dublin - Knight Frank

RESEARCH

DUBLIN

OFFICE MARKET OVERVIEW Q2 2015

OCCUPIER TRENDS

INVESTMENT TRENDS

MARKET OUTLOOK

Q2 OUTLOOK

SUMMARY

Strengthening economy helps drive half year take-up to highest level since 2007.

Ireland’s economic indicators continued to paint a favourable picture in the second quarter of 2015, helping to support the view that the country has entered a phase of sustained economic expansion. A quick survey of some key metrics helps convey the impressive level at which the economy is currently operating:

3. South suburban prime rents currently €25.00 psf 4. F inance sector making a strong rebound

• The unemployment rate has dropped to below 10% in the second quarter to now stand at 9.7% in June, spurring employment growth to 6% from its low of Q1 2012.

5. Office investments activity down on first quarter to €280 million

• A KBC Bank Ireland/Chartered Accountants Ireland survey reported that business confidence has reached an eight-and-a-half-year high this year. •

The government has forecast Ireland’s debt-to-GDP ratio to reach 105% by the end of 2015, an extraordinary turnaround from late 2013 when it stood at approximately 125%.

This robust performance is indicative of an economy firmly in recovery mode with plenty of capacity for further growth. The substantial room for additional contractions in the unemployment rate should be of particular appeal to office

10-Year Bond Yield Spread over German Bonds IRELAND PORTUGAL SPAIN

2.5%

ITALY

2.0% 1.5%

2014

Source: Eurostat

2

2015

Jun

Jan

Feb Mar Apr May

Dec

Oct Nov

Sep

Jun Jul Aug

1.0% 0.5%

FIGURE 1

Standardised unemployment rate 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

Source: Central Statistics Office

KNIGHT FRANK VIEW ON RISK

FIGURE 2

3.0%

investors, with the government targeting a return to full employment by 2018, something which was consistently achieved before the Global Financial Crisis. As a small open economy with a relatively high sensitivity to changes in the international environment, the still elevated level of these statistics also highlights the need for continued prudent government policy to curtail the risks posed by elevated international volatility, such as those emanating from Greece and China in the second quarter.

20 09 20 10 20 11 20 12 20 13 20 14 20 15

Economy

2. Prime grade A rents now in the order of €50 - €52.50 psf

20 08

1. Key economic indicators continue to paint a favourable picture

Despite the international risks cited above, the yield spread of Irish ten-year government bonds over equivalent German bonds has remained largely stable when compared against the periphery countries of Southern Europe, suggesting that Ireland has now decoupled from the other eurozone crisis countries in the eyes of the bond market. As illustrated in figure 2, the yield spread of ten-year Irish bonds above German bonds was 0.86% compared to 2.14% for Portugal in June, while Irish bond yields have declined by 37% when compared with June 2014. This is

in contrast to corresponding falls of 18% for Italy, 5% for Portugal and just 2% for Spain. With the budget deficit tipped by some to come in under 2% this year - well ahead of the 3% target set by the troika at the beginning of the bailout the transformation of Ireland’s sovereign debt risk profile can largely be attributed to its success in putting its public finances on a sustainable path. This solid fiscal foundation creates the stable environment for investor confidence to thrive and is the principal reason for Ireland’s recent success in attracting international capital flows to real estate.

Occupier Market Dublin office take-up reached approximately 1.2 million sq ft in the first half of 2015, the strongest half-year level of take-up since 2007.

Bank of Ireland’s pre-letting of 129,500 sq ft at 27-33 Baggot Street, which is currently undergoing an extensive redevelopment, is indicative of this activity and will complement their existing HQ presence at 40/42 Mespil Road. Bank of Ireland will enter into a new 25-year lease paying €47.50 psf.

The rise in activity was driven by an increase in the number of lettings, with 125 deals completed in the first half of the year compared to 99 over the same period last year. This was more than enough to offset a decrease in average deal size, which dropped slightly to 9,489 sq ft from 10,693 sq ft. Vacancy has now declined to below 12% to stand at 11.8%, while prime grade A rents are currently in the order of €50.00-€52.50.

Aercap has also availed of a pre-letting deal, taking 63,000 sq ft at LXV, at the corner of St. Stephen’s Green and Earlsfort Terrace, with the rent of €60 per square foot agreed the highest level achieved since the peak of the market in 2008. This is considered an exceptional rental level due to its unrivalled location along St. Stephen’s Green and the high specification of the building.

The now chronic scarcity of space in Dublin 2 has become very evident in 2015, with a lack of supply reducing take-up in the most demand postcode to just 17% market share compared to a five-year average of 35%.

The suburban market continues to rebound as evidenced by Green REIT’s announcement that Central Park is now fully let, with lettings to Sage Hibernia Services and MasterCard taking up the last remaining 55,300 sq ft of space.

10 0

Source: Knight Frank Research

2014

Source: European Commission

20

H1 2015

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-8%

EU 28

30

2013

IRELAND

-6%

40

2012

-4%

FORECAST

-2%

50

2011

0%

The TMT sector, which has dominated the office leasing market over the past number of years, again had the highest sector market share accounting for 37% of take-up. Of greater interest, however, is the increased market share of financial services which accounted for 29% of activity and three of the five largest deals in the first half of 2015, compared to 14% market share in 2014 and a highest finance sector deal ranking of 19th.

60

2010

2%

70

2009

4%

€ per sq ft per annum

2008

6%

Dublin prime office rents

2007

8%

FIGURE 4

2006

GDP Growth

2005

This is behind both Dublin 1 and Dublin 4 which accounted for 24% and 20% respectively. Furthermore, 76% of deals completed in Dublin 2 were less than 5,000 sq ft compared to an average of 58% for the entire Dublin, illustrating the lack of availability of large floor plates.

FIGURE 3

RESEARCH

2004

DUBLIN OFFICE MARKET OVERVIEW Q2 2015

FIGURE 5

Office take-up sq ft 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0

04 05 06 07 08 09 10 11 12 13 14 15 20 20 20 20 20 20 20 20 20 20 20 20 1 H


Top 5 office leasing transactions Quarter Property

Tenant

Sector

Size

Q2 2015

27-33 Upper Baggot Street, Dublin 4

Bank of Ireland

Finance

129,500 sq ft (12,031 sq m)

Q2 2015

Marlborough House, Dublin 1

HCL Information Systems

TMT

82,374 sq ft (7,653sq m)

Q2 2015

LXV, St Stephens Green, Dublin 2

AerCap

Finance

63,000 sq ft (5,853 sq m)

Q2 2015

The Quartz, Elm Park, Dublin 4

Willis

Finance

45,000 sq ft (4,181 sq m)

Q2 2015

Former GSK building, Stonemasons Way, Rathfarnham, Dublin 16

CRH

Construction

44,000 sq ft (4,125 sq m)


3

Marlborough House

ND

Type: Letting Date: Q2 2015 Tenant: HCL Information Systems Sector: TMT Size: 82,400 sq ft

W RO

KEY DART RAIL LINE LUAS TRAM LINE NORTH LUAS TRAM LINE SOUTH NEW LUAS CROSS CITY LINE SDZ BOUNDARY

CONNOLLY TRAIN STATION

STR

NNEL

EET

O‘CO

SHERIFF STR

EET

AM

L STR

IEN S

EET UPPER

QU EDEN

AY

QUAY RGES GEO

UAY

CITY QUAY

ET

GOVERNMENT BUILDINGS

DUBLIN BAY

MERRION SQUARE

WE

R

R PE UP ST

ON

ER

27-33 Upper Baggot Street

LE M ON

ILL ZW FIT

T ST

Type: Letting Date: Q2 2015 Tenant: Bank of Ireland Sector: Finance Size: 129,500 sq ft

OURNE ROAD

R

D ROA

WE

SHELB

ER

LO

IN

D LinkedIn HQADSite H One Park Place Grand Canal/Fitzwilliam Sq

D

NR

GTO

UE

BATH AVEN

AVIVA STADIUM

KE BRO

OW

ST

IAM

Type: Planning permission approved Date: Q2 2015 Floorspace: 320,000 sq ft Delivery date: Q3 2017

PEM

TL TS GO

ES R

CA NA LS TL OW

Type: Letting Date: Q1 2015 Tenant: Google Sector: TMT Size: 24,500 sq ft

G BA

LE

AR

WER

O IT R T

21 Charlemount Place

RA

NE

Type: Investment Date: Q1 2015 Price: €70.0 million Net initial yield: 6.7%

LO

Boland’s Quay

2 Grand Canal Plaza

Type: Letting Floorspace: 100,000 sq ft Date: Q1 2015 Delivery date: Feb 2017 Tenant: Dropbox Sector: TMT Size: 29,300 sq ft

CH

CAMDEN STREET LO

E HATCH STR EET LOW

Harcourt Square

EET

Type: Letting Date: Q2 2015 Tenant: AerCap Sector: Finance Size: 63,000 sq ft

Bishop’s Square

SOUTH SUBURBS

TR

LXV, St Stephens Green

ST STEPHEN’S GREEN


TS

GR AN D

L ROAD

UN

NW EL

KILD

ARE

N STRE

DAWSO

MO

CORE

CUFFE STREET

Type: Redevelopment LE E SO Date: Q2 2015 Floorspace: 36,059 sq ft N Delivery date: Q2 2016

S

AD H RO

UP

T

LA G

4

PEARS E STRE

ST

ET

GRAND CANAL ENERGY THEATRE GRAFTON STREET

WEST SUBURBS



TRINITY COLLEGE DUBLIN


NORTH SUBURBS

Riverside One

4 & 5 Grand Canal Square

Beaux Lane House

3ARENA


NQ

O AST

THE CONVENTION CENTRE

George’s Dock House

E WALL ROAD

DUBLIN CENTRAL CITY CORE

RESEARCH

LA RT PO


PE

R Note: All figures contained above are approximate estimates only and subject to change

5

The €25 per square foot achieved on both lettings also sets the benchmark for rents in the south suburbs.

47% South suburban rents have increased to €25 from €17 psf in 2013, an increase of 47%

The pick-up in occupier activity in the first half of 2015 illustrates the strength of business confidence in the market over the past six months. While the second half of the year traditionally brings the strongest levels of take-up, we believe that the lack of supply in Dublin 2 will result in a significant share of demand going unfilled which will suppress the full-year take-up to a level below the 2.48 million sq ft achieved last year.

Development Market The steady flow of development deals continued in the second quarter with a number of important new proposed

developments either gaining planning permission or starting construction. Chief amongst those to get formal planning permission is the €150 million development of the Boland’s Mill site in the Dublin Dockland’s which will comprise of approximately 320,000 sq ft of office space spread out over three blocks. Located within the newly created SDZ planning zone, the building will extend to 53 metres and include a 15 storey apartment block, helping to further enhance the aesthetic appeal and dynamism of the south docklands. Meanwhile, Rohan Holdings have started construction at 21 Charlemont Place, which will deliver 36,059 sq ft in quarter two of 2016, while Green REIT and their joint venture partner, PIMCO, have also broken ground at Block H in Central Park, with completion due for the fourth quarter of 2016.

FIGURE 7

Half year take-up by sector 40% 35% 30% 25% 20% 15% 10% 5% 0%

TMT

PROFESSIONAL SERVICES

Source: Knight Frank Research FIGURE 6

Half year take-up by location

WEST SUBURBS

4%

3%

NORTH SUBURBS

SOUTH SUBURBS

22%

16%

FRINGE CITY CENTRE

54%


6

21 Charlemont Place

PHARMA

FINANCE

EDUCATION

OTHER


RESEARCH

FIGURE 8

Irish commercial investment volumes € million 5,000

4,000

3,000

2,000

1,000 Block H in Central Park

In total, €280 million worth of office investments transacted in Ireland in the second quarter, compared to €836 million in the first, with an absence of portfolio sales driving volumes down. Interestingly, there was a notable shift towards investments outside of Dublin, accounting for 59% of transactions

20


The strengthening of the Dublin suburban and fringe leasing market is likely to see investors take an increasing interest in these areas as rental growth takes off. In this respect, the outcome of the ongoing sale by Lone Star of the Sandyford Portfolio will be of particular interest, which comprises of three modern office blocks and an office redevelopment opportunity. Given its status as the first major suburban office portfolio sale since the sale of Central Park last year, it will provide a valuable gauge of the strength of investor appetite for suburban investments. Finally, Lone Star’s exit of these loan book acquired investments is indicative of successful private equity funds taking some profits off the table following a rise in the market.

FIGURE 9

Dublin prime office yields 10% 9% 8% 7% 6% 5% 4%

2014

2013

2012

H1 2015


2011

2010

2009

2008

2007

2006

3% 2005

The second quarter was distinguished by three large transactions, the biggest of which was the purchase of the 70.8% interest in Riverside One by IPUT for €80.5 million, with Aviva owning the remaining existing stake. The acquisition of Beaux Lane House by German fund Real IS for €60.5 million continues the trend of growing German ownership, following on from Union Investment’s foray into the Dublin market earlier this year with the purchase of 4 & 5 Grand Canal Square for €233.0 million. In our quarter one office report, we documented the heightened demand for assets located within the IFSC and this trend continued into the second quarter with the purchase of George’s Dock House for €35.6 million by an Irish pension fund.

0 20 4 0 20 5 06 20 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 1 20 2 1 2 3 H 01 1 4 20 15

Office investment yields remain unchanged in quarter two at 4.5%, maintaining a total yield contraction of 3.0% since 2011. Despite this extraordinary decline, yields are still 0.75% above their pre-crisis low of 3.75%, implying scope for further tightening. The potential for this is especially apparent when one considers the strong rental growth outlook and unprecedented low interest rate environment.

0

although just 25% by market value, confirming a firm broadening of the office market recovery beyond Dublin.

2004

Investment

Top 5 office investment transactions Quarter Property

Seller

Buyer

Approx price

Q2 2015

Riverside One, Sir John Rogerson’s Quay, Dublin 2

Harcourt Life Assurance Company

IPUT

€80.5 million

Q2 2015

Beaux Lane House, Dublin 2

RCSI

Real IS

€60.5 million

Q2 2015

George’s Dock House, IFSC, Dublin 1

Private Irish

Irish Institutional

€35.5 million

Q2 2015

The Chapel & Milltown House, Dublin 6

Private

Irish Insitutional

€5.6 million

Q2 2015

Vistatec House, South Circular Road, Dublin 8

Private

Private

€€4.3 million


7

CAPITAL MARKETS Adrian Trueick, Director +353 1 634 2466 [email protected] Ross Fogarty, Associate Director +353 1 634 2466 [email protected] Damien McCaffrey, Associate Director +353 1 634 2466 [email protected] John Ring, Investment Analyst +353 1 634 2466 [email protected] OFFICES Declan O’Reilly, Director +353 1 634 2466 [email protected] Paul Hanly, Director +353 1 634 2466 [email protected] Jim O’Reilly, Director +353 1 634 2466 [email protected] Daniel Shannon, Director +353 1 634 2466 [email protected]

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