DUBLIN - Microsoft · the Dublin market and underscores the need for new office space with...
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RESEARCH OCCUPIER TRENDS INVESTMENT TRENDS MARKET OUTLOOK DUBLIN OFFICE MARKET OVERVIEW Q2 2016
Transcript of DUBLIN - Microsoft · the Dublin market and underscores the need for new office space with...
RESEARCH
OCCUPIER TRENDS INVESTMENT TRENDS MARKET OUTLOOK
DUBLINOFFICE MARKET OVERVIEW Q2 2016
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Source: Central Statistics Office
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Standardised unemployment rate
SUMMARY Q2 OUTLOOKA strong economy continues to underwrite robust leasing and investment activity in the first half of the year.1. Unexpected Brexit shock
hits economy
2. Half-year take-up in-line with recent strong years of 2014 and 2015
3. Kennedy Wilson’s Baggot Plaza was the most significant completion of Q2
4. Q2 represented the strongest ever quarter for commercial investment transactions
5. EastPoint has witnessed a strong rebound with vacancy now just 3%
In advance of the beginning of the year, 2016 was earmarked as a year filled with political risk for investors. With an election in Ireland, a referendum on the UK’s membership of the EU and a presidential election in the United States, the year held plenty of potential for volatility arising from political events.
Evaluating the year at the half way juncture, two of the three downside risks have come to pass. Firstly, the Irish general election in February failed to provide a majority government and left in its place what appears to be a relatively unstable Fine Gael led coalition. The markets reacted relatively sanguine to the news, perhaps assuaged by the fact that a hard shift to the left did not emerge as feared, with business friendly Fianna Fáil waiting in the wings should the new government
KNIGHT FRANK VIEW ON RISK falter. As discussed above, the UK vote to leave the EU will have an impact, although it is unclear whether it will be a net positive or net negative at this juncture for the Dublin office market.
Looking forward to the second half of the year, the United States presidential election perhaps holds the greatest risk of the three identified at the start of the year due to fears that a Trump victory could unleash a period of considerable volatility internationally. Those looking for a lead indicator of the result should keep in mind that the S&P 500 generally rises in the three months before an election if the incumbent party retains power and falls if the challenger goes onto win. This has occurred in 19 out of the last 22 (86%) elections stretching back to the 1928 US election.
EconomyHaving caught the majority of investors by surprise, the vote by the United Kingdom in favour of leaving the European Union dominated the economic agenda in Q2. With the long-run economic growth expectations of our closest trading partner now materially reduced, it is inevitable that the vote to leave will act as a drag on Irish economic growth.
A Bloomberg consensus survey of economists found that Ireland will be the most hit of fifteen of the UK’s main trading partners, shaving a total of 0.8% off expected economic growth over 2016 and 2017. This compares to an estimated 0.5% for the euro area as a whole and just a 0.1% impact each for the United States and China. However, of the countries analysed, Ireland’s growth prospects over the period remain second only to China, putting the overall impact in perspective.
The net impact the vote will have on the Dublin office market is more nuanced. Occupiers that require an operation within the EU will no doubt begin casting their
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eye towards Dublin given the geographical proximity and cultural similarities with London. And while Dublin’s deficiencies in appropriate housing and schooling means that we are unlikely to see wholesale relocations from London, capturing just 1-2% of London’s annual office take-up has the potential to boost Dublin’s take-up by a considerable 10%.
Occupier marketHaving witnessed a strong start to the year, take-up was 434,371 sq ft in Q2, which represented the lowest quarterly level since Q3 2014. However, half-year take-up is broadly in-line with the recent strong years of 2015 and 2014 and we expect Q3 to also achieve a high take-up level with a number of large deals nearing completion.
While the number of transactions actually increased from 54 to 62 in Q2 compared to Q1, the decline in space let was a result of a significant fall in the average deal size which fell from 13,393 sq ft to 7,006 sq ft over the period. Furthermore, just one deal in excess of 40,000 sq ft transacted in Q2 compared to five deals in Q1. This highlights the ongoing lack of available space in the Dublin market and underscores the need for new office space with
sufficiently sized floor plates, especially in prime locations such as Dublin 2 and 4.
The lack of space in these areas is continuing to benefit Dublin 1 which saw its market share increase to 24%, which is double the five-year average of 12%. Dublin 1 also recorded the largest letting of the quarter with United Health Group taking 43,625 sq ft at Block C, Spencer Dock for a reported rent of €50 psf. Other significant activity in Dublin 1 included fintech firm Fenergo’s taking of 20,269 sq ft on the ground and first floors at Castleforbes House on Lower Mayor Street for €25 psf.
The push out from Dublin 2 and 4 has also benefited Dublin 3 which accounted for 12% of the market and two of the five largest deals in the quarter, up from a five-year average of 7%. The two deals were located in One Gateway, with Whirlpool’s taking 24,381 sq ft while the ESB rented 18,754 sq ft, which builds on the 120,000 sq ft they leased in the adjoining Gateway development in Q1.
Prime rents remain unchanged at €57.50 psf, while the vacancy rate has now declined to 8.2%. The TMT sector accounted for 34% of deals followed by the medical and the state sectors which accounted for 19% and 12% respectively.
Development marketKennedy Wilson’s Baggot Plaza, which comprises of 129,300 sq ft of redeveloped office space pre-let to Bank
of Ireland, was the most significant completion of Q2. Among the projects which commenced in Q2 was Hibernia REIT’s development of 110,000 sq ft at 1-6 Sir John Rogerson’s Quay. The development is being branded as 1 SJRQ with completion due by mid-2018. Noteworthy schemes to receive planning permission in Q2 included Noel Smyth’s development of three interlinking blocks with an overall floor area of 230,000 sq ft at 3 Arkle Road, Sandyford.
Similarly, IPUT received planning permission for a €45 million redevelopment of Fitzwilton House which will consist of 187,345 sq ft adjacent to Grand Canal and has a targeted completion date of mid-2019.
Property Tenant Sector Size (sq ft)
Block C, Spencer Dock, Dublin 1 United Health Group Medical 43,625
One Gateway, Dublin 3 Whirlpool TMT 24,381
Castleforbes House, Lower Mayor Street, Dublin 1
Fenergo TMT 20,269
3 Grand Canal Quay, Dublin 2 Zalando TMT 19,095
One Gateway, Dublin 3 ESB State 18,574
Top 5 office leasing transactions
Source: Knight Frank Research
DUBLIN OFFICE MARKET OVERVIEW Q2 2016 RESEARCH
FIGURE 4
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FIGURE 3
Dublin prime office rents € per sq ft per annum
Source: Knight Frank Research
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DUBLIN OFFICE MARKET OVERVIEW Q2 2016 RESEARCH
EASTPOINT
Note: All areas and delivery times noted above are approximate estimates only and subject to change
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Blocks J&KDate: Q2 2016Yield: 6.4%Capital Value: €332 psfGuide price: €21,000,000
Block PDate: Q1 2016Yield: 2.91%Capital Value: €187 psfPrice: €5,950,000Purchaser: Drive Investments
Block A1Date: Q2 2016Yield: Owner OccupiedCapital Value: €195 psfPrice: €7,100,000Purchaser: Oracle
Block B1Date: Q3 2014Yield: Owner OccupiedPrice: UndisclosedPurchaser: Oracle
Block B2Date: Q1 2014Yield: Owner OccupiedPrice: UndisclosedPurchaser: Oracle
Block A2Date: Q4 2015Yield: Owner OccupiedCapital Value: €197 psfPrice: €7,200,000Purchaser: Oracle
Block TDate: Q1 2016Yield: 6.11%Capital Value: €177 psfPrice: €6,250,000Purchaser: Drive Investments
Block GDate: Q1 2016Yield: 3.13%Capital Value: €187 psfPrice: €4,950,000Purchaser: Capital Assets/Fine Grain Property
Block RDate: Q1 2015Yield: 3.30%Capital Value: €190 psfPrice: €7,500,000Purchaser: BCP Group
Block P2Date: Q4 2014Yield: 10.69%Capital Value: €187 psfPrice: €9,100,000Purchaser: Ardstone
Pinnacle 2Date: Q3 2013Rent: €15.00 psfTake-up: 110,000 sq ft Tenant: Deutsche Bank
Pinnacle 1Date: Q4 2014Rent: €16.00 psfTake-up: 39,000 sq ft Tenant: Google
Block P1Date: Q3 2015Rent: €20.00 psfTake-up: 10,326 sq ft Tenant: Citix
Block P1Date: Q2 2016Quoting Rent: €21.00 psfAvailable to Sub-Let: 18,148 sq ft
Block P1Date: Q2 2016Rent: €21.00 psfTake-up: 7,500 sq ft Tenant: Quintiles
Block P3Date: Q2 2016Quoting Rent: €25.00 psfAvailable to Let: 24,000 sq ft
Block SDate: Q1 2015Rent: €13.50 psfTake-up: 15,537 sq ft Tenant: Cadence
Block SDate: Q2 2016Quoting Rent: €25.50 psfAvailable to Let: 7,367 sq ft
Block TDate: Q1 2016Rent: €22.00 psfTake-up: 11,205 sq ft Tenant: Verizon
Block TDate: Q1 2015Rent: €15.00 psfTake-up: 11,873 sq ft Tenant: Verizon
Block WDate: Q3 2013Rent: €10.50 psfTake-up: 7,700 sq ft Tenant: Microchip
Block WDate: Q1 2014Rent: €12.50 psfTake-up: 8,000 sq ft Tenant: Broadcom
Block WDate: Q3 2014Rent: €13.00 psfTake-up: 8,000 sq ft Tenant: Peninsula Petroleum
Block GDate: Q1 2016Rent: €17.40 psfTake-up: 8,632 sq ft Tenant: Red C
Block F2Date: Q2 2016Quoting Rent: €16.00 psfAvailable to Let: 4,937 sq ft
Blocks J&KDate: Q1 2016Rent: €20.00 psfTake-up: 63,272 sq ft Tenant: Arvato
Block NDate: Q2 2016Quoting Rent: €18.50 psfAvailable to Let: 50,466 sq ft
Block P4BDate: Q2 2015Rent: €19.00 psfTake-up: 14,703 sq ftTenant: Academy ofFinancial Trading
Block P7Date: Q1 2015Rent: €16.50 psfTake-up: 6,501 sq ftTenant: Coupa
Block P6Date: Q4 2015Rent: €21.00 psfTake-up: 29,500 sq ftTenant: Oracle
Block P7Date: Q4 2014Rent: €16.50 psfTake-up: 18,000 sq ftTenant: Quintiles
Block P6Date: Q3 2015Rent: €17.50 psfTake-up: 29,500 sq ftTenant: Cisco
Food retailers
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INVESTMENTLETTINGS
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Property Seller Buyer Approx price
1 Spencer Dock, Dublin 1 EY International Fund €€240.0 million
Project Kells, Dublin 2 Aviva Meyer Bergman/BCP €93.0 million
LXV/Aercap House, St Stephen’s Green, Dublin 2 Private Irish CNP Assurance €85.0 million
Block B, Allianz Building, Dublin 4 Starwood Standard Life €57.0 million
Office Part of the Liffey Collection NAMA Avestus and Ares €53.7 million
Top 5 office investment transactions
Source: Knight Frank Research
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FIGURE 6
Dublin prime office yields
Investment€2.1 billion worth of investments transacted in Q2, making it the strongest performing quarter ever witnessed in the Irish commercial property market. The value of transactions in the first half of the year now stands at €2.8 billion, approximately €1 billion ahead of the first half of the record breaking year of 2014. In total, Dublin office investments were €752 million, or 36% of all commercial transactions in Q2. Prime office yields remain stable at 4.50%.
The high Q2 sales volume was helped by the sale of One Spencer Dock to Middle Eastern investors, which represented the largest ever single office asset to transact in the Dublin market. The 227,000 sq ft building, let to PWC with 16.5 years unexpired, sold for €240 million at a yield of 4.70%.
Q2 saw European institutional investors continue to build their foothold in the market. In the second largest transaction of 2016, Pan European real estate investment fund Meyer Bergman teamed up with local partner BCP Asset Management to purchase Project Kells, a four storey office over ground floor retail block on the corner of Nassau Street and Dawson Street for €93 million from Aviva Investors. Other transactions included French firm CNP, advised by Hines, acquiring LXV, located on the corner
of St. Stephen’s Green and Earlsfort Terrace, for €85 million. Meanwhile, Italian bank, Intesa Sanpaolo, purchased Harbourmaster 3 in the IFSC for €41 million.
Other major transactions included Standard Life’s purchase of Block B of the Alliance Building for €57 million while Avestus Capital Partners and Ares completed their first joint venture acquisition with the purchase of three Grade A office buildings from The Liffey Collection for €53.7 million. The buildings include One Kilmainham Square, 51-54 Pearse Street and Magennis Court, and provide exposure to a high-quality tenant mix with opportunities for increasing income due to the high reversionary potential of the properties.
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Source: Knight Frank Research
FIGURE 7 Half-year take-up by location
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Irish commercial investment volumes € million
worth of investments transacted in Q2 making it the strongest performing quarter ever witnessed in the Irish commercial property market.
€2.1bn
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DUBLIN OFFICE MARKET OVERVIEW Q2 2016 RESEARCH
BACKGROUNDEastPoint is located on 40 acres of land reclaimed by Dublin Port during the 1960’s and ‘70’s. Developed on a building by building basis, it has grown into a landscaped office park consisting of 37 buildings housing 7,000 workers. Originally earmarked as a site for a city airport, its heritage as an office campus can be traced to when Earlsfort Centre Developments purchased the site in 1990, with the first building delivered in 1996.
Much of the initial success of the park lay in its designation by the government as an Enterprise Zone within Dublin. This designation offered economic incentives in the form of tax breaks and was successful in attracting investors, mostly comprised of Irish consortiums, to invest in EastPoint.
Crucially, various incentives also applied to qualifying tenants approved by the Irish Development Authority (IDA), tenants which were generally sourced from the technology sector. As a result, EastPoint became home to some of the most famous pioneers of the early internet boom with companies such as AOL among the first to take space in the park. This tech heritage has stood the office park in good stead, as it has attracted contemporary household names such as Google and Oracle, who occupy four and five buildings respectively. It was a
stroke of luck that EastPoint had tied its fortunes to the tech sector, as the sector has grown fast to become the dominant sector in Dublin’s office market. In order to insure that the area remains attractive to this lucrative sector, investment in infrastructure in areas such as hyper-capacity fibre optic cabling have been made.
The campus style layout is one of the main strengths of EastPoint as this enables occupiers to capture knowledge spillovers that derive from clustering. While some suburban locations appear disparate and disjointed, EastPoint is a cohesive community of like-minded tenants in close proximity to the city centre. However, despite being just approximately one kilometre from the River Liffey, the park has suffered from a perception as being a fringe or an out of town location.
Attitudes are likely to change, however, as the continued development of the north docklands takes place. This will draw the gravity of the city centre closer, while connectivity with the south of the city will be improved by the additional bridges that are due to be constructed between the north and south docks. Furthermore, in the longer-term, the area between the Point Village and EastPoint is likely to be developed for commercial space which will eventually truly connect EastPoint with the city centre.
OCCUPIER MARKETIreland’s economic crisis hit EastPoint severely as many of the original tenants dating from circa 1996 had fifteen year break options which they exercised around 2011, having undergone significant rental mark-ups at the height of the boom in circa 2006. As a result, vacancy hit approximately 30% in the following years, which resulted in many of the loans associated with properties in EastPoint subsequently turning up in loan book sales.
Keen to retain tenants, a number of deals were done by receivers at very low rents which persist to today. For example, Block R is currently let to Google at a significantly under rented rate of just €5.75 psf having struck a deal to undertake significant capital expenditure to refurbish the building in 2013 in exchange for a reduced rent until an open market rent review in 2018.
However, as the Dublin office market has rebounded in recent years, EastPoint has benefited as the supply of available space in the city centre has diminished. Strong take-up of 81,705 sq ft in the first half of 2016 has helped to push down the vacancy to just 3%, while rents have risen from approximately €15.00 psf to €22.00 psf in the last twelve months. Notwithstanding, it should be noted that rents are greatly variable between the buildings, reflecting the degree of capital expenditure that has been spent on
AREA FOCUS: EASTPOINT
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FIGURE 8
EastPoint take-up and number of deals per annum
EastPoint
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© HT Meagher O’Reilly trading as Knight FrankThis report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by HT Meagher O’Reilly trading as Knight Frank for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of HT Meagher O’Reilly trading as Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of HT Meagher O’Reilly trading as Knight Frank to the form and content within which it appears. HT Meagher O’Reilly trading as Knight Frank, Registered in Ireland No. 385044, PSR Reg. No. 001266. HT Meagher O’Reilly New Homes Limited trading as Knight Frank, Registered in Ireland No. 428289, PSR Reg. No. 001880. Registered Office – 20-21 Upper Pembroke Street, Dublin 2.
CAPITAL MARKETS
Adrian Trueick, Director +353 1 634 2466 [email protected]
Peter Flanagan, Director +353 1 634 2466 [email protected]
Ross Fogarty, Director +353 1 634 2466 [email protected]
Damien McCaffrey, Director +353 1 634 2466 [email protected]
John Ring, Investment Analyst +353 1 634 2466 [email protected]
Robert O’Connor, Research 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]
Gavin Maguire, Head of Tenant Representation +353 1 634 2466 [email protected]
Mark Headon, Associate Director +353 1 634 2466 [email protected]
refurbishments. Knight Frank are currently marketing, on behalf of IPUT, newly refurbished grade A space for €25.00 psf which would set a new rental benchmark for the area, up from the previous peak of €24.00 psf. Given that €29.50 psf was recently achieved for the remaining space at nearby Point Village, Dublin 1, the spread is still attractive given the close proximity of the two areas.
INVESTMENT MARKETToday, the original developer retains varying degrees of interest in 40% of the buildings while owner occupiers account for 10%, IPUT own two buildings and various Irish and overseas syndicates account for the balance. Investment yields in EastPoint are now in the order of 7% with investment capital values in excess of €300 psf. This marks a considerable rebound in values of the 2012-2013 period, when vacant possession capital values were in the range of €65-€80 psf. With rents having increased rapidly over the past year, much of the park
is now significantly under rented on short-term tenancies which offers asset management opportunities to drive value through rental mark-ups and lease renegotiations.
Examples of this can be found in the recent sales of Block G and Block P which, although showing net initial yields of approximately 3%, both have an estimated equivalent yield of circa 7-8%. Investments currently on the market include Blocks J & K, which was let to Arvato for a 15-year term in Q1 and is guiding €21 million, representing a yield of 6.4%.
The blocks offer the potential for adding floorspace primarily through the construction of an additional floor. In this manner, the development of further space in EastPoint is likely to take the form of adding additional height to existing buildings given that the economics that would support the construction of new buildings in fringe locations is some considerable time off yet.
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