors may be looking to invest more internationally," they said. Their advice is that investors should "think globally, examine trends, assess the strongest cities (currently Dublin near term, Berlin, Amsterdam, Seattle, Sydney and Melbourne) and look for strong occupier fundamentals".

Anderson will speak on these topics tomorrow in Dublin at a breakfast seminar organised by Compass Private Wealth.

To attend, contact events@CompassPrivate Wealth.ie or call 01 685 2530.

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