dublin - knight frank · 2016 has seen a significant pivot by occupiers to the fringe market. 1....
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RESEARCH
OCCUPIER TRENDS INVESTMENT TRENDS MARKET OUTLOOK
DUBLINOFFICE MARKET OVERVIEW Q1 2016
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Source: Central Statistics Office
FIGURE 2
Standardised unemployment rate
SUMMARY Q1 OUTLOOKAs the city centre becomes supply constrained, 2016 has seen a significant pivot by occupiers to the fringe market.
1. Economic growth of 4.9% projected for 2016
2. Q1 take-up was 723,221 sq ft, 62% higher than the same period last year
3. Prime grade A rents unchanged at €57.50 psf
4. €744 million worth of commercial investment sales transacted in Q1, representing a 34% decline on the same period last year
5. Sandyford seeing a pick-up in occupier and investor interest, as rents rise by 67% since 2013
The ‘Brexit’ referendum, due to be held on 23rd June, is by far the largest risk currently occupying investor and business minds alike. The corporate bond spread between U.K. and European companies – a good proxy for measuring the likelihood of Britain leaving the EU – gave cause for alarm in February when it spiked at £210, having trundled along the £150 to £160 range during the course of the previous months. The panic that threatened to build has since subsided, with the spread tightening and reverting towards trading within the previous bandwidth. From an Irish capital markets perspective, while the
KNIGHT FRANK VIEW ON RISK risk of instability caused by a Brexit and the wider concerns of a global slowdown are certainly factoring into investors’ thoughts, there is little indication that they are postponing investment decisions because of it. It’s probably true to say that pricing is not being pushed as aggressively as before because of these concerns. On the occupier side, there has been little evidence that Brexit has had a significant impact on indigenous or multinational occupier demand. In fact, we have seen an increase in the number of enquiries from U.K. based companies looking at Ireland as a base in the event that the vote is in favour of leaving.
EconomyThe case for the continued outperformance of Ireland’s real estate market in a European context was underlined in the European Commission’s latest economic outlook. In its Spring Statement, the Commission raised its Irish GDP growth forecast for 2016 to 4.9%, up from the 4.5% contained in its Winter Statement, while simultaneously revising down its forecast for the EU from 1.7% to 1.6%.
The upward revision for Ireland puts the Commission’s forecast in line with the IMF, who are forecasting 5% growth, but below Davy who are forecasting a 6% expansion. On a more cautionary note, the CSO’s Quarterly National Household Survey showed that there was a slowing of employment growth in Q4 2015 to 4,700, which represented approximately a third of the increase recorded during the same period last year.
The global outlook has strengthened considerably since the severe bout of stock market volatility witnessed at the beginning of the year during which the S&P 500 Index had fallen by more than
10% by mid-February, making it the worst start to a year since 2009.
While sentiment has strengthened since, the tri uncertainties of the election in the United States, ‘Brexit’ and the slowing of China’s economy will continue to loom large as the year unfolds. Interestingly, the Shanghai residential market recorded the highest growth in the Q1 Knight Frank
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FIGURE 1
GDP Growth
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Prime Global Cities Index with 9.3% appreciation recorded over the period.
There is debate whether this pace of growth represents a vote of continued consumer confidence in the economy or whether the dynamic is due to a safe haven flight to residential property stemming from uncertainty regarding the economy.
Occupier marketQ1 letting activity was 62% higher than the same period last year with 723,221 sq ft of space transacting. This strong start to the year suggests that take-up in 2016 could even surpass the stellar levels achieved in 2015 and indicates that the business community has not been delaying occupational decisions in the context of uncertainty arising from the general election and Brexit vote.
The increase in take-up was driven by a relatively large average deal size of 13,393 sq ft across 54 transactions compared to the average deal size of 6,463 sq ft recorded across 69 deals in Q1 last year. Prime rents remained at €57.50 psf and vacancy declined to 8.3% in Q1.
Q1 saw the market pivot towards Dublin 3 with the postcode accounting for 27% of the market, behind only Dublin 2 which had a 34% market share. The high level of Dublin 3 take-up helped boost the city fringe market share to 32%, although it was still behind the city centre which accounted for 47% of the market. Examining figure 3, we can see that this represents a significant departure from historical performance since 2012 with
the city fringe, like the south suburbs, having consistently remained within the 10-20% range.
The activity in Dublin 3 was led by the ESB taking of 77,780 sq ft and 42,390 sq ft at Two and Three Gateway respectively. The ESB will take two separate five-year leases while the €150 million redevelopment of their current headquarters on Fitzwilliam Street takes place. Other significant activity in Dublin 3 included professional services firm Avarto taking 63,000 sq ft at Eastpoint Business Park for €19.50 psf.
Meanwhile in the city centre, finance firm Fidelity International have taken 68,000 sq ft at George’s Quay House where they will pay a rent of €49 psf. Elsewhere in Dublin 2, another financial firm, Hedgeserv, are taking 18,855 sq ft on a sub-lease at One Park Place at a rent of €55 psf. Overall, the finance sector accounted for 18% of deals which
lagged the state, technology, media and telecommunications (TMT) and professional services sectors which accounted for 29%, 25% and 23% of the market respectively.
Development marketQ1 saw the delivery of a number of significant new office buildings to the market including 61,000 sq ft at LXV, located on the corner of St. Stephen’s Green and Earlsfort Terrace, and 89,400 sq ft delivered at One Airport Central. Buildings nearing completion include 75,000 sq ft at Block 2 and 3 Miesian Plaza, 129,000 sq ft at the corner of Earlsfort Terrace and Hatch Street and 36,000 sq ft at 21 Charlemont. The delivery of new office stock will begin to address the severe shortage of availability options for occupiers, even if we are a couple of years away from the quantum being of a sufficient size to have a significant effect on rental inflation.
Property Tenant Sector Size (sq ft)
Two Gateway, East Wall, Dublin 3 ESB State 77,780
George’s Quay, Dublin 2 Fidelity International Finance 68,000
Blocks J and K Eastpoint, Dublin 3 Arvato Professional Services 63,000
Colvill House, Dublin 1 Irish Water State 55,000
Three Gateway, East Wall Road, Dublin 3
ESB State 42,390
Top 5 office leasing transactions
Source: Knight Frank Research
DUBLIN OFFICE MARKET OVERVIEW Q1 2016 RESEARCH
FIGURE 5
Office take-up sq ft
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Source: Knight Frank Research
FIGURE 4
Dublin prime office rents € per sq ft per annum
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CITY CENTRE FRINGE SOUTH SUBURBS
Source: Knight Frank Research
FIGURE 3
Market share by submarket Source: Knight Frank Research
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DUBLIN OFFICE MARKET OVERVIEW Q1 2016 RESEARCH
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Sandyford Industrial
Estate Beacon South Quarter
South County Business Park
Central Park
Innovation HouseSize: 227,000 sq ftStatus: Planningpermission lodged
South County GatewaySize: 285,512 sq ftStatus: Planning granted
Burton HallRoad SiteSize: 298,709 sq ftStatus: Planningpermission lodged
The Sentinel BuildingSize: 294 Live-Work UnitsStatus: Planning granted
Grafton HouseSize: 65,475 sq ftStatus: Potential
New MicrosoftOffice CampusSize: 372,000 sq ftStatus: Under construction
ESB SiteSize: 750,000 sq ftStatus: Potential
Block HSize: 150,000 sq ftStatus: Under construction
Block ISize: 82,000 sq ftStatus: Planning granted
Faac SiteSize: 300,000-350,000 sq ftStatus: Potential
Eden Plaza SiteSize: 450,000 sq ftStatus: Planningpermission lodged
Ballymoss HouseDate: Q1 2016Yield: 7.00%Capital Value: €228 psfGuide Price: €15,000,000
Corrig CourtDate: 2016Yield: 6.80%Capital Value: €219 psfGuide Price: €8,400,000
Heron HouseDate: Q1 2016Yield: 5.92%Capital Value: €202 psfPrice: €3,750,000
Bracken CourtDate: Q4 2015Yield: 3.00%Capital Value: €128 psfPrice: €3,300,000
The ChaseDate: Q3 2014Rent: €16.20 psfTake-up: 10,736 sq ft Tenant: Suntory
RavenscourtDate: Q3 2015Rent: €13.75 psfTake-up: 17,459 sq ft Tenant: Innopharma Labs
RavenscourtDate: Q4 2014Rent: €15.00 psfTake-up: 25,833 sq ft Tenant: Chill Insurance
Block GDate: Q3 2015Rent: €25.00 psfTake-up: 10,000 sq ft Tenant: Mastercard
The ChaseDate: Q2 2015Rent: €22.50 psfTake-up: 13,466 sq ft Tenant: Mars Ireland
Fenward HouseDate: Q2 2015Rent: €19.40 psfTake-up: 18,000 sq ft Tenant: Slainte Healthcare
The ChaseDate: 2016Yield: 4.00%Capital Value: €356 psfPrice: €62,500,000
Fenward HouseDate: Q1 2016Yield: 7.50%Capital Value: €253 psfGuide price: €5,000,000
Red OakDate: Q1 2016Rent: €24.40 psfTake-up: 17,562 sq ft Tenant: Marketo Heather House
Date: Q1 2016Yield: 6.71%Capital Value: €168 psfGuide price: €6,500,000
Central Park (50%)Date: Q4 2015Yield: 5.60%Capital Value: €428 psfPrice: €155,000,000
Building 2Date: 2016Yield: 8.50%Capital Value: €252 psfGuide price: €22,000,000
Block GDate: Q1 2016Rent: €27.50 psf Take-up: 25,000 sq ftTenant: Salesforce
Block GDate: Q1 2013Rent: €16.50 psf Take-up: 4,645 sq ftTenant: Salesforce Block G
Date: Q3 2015Rent: €25.00 psf Take-up: 45,200 sq ft Tenant: Sage
Block EDate: Q1 2016Rent: €27.75 psf Take-up: 263,000 sq ft Tenant: Vodafone
SANDYFORD OFFICE MARKET
Note: All figures noted above are approximate estimates only and may be subject to change.
LETTING
KEY
NEW CONTRUCTION
LUAS TRAM LINECOMMERCIALRESIDENTIAL/OTHER
INVESTMENT
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Property Seller Buyer Approx price
The Oval, Dublin 4 Private Irish Patrizia €€145.0 million
Central Quay, Dublin 2 Blackstone Hibernian REIT €€51.3 million
8 Hanover Quay, Dublin 2 TIO BNP Paribas €€32.0 million
Marine House, Dublin 2 Bastow Charleton Hibernian REIT €€26.5 million
61-64 Marlborough Street, Dublin 1 Gannon Irish Insurance Company €€21.0 million
Top 5 office investment transactions
Source: Knight Frank Research
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FIGURE 7
Dublin prime office yields
InvestmentQ1 represented another robust quarter for the investment market with €744 million worth of commercial transactions changing hands, although this was down 34% on the same period last year. Activity continues to be heavily concentrated in Dublin, with the capital accounting for 99% of office investment transactions by market value.
Stabilised European income investors increased their holdings in Q1, with the largest and third largest deals executed by German and French funds respectively. In the largest office transaction, German pension fund Patrizia, purchased The Oval on Shelbourne Road, Dublin 4 for €145 million at a yield of 5.1%. The scheme consists of over 180,000 sq ft of grade A office space in addition to ground floor retail units and is home to multiple tenants, the largest of which is Avolon Aviation.
French investors, BNP Paribas Real Estate Investment Managers, purchased 8 Hanover Quay for €32.0 million from Targeted Investment Opportunities, a joint venture between Oaktree, Bennett and Nama. The newly converted warehouse is home to Airbnb’s European headquarters and consists of a two storey over basement grade A office building with a floor area of 38,471 sq ft. Airbnb have a
twenty-year lease with eight years term certain, incorporating a guaranteed rental uplift of 22.5% at the end of year five.
Hibernian REIT remained particularly active in Q1, spending €97.1 million across three assets. In what was the second largest transaction of the quarter, Hibernian REIT purchased Central Quay from Blackstone for €51.0 million. The two remaining purchases comprised of Marine House and One Earlsfort Terrace in Dublin 2 for €26.5 million and €19.3 million respectively. Combined, the three transactions accounted for 28% of the office investment market in Q1.
In total, US funds exited approximately €100 million worth of investments in Dublin in Q1, with Kennedy Wilson being the sole United States buyer with the purchase of Blackrock Business Park for €14.5 million.
Prime yields remain steady at 4.5%.
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FIGURE 6
Irish commercial investment volumes € million
worth of commercial transactions changed hands during Q1 2016
€744m
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DUBLIN OFFICE MARKET OVERVIEW Q1 2016 RESEARCH
Sandyford, located 10 kilometres south of the city centre, is Dublin’s most important suburban location and is comprised of three key distinct business parks:
• Sandyford Industrial Estate
• Central Park
• South County Business Park
Originating as an area characterised by low-rise, low-density manufacturing sites, Sandyford’s evolution as an office location can be traced to the early 1990s when warehouses in Sandyford Industrial Estate began to be converted for office use. In 2001, the first offices in Central Park were launched, with the park since becoming one of the best examples of integrated development in Dublin. The development of the new 372,000 sq ft Microsoft Office Campus marks the next stage of Sandyford’s evolution, with the extensive presence of the world’s second largest company in South County Business Park expected to draw further occupiers to the area.
OCCUPIER MARKETQ1 take-up in Sandyford reached 58,000 sq ft indicating that 2016 will see another strong year of activity, and may even exceed the record level of 208,000 sq ft recorded in 2013. The vacancy rate has declined strongly to currently stand at 8.2%, although this masks variations between the different parks with Central Park fully let since July 2015.
Salesforce’s two lettings in Central Park, executed in Q1 2013 and Q1 2016 respectively, provide a good benchmark with which to judge the recovery in the Sandyford market over the last three years. During this period, the rent paid by the cloud computing giant rose from €16.50 to €27.50 psf, an increase of 67%. Elsewhere, Suntory’s letting of 17,000 sq ft in Q3 2014 for €16.20 psf was substantially increased upon when Mars Ireland let 12,300 sq ft in Q2 2015 for €22.50 psf. Current quoting levels for Sandyford Industrial Estate include €27.50 psf at The Atrium and €25.00 psf at Blackthorn House, the latter having just underwent a €1.6 million refurbishment by owners Irish Life.
The recovery in the Sandyford market can be attributed to a number of push and pull factors. The declining availability and strong rental appreciation in the city centre has undoubtedly played a key role, with the current prime city centre rent of €57.50 psf over double the equivalent in Sandyford. On the pull side, Sandyford’s excellent transport connections with the city centre via the Luas, and the rest of the city via the M50, means the area is well positioned to capture those occupiers seeking a suburban home.
Furthermore, while the demand for office space in the city centre is dominated by the technology, media and communications (TMT) sector, take-up in Sandyford comes from a more diverse range of occupiers, with industries such as pharmaceuticals playing a more important role.
As the economy continues to grow, companies are outgrowing their existing offices and are seeking larger buildings to enable their expansion requirements, something which Sandyford facilitates. This was illustrated by Innopharma Labs, who in 2012 rented 2,551 sq ft in Q House before taking an additional 17,459 sq ft in the Ravenscourt Building in 2015.
INVESTMENT MARKETAs occupier activity rebounded and rents increased, Sandyford has attracted significant attention from institutional buyers which marks a break from the investor syndicate ownership structure of the past. The most significant purchase of the last number of years was Green REIT’s phased acquisition of Central Park. In 2014, Green REIT teamed up with PIMCO to purchase the investment and development element of Central Park for €310.0 million, with Kennedy Wilson assuming ownership of the apartments in a separate €82.0 million deal. Green REIT purchased the remaining 50% share from PIMCO for €155.0 million late in 2015 at an equivalent yield of 5.6%. Blackstone, underbidder for Central Park, bought The Atrium building, which extends to 346,000 sq ft, for €100 million in Q4 2014.
Kennedy Wilson has also been active in acquiring office buildings in Sandyford, having recently purchased the 175,600 sq ft Chase Building for €62.5 million at a yield of 4%. Investments such as Central Park, The Atrium and The Chase represent attractive opportunities for institutional
SPECIAL AREA FOCUS: SANDYFORD
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FIGURE 8
Sandyford take-up Sq ft
Block I, Central Park
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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
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OFFICES
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investors as there is significant scope for value-add asset management through the reconfiguration of space, leasing-up of voids, rent reviews and the re-gearing of leases.
DEVELOPMENT MARKETRecent improved market fundamentals of declining vacancy and rental appreciation have made building viable once again in Sandyford. At Central Park, work on the remaining 7.4 acres ofdevelopment potential has commenced with the delivery of 150,000 sq ft at Block H expected by the end of the 2016. Block I is the next phase scheduled to be developed, with potential for a further 82,000 sq ft of office space
Irish investment firm, Ardstone Capital, has been particularly active in acquiring sites with development potential in Sandyford Industrial Estate. In addition to plans to develop up to 300,000 sq ft at Burton Road, Ardstone are also seeking to construct 450,000 sq ft of office space in a development labelled ‘Eden Plaza’ along Blackthorn Avenue following the purchase of the 5.06 acre site for €6.5 million last year. In an indication of how far development land prices have fallen since
the peak, the site was last sold for €70 million in 2007, a price at the time that was considered somewhat soft given that the guide price was pitched at €90 million. Developer Noel Smyth has also submitted plans to redevelop Innovation House which will involve replacing the existing two-storey building with a six-storey over basement office block with a gross floor area of 227,000 sq ft. Meanwhile, 286,000 sq ft is to be developed at the entrance of South County Business Park which will see the demolition of the existing Media House and Infinity House.
Finally, work has already commenced at the adjacent site where Microsoft are building their state of the art campus, which will bring all the Microsoft staff currently housed in three different buildings in Sandyford under one roof by the end of 2017. Building 2, currently tenanted by Microsoft, has just come to market as an investment/development opportunity. With Microsoft set to exercise their rolling nine month break option in anticipation of the completion of their new campus, the sale provides the opportunity to increase the site footprint from 87,000 sq ft to 300,000 sq ft.
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