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Ireland

Summer Review 2012

03 Economic Overview05 Dublin Office Market 11 Dublin Industrial Market16 Development Land Market19 Irish Retail Market24 Regional Commercial Markets35 Irish Investment Market38 Market Definitions

Content:

Euro area growth prospects continue to deteriorate as the sovereign debt crisis has intensified and the long-term impact of the financial crisis on economic activity remains uncertain. Consequently, Ireland is still heavily susceptible to the ongoing turmoil in the Euro area. The fiscal insecurity across Europe will unfortunately remain until political certainty is restored in key economies such as Greece, Italy and Spain. That said, the recent decision by EU leaders to ease debt-crisis rules with a new deal regarding the recapitalisation of European banks, is expected to have a positive impact on market conditions. However, the short-term outlook for Ireland remains subdued due to expectations of further weaknesses in both consumer and government spending and investment as a result of the spill-over from the external environment.

Economic Overview

Eurozone leaders have mapped out a potential direction in which to reshape the 17-nation euro zone. The European Stability Mechanism, the permanent bailout fund, will now be available to enable direct recapitalisation of banks. These loans will not have to be paid back before other loans, in case of default. Moreover, the ECB will act as an agent to bailout funds which will be used “in a flexible and efficient manner to stabilise markets”. The funds can now be used to stabilize bond markets without demanding countries

to adopt extra austerity measures or economic reforms.

Ireland has successfully concluded the sixth review of the “Programme of Fiscal Consolidation”. In line with each of the previous five quarterly reviews, Ireland has continued to implement the required economic reforms. Ireland’s adherence to the EU/IMF performance targets throughout 2011 and 2012 has helped the budgetary process to gain credibility with market

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GDP & GNP Quarterly Percentage

Source: CSO

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participants. Furthermore, exchequer returns show that revenue collected in tax by the Government in the period to the end of May was 2.8% or €386m ahead of target. Moreover, as a result of Ireland’s successful programme adjustment, Ireland has effectively secured a deal which aims to alleviate the country’s debt burden. Eurozone leaders have vowed to further examine the situation of the Irish financial sector. The examination will endeavour to improve the sustainability of the fiscal programme.

That said, the IMF has recognised that despite effective implementation of agreed budgetary adjustments, the prospects for the programme of funding support remain delicate; thus any risks to Ireland’s growth prospects could call into question debt sustainability.

In late May 2012, Irish voters endorsed the European Union’s fiscal compact by a large majority - with 60.3% voting Yes and 39.7% voting No. This effectively is an agreement to tighten budget rules as general government budgets must be balanced or in surplus. The annual structural deficit must not exceed 0.5% of GDP. Even countries with lower government debt levels, below 60 percent, can only reach a structural deficit of at most 1% of GDP. The Yes vote has sent an important signal of Ireland’s commitment to the euro zone and to the EU more broadly. It brings much needed clarity and certainty for all areas of the economy. International investors lead the way and Ireland’s commitment is expected to result in increased activity.

The most recent figures from the Quarterly National Accounts (QNA) Q4 2011 had revealed that 2011 saw an uplift in economic activity, with GDP recording its first full year of growth since 2007. Exports rose by 4.1% on an annual basis in 2011. That said, investment fell by 10.6% year-on-year, with personal consumption and government spending down by 2.7% and 3.7% respectively. Imports also contracted last year, declining by 0.7% in annual terms. As a result, net exports made a strong contribution to economic activity and the trade balance increased further. The traded sector appears to be leading the recovery; this being a typical feature of small open economies.

The latest ESRI publication includes revised forecasts for GDP/GNP and its components for both 2012 and 2013. Regarding GDP, a 0.6% increase for 2012 is predicted followed by a 2.2% upgrade in 2013. GNP predictions are less optimistic with the ESRI predicting 0% growth in 2012 and 0.5% in 2013.

The Department of Finance figures for GDP are broadly the same; however in contrast, the Department of Finance have forecast negligible growth in 2012 of -0.2% and an increase of 1.4% in 2013. GNP is arguably a more accurate indicator of economic growth in Ireland.

The ESRI and the Department of Finance forecasts for personal consumption are very similar with expectations of - 2% and - 1.7% respectively. The Department of Finance have forecast 0% growth for 2013, while the ESRI have forecast a reduction of 0.5%. Regarding exports, both agencies have forecast increases of 3.3% in 2012 followed by further improvements in 2013. Investment expectations remain subdued for 2012, however a welcome uplift is forecast for 2013; The ESRI have anticipated an uplift of 4.3% in comparison to just 1.5% from the Department of Finance. With regard to the labour market, the unemployment rate which has now climbed to 14.7% remains a key concern. The latest Quarterly National

Household Survey (QNHS) figures for Q1 2012 have shown an annual reduction of 1.0% in employment. Furthermore, on a seasonally adjusted basis, a decrease of 0.6% was seen in employment in the opening quarter to the year.

Employment fell in nine of the fourteen economic sectors over the year. The biggest fall witnessed was in the Professional, Scientific and Technical Activities sector with a loss of 7,400 jobs. In contrast, the largest increase was recorded in the Accommodation and Food Service Activities sector where employment increased by 8,700.

There were 309,000 persons unemployed in the first quarter of 2012, representing an increase of 4.5% in the year. As a result, the seasonally adjusted unemployment rate climbed to 14.8%. The long-term unemployment rate rose from 7.8% to 8.9% over the year up to quarter one of 2012. Worryingly, the total amount of people out of work for more than a year continues to increase; now accounting for more than 60.6% of the totals.

The latest results from the KBC Bank Ireland/ESRI Consumer Sentiment Index, has revealed a moderate downgrade in May 2012 to 61.0 from 62.5 in April. This followed a positive trajectory since December 2011. Conversely, the long run equilibrium level for this index is approximately 89-90; thus illustrating the size of the gap that remains in consumer sentiment.The most recent publication of the Consumer Price Index in May 2012 determined that prices rose by 1.8% in the year to May. The most significant change in the monthly figures was seen in ‘Alcoholic Beverages & Tobacco’ (+1.2%). The most notable changes in the year were increases in ‘Education’ (+9.4%), ‘Transport’ (+5.0%) and ‘Alcoholic Beverages & Tobacco’ (+4.2%) and ‘Miscellaneous Goods & Services’ (+4.1%). The fluctuations in petrol and diesel costs have played a part in the annual change; while education and training costs remain at an elevated level.

GNP

GDP

Private Consumption

Public Expenditure

Investment

Exports

Imports

2012: -0.2%

2013: 1.4%

2012: 0.7%

2013: 2.2%

2012: -1.7%

2013: 0.0%

2012: -2.2%

2013: -2.2%

2012: -2.5%

2013: 1.5%

2012: 3.3%

2013: 4.3%

2012: 1.4%

2013: 2.6%

ESRI

2012: 0.0%

2013: 0.5%

2012: 0.6%

2013: 2.2%

2012: -2.0%

2013: -0.5%

2012: -2.3%

2013: -2.2%

2012: -2.7%

2013: 4.3%

2012: 3.3%

2013: 3.5%

2012: 0.9%

2013: 2.6%

Source: Department of Finance/ESRI

Dept of Finance

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Dublin Office Market

Summary

Performance in the office market during the first six months of the year has been mixed. While take up in quarter two was robust, the level of enquires have diminished. Europe’s debt crisis and a weak domestic economy have cast a shadow over the office market recovery. That said, the recent European summit saw EU leaders agree a series of measures that will break the link between private bank debt and sovereign debt. This marks a positive step towards resolving the eurozone crisis and ensuring financial stability in the EU area. It is hoped that the euphoria that accompanied the announcement will positively impact the office market as it digests the small print of the deal in the coming months.

The office market continues to suffer from a deficient supply of large floor plate Grade A stock. Despite over 760,000 sq m of available space in the capital, the office market is facing a shortage of quality Grade A office space with large floor plates in the Central Business District. The stock of Grade A space and in particular newer A1 continues to diminish and has not been replenished. Furthermore, there are only three buildings that can provide over 10,000 sq m of Grade A1 office accommodation in the CBD. Prime rents in the capital remain have stabilised at €313 per sq m. As supply levels in the CBD recede, prime rents are unlikely to increase. However, the incentives available on existing new Grade A space will start to tighten and lease flexibility will begin to diminish.

The total quantity of space occupied during the second quarter of 2012 stood at 30,200 sq m. This compares to approximately 24,500 sq m transacted

in the previous quarter. While there was a modest uplift in the level of take up during the quarter, it remains below the quarterly average. An analysis of the space transacted in the year to date reveals a 14% increase in activity levels.

Take up during the quarter was boosted by the occupation of approximately 3,000 sq m by MSD, a pharmaceutical company, at the Red Oak North Building, South County Business Park. However, an analysis of activity during the quarter reveals that demand remains prevalent for smaller sized deals measuring 1,000 sq m or less.

The Dublin office market remains divided. In the Central Business District (CBD) demand remains strong for third generation space, in particular Grade A accommodation. Conversely, demand is more subdued for second generation space. That said if the location is right, there is demand for space that is refurbished to a high standard. This

Take UpAfter suffering a setback during the opening quarter of 2012, transaction activity in the Dublin office market strengthened during the second quarter. The total quantity of space transacted in the three months to June edged upwards to 30,200 sq m. Although there were improvements during the quarter, the European sovereign debt crisis has impacted the office market and until resolved will result in the office market recovery remaining fragile.

is evidenced by the full letting of No 2 Hume Street. The office building which is located in prime Dublin 2 has been extensively refurbished and transformed into a modern office building which extends to approximately 1,600 sq m. The success of this refurbishment may prompt other landlords to follow suit. A third tier has the potential to emerge in the latter half of 2012 as a looming shortage of Grade A space may see pre-let agreements emerge to satisfy demand for space, in particular larger floorplates.

The attractiveness of the Central Business District (CBD) as a location preference continued to dominate take up during the second quarter of 2012. An analysis of the space transacted in the year to date reveals that two out of every three offices taken up are located in the CBD. Furthermore, higher quality Grade A accommodation continues to be the most sought after, evidenced by the fact that 73% of space transacted in the CBD during the first six months of the year comprised of Grade A space. Moreover, 48% comprised of newer Grade A1 space.

During the first six months of the year, demand for space in the CBD rose by 15% when compared to the corresponding period in 2011. Within the CBD boundaries, the traditional core area remains the most sought after location, accounting for 52% of the CBD space taken up.

Transaction activity strengthened in quarter two

666


Source: DTZ Sherry FitzGerald Research


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This was followed by the fringe area accounting for 17%. A combination of significantly reduced rents coupled with attractive lease lengths has seen the CBD continue to gain further ground over the suburban region as a location preference. The suburban region accounted for 33% of space occupied during the three month period.

The level of net take up, which measures the change in occupied space, rose to 65,100 sq m at the end of June; representing a 25% increase on the previous quarter. The CBD also witnessed a strong uplift in the level of net take up when compared to the same period in 2011. This reflects the continued strength in demand for this area.

With regard to future demand, while there are a number of active requirements in the market at present, the unresolved euro crisis is acting as a barrier and thus weighing on investor confidence. This is evident in the case of new entrants to the market and in particular multinational companies. A number of high profile companies with requirements for space include software giant Microsoft, Arthur Cox, Paypal, Salesforce.com, CITI Group and BNY Mellon. However, cautiousness

and uncertainty on behalf of potential occupiers and in particular multi-national occupier’s, results in deals taking time to close. At the end of quarter two, there was a further 8,400 sq m of office space signed and awaiting occupation in the capital with a further 46,300 sq m reserved.

The opening quarter of 2012 saw demand driven by the finance sector. This trend continued in the second quarter, with the finance cohort occupying the largest proportion of space during the first half of the year. In the year to date there have been ten individual deals recorded by the Finance sector; this is double the amount recorded during the corresponding period in 2011. The IT/telecommunications and the Pharmaceutical/Health sectors remain very active absorbing a third of the space transacted during the quarter. The State, which remains constrained by policy, was inactive during the first six months of the year.

The Dublin office market has stuttered somewhat this quarter with the shadow of the European debt crises hanging over it. Having said that, the fundamentals remain strong for a quick bounce back when conditions improve. The shortage of new grade A1 space in particular will act as a catalyst for the futureRonan Corbett, Director & Head of Business Space, DTZ Sherry FitzGerald

CBD Take Up by Area, H1 2012


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The second quarter of 2012 saw supply levels in the Dublin office market continue to fluctuate. Following increasing signs of stabilisation in 2011,

the opening quarter of 2012 witnessed a surge in the quantum of second hand space released to the market resulting in upward pressure on supply. However, the highly volatile nature of supply at present returned in the second quarter; with availability declining by 2% during the three month period. The total quantity of available space in the Dublin office market stood at 746,300 sq m at the end of June. A comparison with the corresponding period in 2011 reveals an 8% reduction in supply.

The reduction in supply recorded during the second quarter of 2012 resulted in a combination of stronger demand during the quarter and a stabilisation in the rate of release of second hand space to the market during the three month period. That said, the quantum of second hand space entering the market remains elevated. While the rate of increase in the supply of second hand space has lessened considerably compared with rates witnessed at the onset of the downturn; upside risks remain both from potential future consolidations and also relocation activity.

In light of Europe’s financial turmoil, relocations continue to dominate expansions. Occupiers seek to avail of break options in their leases and upgrade the quality and location of their office and more importantly, take advantage of the competitive terms and conditions on offer. The strength of relocation activity will see the quantity of second hand space

AvailabilitySupply levels in the Dublin office market remain volatile. Having peaked at approximately 811,400 sq m during the second quarter of 2011, the quantity of available space has fallen by 8% over the past twelve months to stand at 746,300 sq m. The rate of decline in availability in the CBD has continued, however at a more accelerated pace; in particular grade A space, receding by almost 14% during the twelve month period. Thus the CBD is potentially facing a looming shortage of top quality accommodation. However, supply levels are expected to remain volatile during the latter part of 2012 due to ongoing uncertainty in the wider economic environment.

Supply levels continue to fluctuate quarter on quarter

CBD Availability by Area, Q2 2012


Constructionremained stagnant for the fifth consecutivequarter

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released to the market remain high resulting in a modest improvement in the level of net absorption. Anecdotal evidence would suggest that 2012 could see a large quantity of grade A3/A2 accommodation enter the market as financial institutions release surplus space.

The level of supply remains stubbornly high by historical standards. This is highlighted by an analysis of the vacancy rate. At the end of June, the vacancy rate stood at 22.3%. Although high, it has fallen marginally when compared to a rate of 24.2% recorded twelve months previously. It is important to note that this rate is significantly greater than the equilibrium rate of 7%.

A significant proportion of the vacant space is older stock which is effectively obsolete. This stock has been on the market for a considerable number of years and therefore arguably masking the true vacancy rate in the market.

An analysis of the spread of available space in the office market at the end of quarter two reveals that the suburbs continues to account for the majority of accommodation, 41%. This would suggest that the vacancy rate in this region is significantly greater than the overall market rate of 22.3%. A further 23% of accommodation is located in the secondary region.

In the CBD, the total quantity of space stood at approximately 264,500 sq m or 35% of the total available space at the end of June. This represents a reduction of 4% when compared to the previous quarter. The corresponding vacancy rate fell to 15.4%, down from 16.9% recorded in the previous year. Active demand for floorspace in the CBD rose sharply during the second quarter, the quantity of space under active negotiation stood at 31,800 sq m; representing an increase of 27% on the previous quarter. If this space is taken up, it could potentially reduce the vacancy rate for the area to 13.6%.

Furthermore, Grade A space continues to be the most sought after. In the CBD, the quantity of Grade A space stands at 174,900 sq m, down 14% on the level recorded twelve months previously. An occupier with a requirement for 10,000+ sq m of new space has limited choice with just three buildings which satisfy this requirement. Grade B space located in the CBD witnessed a modest increase of 1% over the same period.

Under Construction Development activity in the Dublin office market has ceased with no space currently under construction. This marks the fifth quarter in which the market recorded no active construction. At the height of the market, the quantity of space under construction totalled 350,000 sq m; this has declined radically to a situation where there is now no development in the capital.

The volume of space under construction fell to zero during 2011. Since then, no new space has commenced construction and with no new developments starts scheduled at present,

development activity is expected to be limited during 2012. Furthermore, it is highly unlikely there will be any speculative development given the large overhang of available space that exists in the market coupled with the lack of development finance and low rents. Strong demand for Grade A space, particularly in the CBD may see some occupiers forced to consider better Grade B space which may give an impetus to self financed landlords to refurbish Grade B space as the stock of Grade A space continues to diminish.

The total stock of office accommodation remained unchanged at approximately 3,350,100 sq m at the end of quarter two 2012.

As there is no space under construction, supply in the market stands at 746,300 sq m. Any increases in availability going forward will stem from the release of second hand space to the market. Comparing this to the average annual take up over the past decade suggests ample supply going forward.

The course of recovery has dimmed somewhat as ongoing uncertainty surrounding euro debt crisis triggers more cautiousness on the part of occupiers to commit to deals; particularly from multinational companies. However, the recent European summit saw EU leaders ease debt-crisis rules; this marks a positive step towards stemming the debt crisis and reducing uncertainty among potential office occupiers.

Performance during the opening half of 2012 has been mixed. Activity for the first six months of 2012 is marginally ahead of last year and while there may be some spikes in take up during the coming quarters, the current trajectory would suggest that transaction volumes may not match 2011 levels. This is due to the fact that while the numbers of individual deals are expected to expand, the quantum of space occupied is expected to be volatile; unless the much talked about large requirements translate into deals.

The volume of available office space continues to fluctuate on a quarterly basis. While the opening quarter of 2012 witnessed upward pressure on supply, the second quarter saw supply levels decline by 2%. The volatility experienced largely relates to the release of second hand space to the market. In the CBD a downward trend has become more evident: in particular the quantum of grade A1 space continues to recede at a faster rate.

The second quarter of 2012 saw prime rents in the capital remain stable at €313 per sq m. Despite the fact that supply levels in the CBD continue to decline, prime rents are unlikely to increase. However, the incentives available on existing new Grade A space will start to tighten and lease flexibility will begin to diminish.

Outlook for the futureDespite optimism last year that 2012 would be the year of sustained recovery, the reality is that 2012 is likely to be another challenging year for the market.

Headline rents remain static

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Rental Levels Prime rents in the capital remain stable at €313 per sq m, unchanged from the previous quarter. In addition, incentives have also remained broadly stable across the Dublin office market.

In the CBD, headline rents for third generation prime accommodation stood at approximately €313 per sq m, having remained static since the second quarter of 2011. However, there have been some deals recorded marginally above this rate, such as reported for No 2 Hume Street. Rents may be subject to downward pressure over the coming year due to ongoing supply demand imbalances coupled with ongoing uncertainty in the world economy.

The level of incentives on offer such as rent free periods and other tenant inducements continue to be a fundamental part of tenant incentive

packages. However, they have become intrinsically linked to the condition of the property. An example of this is that inducements are limited for turn key properties. Tenants acquiring new space can expect on average two months rent free per year term certain.

In the suburbs, rents can vary significantly depending on location and building specification, but have remained broadly unchanged during quarter two. The south suburbs continue to see the strongest suburban headline rental levels, particularly in Sandyford where rents range between €161 and €194 per sq m per annum. In the western suburbs rents typically range between €86 and €150 per sq m per annum. In the northern suburbs, headline rents generally range between €129 and €150 per sq m per annum. Similar to the prime region of Dublin, landlords in the suburbs are also tailoring incentive packages to secure those tenants active in the market.

Dublin Industrial Market

Summary

A robust level of transaction activity was recorded in the Dublin industrial market during the opening half of the year. That said, activity still lags behind the long run average.

There exists a limited stock of large, good quality vacant buildings despite an oversupplied market.

Development activity remains stagnant with no space currently under construction in the Dublin industrial market.

Prime quoting rents remained flat in quarter two at €50-55 per sq m.

Despite a challenging economic environment, transaction levels in the Dublin industrial market proved to be quite resilient in the opening half of 2012”.

Marian Finnegan, Chief EconomistDTZ Sherry FitzGerald

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The total quantity of space transacted during the second quarter of the year rose to 52,100 sq m at the end of June, representing a notable uplift when compared to the previous quarter when just over 30,000 sq m transacted. It is important to highlight that transaction levels during the quarter were boosted by the single letting of a distribution facility measuring approximately 22,200 sq m at Kilcarbery Industrial Estate in Clondalkin. Activity in the market continues to reflect significant fluctuations in take up due to a small number of large deals skewing transaction levels, particularly when activity remains significantly lower than the long run average. If the Kilcarberry deal is omitted from the analysis, the number and quantum of deals transacted during the three month period was similar to that achieved in quarter one. Other notable deals during quarter two include the letting of approximately 4,850 sq m to Fastway Couriers at unit 4 Crosslands Industrial Estate in Ballymount.

The volume of transaction activity for the first six months of the year

stood at 82,700 sq m; representing a 3% reduction when compared to the level achieved during the corresponding period in 2011.

An assessment of net take up, which measures the change in occupied space rather than transacted space, stood at -16,000 sq m at the end of June. While the rate remains in negative territory the level has improved considerably compared with the previous quarter. An increase in supply, driven by the release of second hand space, continues to act as a drag, resulting in the overall level remaining negative.

An analysis of market conditions reveals that sentiment remained stable during the second quarter; following a tepid increase during the opening quarter of the year. Uncertainty continues amid the interplay between the fragile domestic economy and the Euro debt crisis; consequently occupiers remain cautious. Furthermore, the logistics industry has been hit by rising fuel prices leading to further liquidations,

Transaction ActivityAt the mid point of the year, performance in the industrial market has been relatively robust; despite the market being constrained by conditions both domestically and internationally. Transaction activity during the first six months of the year stood at 52,100 sq m at the end of June. Despite a high vacancy rate in the market, prime stock remains low which is restricting the number of transactions in the market. The second quarter of 2012 saw more subdued levels of enquiries and requirements which may also negatively impact transaction volumes in the coming quarters.

Dublin Industrial Take Up


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The second quarter witnessed a continuation in this trend however the rate of increase slowed notably. Looking forward, availability is expected to stabilise at a more sustainable rate as the steady stream of second hand space entering the market shows signs of slowing.

The quantum of available industrial accommodation rose again during the second quarter of the year; however the rate of increase was not as aggressive as was witnessed in the previous quarter. Overall availability reached 1,075,500 sq m at the end of June, representing a marginal increase of 2% during the three month period. However, a comparison with the same period in 2011 reveals an 11% increase in the level of vacant space during the twelve month period. The return to the upward trajectory in supply is a concern as total availability has seen approximately 648,000 sq m released to the market since the downturn began.

Despite a more robust level of demand during quarter two of 2012, availability rose during the quarter. The fact that availability outweighed demand largely reflects an increase in the level of second hand space released to the market. While there was a slowdown in the rate of increase during the second quarter, the release of second hand space to the market remains stubbornly high and thus demonstrates increasing signs of instability as a result of ongoing consolidations and closures in the market. Such occupancy losses can result in large quantities of surplus accommodation entering the market and impacting vacancy levels.

The latest published list of properties, which are subject to enforcement actions by the National Assets Management Agency, contain less industrial properties than anticipated. While this is a positive development for supply levels, uncertainty surrounds the rate of release of these properties to the market. However, many occupiers who took out leases at the height of the market in 2007 are approaching five year break options/lease expiries which could result in more ‘chess-board’ like movement as they exercise break options. This could see continued volatility in the level of available space on the market.

In line with the increase in supply witnessed during the quarter, the vacancy rate also experienced upward pressure climbing to 26.5% at the end of June. This compares to 26.1% recorded three months previously. The vacancy rate stood at 23.9% during the corresponding period in 2011. It is important to note that the vacancy rate remains significantly greater than the equilibrium rate of 7%. The extent of the increase in supply over the past four years is further highlighted when the current rate of 26.5% is compared to an average vacancy rate of 10.5% in 2007, when activity in the market was healthy.

Availability Dublin industrial availability remains extremely volatile. 2012 commenced with strong upward pressure on supply, following emerging signs of stability during the latter part of 2011.

acquisitions and consolidations. As a result, the level of enquires and requirements slowed somewhat and those which are currently active are taking an increasing amount of time to complete. In addition, foreign direct investment related requirements have been limited relative to the same period in 2011.

The profile of space transacted during the first half of the year illustrates increasing demand filtering through for medium sized units, albeit at reduced levels. That said, overall activity remains largely focussed on smaller sized deals measuring 1,000 sq m or less.

The appetite for freehold purchases as an occupational preference increased during the opening quarter of the year, largely due to properties being brought to the market with asking prices reflective of current market realities. However, the second quarter did not see a continuation of this trend with just a handful of deals sold during the second quarter. That said, the level of enquiries for sales have improved as industrial occupiers are beginning to see real value in the market although the lack of available finance is hampering a large proportion of transactions and getting them over the line remains challenging. The most significant industrial sale during the first half of 2012 was the sale of the former Walsh Family Foods facility in the Poppintree Industrial Estate in quarter one measuring approximately 5,050 sq m.

Leasehold transactions accounted for 87% of activity in the year to date and are expected to continue to dominate activity in 2012 as financial conditions remain broadly unchanged.

The South West industrial corridor remains the most sought after region, accounting for approximately 55% of all transacted space during the year to date. This was followed by the North West region which accounted for 21% of all the newly occupied space. A further 19% of space was absorbed in the North East, with the remaining space transacted in the South East.

Modern accommodation continues to be the preferred option among those active in the market at present. Approximately 67% of all transacted space during the opening six months of the year was greater than 6.1 metres in height. A further 20% ranged from 5.5 – 6.1 sq m, with the remaining space less than 5.5 metres in height.

Prime headline quoting rents remained stable during the second quarter of the year ranging between €50-€55 per sq m; following downward pressure experienced during the previous quarter. From the peak of the market, prime quoting rents have declined by 63%. While the negotiation power still lies with the tenant, the market has moved away from leases being backed by strong incentives to a position where landlords are reducing rents from lease commencement with a small element of rent free provided as a token gesture. The opening half of 2012 also saw increased evidence of purchase options being included in a number of leases.


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Surprisingly, despite elevated levels of supply in the market, there is a limited stock of large good quality vacant buildings. As a result, occupiers are facing limited options. Anecdotal evidence would suggest that good quality stock coming to the market is moving fast.

In terms of the age profile of available space, 10% is less than 5.5 metres in height while a further 23% ranges between 5.5 and 6.1 metres in height with low eaves. This would suggest that much of the available space comprises older stock and as a result may not meet occupier requirements; therefore arguably masking the true vacancy rate in the market. In a normal functioning market it could be argued that much of this space would be sold for development purposes, although clearly this is not a viable option in the current market.

Furthermore, demand continues to be largely focussed on good quality accommodation, which has resulted in a continual erosion of existing stock. That said, factors such as location and access to power continue to be instrumental in the decision making process.

The South West region continues to account for the highest proportion of available industrial space with approximately 481,300 sq m or 45% of overall availability located in this region. However, while this region continues to benefit from stronger demand, the rate of second hand stock entering the market in this region remains high. A further 29% of accommodation is located in the North West, while the North East accounts for 24%. The remaining space is available in the South East, where supply remains limited.

As no new space completed construction in the first half of 2012, the total stock of accommodation in the market remains at 4,058,500 million sq m.

New development activity effectively grounded to a halt during the second quarter of 2008 and speculative development is virtually non existent. This is due to a number of factors such as continued uncertainty regarding the economic outlook, a large over hang of stock and a tighter lending environment impact potential development decisions. Furthermore, the appetite for new development has been impacted by the current low and extremely competitive rental levels which have impacted the viability of design and build options. However, despite excessively high levels of availability, the supply of good quality larger units remains limited.

The second quarter of 2012 has seen increased interest in land. Furthermore, there are a number of sites which have existing planning permission for development and if required could have a turn around period of between 6-9 months. That said, developers and investors are unwilling to commit to speculative development.

Construction ActivityDevelopment activity in the Dublin industrial market is stagnant at present with no space currently under construction.

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The majority of transactions in quarter two consisted of buildings that were on the market for a relatively short period; indicating that that there is reasonable demand for good quality building. That said, much of the existing available space is not meeting occupier demands.

Brendan Smyth,Head of Industrial, DTZ Sherry FitzGerald.

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Outlook for the FutureTransaction activity in the Dublin industrial market was relatively resilient during the first half of 2012, despite a challenging external environment. A notable development from the first quarter to the second was the slowdown in the level of active requirements, a factor that may impact activity in the latter half of the year. The outlook for 2012 remains one of cautious optimism, as underlying occupier demand remains vulnerable to both domestic and global shocks.

The quantum of space available on the market remains high and unpredictable. At the end of June, supply levels rose to 1,075,500 sq m. That said, tentative signs of stability have started to emerge. The associated vacancy rate rose marginally to 26.1% and remains significantly greater than the market equilibrium. While new supply is set to remain limited, upward pressure on supply levels will continue to exist due to the ongoing release of second hand space.

Prime quoting rents remained stable during the second quarter of 2012 at €50-55 per sq m. While the outlook is expected to be more relatively durable in 2012, the balance of negotiating power remains with the tenant.

It appears that this situation will persist until there is more political certainty in Greece, Spain and Italy. Financing for speculative development remains at negligible levels due to the imposition of high loan to value ratios and unattractive repayment terms. Indeed, the benefit of securing a prelet for a proposed development appears to have limited impact on a developer’s ability to secure finance. While there has been an increase in activity along with a marginally positive shift in sentiment, the volume of transactions has remained limited.

Due to the lack of funding the majority of purchasers active in the market are currently cash purchasers or parties relying on limited finance only. These purchasers generally have an appetite for smaller lot sizes and particularly sites with planning permission for traditional housing schemes. During 2011 they were focused mainly on established inner suburban areas which have higher levels of demand and more limited availability of

existing stock. However, in recent months they have turned to the outer suburban areas which have limited availability of existing stock. In Dublin this has focused mainly in the south suburbs, with some increased activity in commuter towns around Dublin. Other buyers active in the market include multi national retailers

as evidenced by site acquisitions and store openings by Tesco along with continued expansion by discount retailers Aldi and Lidl; with an increased focus on the Greater Dublin Area. The latter part of 2011 and the first half of 2012 has seen the emergence of student accommodation providers seeking to acquire development sites close to major third level institutions. Many of these providers have diverse international portfolios and have leveraged these to secure advance funding.

Recent sales of development land, particularly of smaller sites with planning permission for traditional housing, have demonstrated that there is demand for the right product. Although the number of development sites being placed on market for sale on behalf of both private vendors and receivers continues to increase there is limited availability of the correct product. The transactions which have taken place suggest that land values in some urban areas have stabilised or the rate of reduction in value has moderated. This is despite the weakening of residential and commercial values in some areas. One feature of the market which has become more prevalent in recent months is the realistic pricing

of development land being placed on the market for sale which has enabled a greater number of transactions to be agreed.

Despite the limited availability of finance some speculative development is taking place. In Cork, for example, a 24,600 sq m office development known as City Gate Park is currently near completion. The development has also secured a significant prelet to Quest Software of approximately one fifth of the overall development. This demonstrates that in some cases there is scope for speculative development particularly for office and industrial uses in regional locations. Recently in Galway due to the lack of availability of large modern office buildings two significant lettings to EA Bioware and Zenimax have required the retrofitting of industrial buildings to provide suitable office accommodation. Also in Galway, Hewlett Packard are seeking a design and build option for a significant new facility, as no suitable options are currently available that would broadly meet their requirements.

In contrast with Galway and Cork, virtually no speculative office or industrial development is currently under progression in Dublin, with the exception of some design and build industrial units. The availability of prime office buildings in Dublin’s Central Business District continues to decrease, while industrial occupiers normally seeking high bay warehousing are now acquiring warehouses with a larger footprint which provide the same cubic capacity as smaller buildings with higher eaves; providing the most cost effective approach. In respect of large modern office developments in prime locations there now appears to be some scope for speculative development especially if a prelet can be secured. It remains unclear when speculative industrial development will become viable in the immediate future.

Multi asset property auctions and receiverships sales are now commonplace throughout Ireland. Initially multi asset property auctions were pitched at distressed property sales, particularly those which have issues which would otherwise prevent a sale by Private Treaty. The impact of these auctions on the development land market has been limited as they have tended to be used mainly to dispose of income producing assets. 2011 and 2012 have seen a marked increase in receivership sales particularly of development land. Initially receivership sales were considered by many purchasers active in the market to be distressed sales. Although distressed sales have taken place in some instances, the market is now recognising that the majority of receivership sales are not distressed sales and therefore pricing for such sales and the pricing of sales on behalf of private vendors are becoming more aligned.

One issue which is continuing to inhibit development is the level of development contributions generally and particularly in areas of Dublin which are also subject to supplementary development levies for major transportation projects such as Metro North, Metro West

The majority of purchasers active in the market are currently cash purchasers or parties relying on limited finance only

Development Land MarketThe first half of 2012 has been a challenging period for the development land market. Continuing fiscal uncertainty across Europe has resulted in an ongoing lack of liquidity and the absence of a functioning debt market in Ireland for speculative development.

16

Development Land Market

17

and the Luas Green line extension to Cherrywood. There are also local supplementary development contribution schemes such as the Glenamuck Distributor Road, the Kildare Route Project and the Clonsilla to M3 Parkway Rail Line. These schemes were designed to recoup the cost of constructing these projects; while also seeking to encourage higher density development by setting levies based on site area without specific regard to the quantum of development proposed and the likely revenues which would be generated by a proposed development. However, higher density development is no longer feasible in most of these locations. In many cases these levies are therefore inhibiting development as they are resulting in otherwise viable schemes becoming unviable.

Given that some of these projects may not proceed for an extended period and others may not proceed at all within the lifetime of the relevant scheme, it may now be prudent for the relevant local authorities to consider reducing or removing these supplementary levies in order to encourage developments along the routes of these projects and thus increasing the level of development contributions being generated.

Furthermore in June 2012, the Department of the Environment, Community and Local Government

published daft guidelines for Planning Authorities in respect of development contributions. The purpose of these guidelines is to ensure that development contribution schemes are evidence schemes are evidenced based and balanced in order to support economic activity, thus promoting sustainable development. The draft guidelines should in turn encourage the review of all existing Development Contribution Schemes. Once implemented, the draft guidelines are likely to reduce the burden of development contributions.

In Budget 2012, the Government reduced the level of stamp duty payable on all non-residential property including land from the previous top rate of 6% to a flat rate of 2% on all amounts. This change reduced the cost of acquiring development land, while also reducing the cost for purchasers of acquiring a completed commercial development, thus potentially increasing the viability of commercial schemes. The government also introduced changes to Capital Gains Tax for properties purchased before the end of 2013. If a property is purchased during this period and held for a minimum of seven years, the gain attributable during that period will not be subject to Capital Gains Tax. This measure was designed to incentivise proceeding with viable property development. Although both changes should lead

to increased activity in the development land market, it is unclear at this point whether these changes have had an impact in the first six months of 2012. It is possible that as we approach the end of the qualifying period for this Capital Gains Tax scheme that it will become evident that activity has increased as a direct result of this change.

The National Assets Management Agency (NAMA) and other financial institutions will play a key role in the future of the development land market. NAMA has proposed investing €2 billion up until 2016 to facilitate completion of partially constructed developments and to

develop greenfield sites.

NAMA previously indicated that it would not provide finance for speculative development and this change in approach is likely to positively impact the development land market by providing finance for speculative development in a market

effectively devoid of finance for such developments. The impact of this proposal on the market generally will become clearer once it has been identified which properties will benefit from this investment. In respect of NAMA and non NAMA participating institutions there continues to be an increasing number of property developers and borrowers being placed into receivership as the institutions seek to implement their strategies in respect of their distressed property loans, resulting in an increased number of property sales. It is anticipated that this trend will continue for the foreseeable future.

The Planning and Development Act 2010 introduced “Core Strategy” planning to ensure cohesive and consistent planning policy at a national, regional and local level. This included ensuring that a reasonable quantum of land is zoned to meet the anticipated demand over the lifespan of a development plan. Previously in many cases sufficient land was zoned for the lifespan of a number of development plans and consequently under the new core strategies being adopted dezoning has become part of the development plan review process. The implementation of core strategies has resulted in the dezoning of lands where there is an obvious surplus of zoned lands. In addition some planning authorities have sought to control the pace of development by zoning land on a phased basis, thereby ensuring progressive development moving from the existing development boundary outwards on a consistent basis within a development plan area.

Regarding agricultural land, activity has remained relatively strong with demand focusing to a greater extent on high quality farmland. This has created a two tier market in respect of prime agricultural land and the remainder of the market. Pricing over the past 12 to 18 months has also remained relatively static although there are now signs of tentative improvement. That said, a proportion of prime farmland in the agricultural land market is achieving rather substantial premiums. Recent transactions suggest that an upward trajectory in average prices is emerging in particular locations. The highest prices being achieved for agricultural land is currently in Kildare, Dublin and Cork respectively; while demand remains relatively strong throughout the country.

Development Land Market

The outlook for the development land market remains challenging, although there are some indications that sentiment is no longer falling and in certain sectors of the development land market sentiment is possibly improving as activity increases; albeit from a low base. There remains good appetite for specific types of development properties, mainly for prime commercial sites and residential sites with viable planning permissions. The market appears to be responding to this demand as the number of development sites being placed on market for sale seems to be increasing, although a large proportion of development land being placed on market still does not meet the requirements of this evident demand. Also as the quantum of development land being placed on the market for sale increases, first move advantage is likely to be key to securing a swift sale. The impact of a potentially large number of development sites being placed on the market for sale is as yet unclear. However, it may further reduce values and in turn possibly negatively impact sentiment.

On a more positive note, agricultural land activity is expected to remain relatively strong with an uplift in demand. The moderate climb in pricing is also expected to continue for prime agricultural land.

The National Assets Management Agency (NAMA) and other financial institutions will continue to have a significant bearing on the development land market, particularly in respect of sales on behalf of traditional receivers and fixed charge receivers and the availability of finance. As receivers continue to seek to realise the value of assets held, the lack of funding may become a more significant obstacle to completing sales particularly as the volume of development land for sale increases and the level of funds held privately consequently decreases as land is acquired.

Any improvement in market conditions will ultimately be dependent primarily on two factors improving in tandem namely; confidence and market sentiment and an increase in the availability of finance. Until these factors are evident, market conditions are unlikely to improve significantly with some notable exceptions in certain sectors of the development land market.

NAMA proposes to invest €2 billion in development capital over the period to 2016

18

Outlook

Irish Retail Market

19

Irish Retail Market The Irish retail market continues to be impacted by a contracting indigenous economy. The notable reduction in consumer spending of 2.7% in 2011, was very damaging to all sectors of the retail market. Current forecasts suggest that 2012 will see a further contraction of 2%.Since the economic crisis began, households have been deleveraging their debt with an associated increase in personal savings. It could be argued that this increase in household savings has been one of the most significant factors in the decline in the retail sector overall.

Such an increase in the savings ratio is a direct response to a drop in consumer confidence. The latest results from the KBC Bank Ireland/ESRI Consumer Sentiment Index reveals a moderate weakening in May to 61.0 from 62.5 in April. This follows a positive trajectory since December 2011. That said the long run equilibrium level for this index is in the order of 89-90; an indicator of the gap that exists in consumer sentiment.

The latest results for the volume of retail sales have shown a minimal decrease of 0.1% in May 2012 when compared with April 2012, while there has been an annual decrease of 2.1% according to the Central Statistics Office (CSO). ‘Food beverages & Tobacco’, ‘Hardware, Paints & Glass’ and

‘Pharmaceuticals’ all saw sales increases when compared to April. However, retailers are continuing to see sales decrease year-on-year. Sectors that were particularly hit hard are bars, stationery, electrical goods and motor trade; all seeing monthly and annual sales decreases.

Given the backdrop of the challenging economic environment, it is not surprising that the first six months of 2012 remained very testing for all retailers but in particular for those in the comparison goods sector.

Within this difficult environment the most active sector is the value and convenience sector which are reported to be trading relatively well. Any uplift in demand for retail opportunities came from the convenience sector, together with the discount sector, general food sector and to a lesser extent fashion.

Interest in prime retail locations remained reasonable due to the more favourable terms available. Turnover rents are now more prevalent for new shopping centre lettings. In sharp contrast, secondary and tertiary retail locations continue to be under pressure; in particular the poorly located and inadequately designed developments across all locations nationwide.

The change in legislation to abolish the upward only clause for all new leases post February 2010 has unfortunately resulted in a two tier market. That said, there is clear evidence that landlords and tenants are working more closely together to come to resolutions for challenging lease structures.

Given the backdrop outlined above, it is not surprising that there have been further casualties in the retail sector in the year to date, including; Birthdays, The Josef Store and Game. The most recent casualty was Atlantic Homecare, which has been placed under High Court protection from its creditors.

Shopping Centre MarketAfter more than a decade of robust expansion, construction activity in the Irish shopping centre market has declined notably in the past five years. It now seems certain that 2012 will mark the first calendar year since 1966 when not one shopping centre will be developed in the entire country. 1966 was the year in which Ireland’s first shopping centre opened in Stillorgan in Dublin. As of June 2012 there was a total of just over 2 million sq m of shopping centre space in Ireland. This equates to an average density level of at 445 sq m per thousand of the population.

Density levels do vary significantly by location. There are currently 206 purpose-built shopping centres in Ireland, with the majority of centres not surprisingly located in the east of the country. Dublin alone accounts for 64 of the nation’s shopping centres, equating to 31% of the total stock nationally. In contrast to this, counties in the west and midlands have the lowest number of shopping centres, with only one shopping centre in each of in the counties of Cavan, Leitrim, Longford and Roscommon.

An analysis of the density of shopping centre stock per thousand of the population shows a range from 265 to 623 sq m per thousand when comparing the West to Dublin.

20

Shopping Centre Development - 1966-2011


600 - 700

State Figure 445

0 - 100

100 - 200

200 - 300

300 - 400

400 - 500

500 - 600

Density '12 (Square Metres per 1,000)

BORDER

WEST

MIDLAND

SOUTH-EAST

SOUTH-WEST

MID-EAST

MID-WEST

DUBLIN


That said, the above analysis is based on a local definition of a shopping centre. In contrast, if the European definition of a shopping centre is applied, the number of developments considered to be a shopping centre falls by 81, from 206 to 125. Under the European definition, shopping centre must be at least 5,000 sq m. Under this definition, the national GLA falls by more than a quarter of a million square metres to 1,783,666 sq m. Dublin remains the best supplied county, with a GLA of 711,998 sq m. While Cavan and Roscommon no longer possess a shopping centre and their GLA fall to zero respectively.

The adjoining map illustrates the number of shopping centres in line with the European definition of a shopping centre. The majority of the centres around the country are “small” sized by the European definition. Dublin is the only county region with any “large” shopping centres. The Dundrum Town Centre in Dublin is also the only centre in Ireland to be deemed “very large” by European standards, with a GLA of 85,307 sq m.

In terms of market performance, the leading Dublin shopping centres are proving to be the resilient and have continued to achieve new lettings in the first half of 2012, with resultant low vacancy levels.

In Dublin, demand is strongest in Dundrum, Blanchardstown, Liffey Valley and the Pavilions shopping centre. New retailers to emerge in Dundrum Town Centre include Molton Brown, L’Occitane and cosmetic retailer Kiehls who took over the former Furla store.

Italian cuisine operator Del Arte opened in the former Chinese Buffet King unit and it is reported that Jamie Oliver will open a restaurant later this year in the former gastro pub Ruari Maguires. Apple premium resellers CompuB are currently fitting out in the former Sony unit are due to open in the summer months.

They also opened a new store in Blancharstown Centre earlier this year in the former Monsoon unit. Other new lettings in the centre include a new flagship store for Boots which is due to open in the autumn and footwear retailer Skechers are due to open in Liffey Valley.At the regional level, the Crescent shopping centre in Limerick and Mahon Point shopping centre in Cork have proven capable of attracting new key tenants, albeit on concessionary terms.

Looking to the future, the National Asset Management Agency (NAMA) have announced proposals to invest up to €2 billion in Ireland over the next four years to complete commercial and residential projects and to develop future Greenfield sites. One of the beneficiaries of this investment will be the developers of the Charlestown shopping centre who have secured funding of €12 million from NAMA. Construction is due to commence on a new cinema complex and Leisureplex facility along with drive-through restaurants for KFC and McDonalds.

It will be interesting to see what other retail developments NAMA will provide funding for either to facilitate extensions to existing centres or new shopping centre developments.

The only major shopping centre schemes at the planning stage are Carlow Central and the Treasury scheme in Sligo. Notably Debenhams have signed up as the anchor tenant for both and the target completion date is 2014/2015. Parkway Valley in Limerick is now under new ownership and is aiming for completion within the years subject to pre-lets.

Irish Retail Market

21

Louth

Monaghan

Dublin

Meath

Cavan

Westmeath

Kildare

Laois

Carlow

Wicklow

WexfordKilkenny

Waterford

CorkKerry

Limerick

TipperaryNorth

Offaly

Tipperary South

Clare

Galway

MayoRoscommon

Sligo

Longford

Leitrim

Donegal

24 4530 1

2 2

1

1 2

2 1

2 11

1 2

1 2

1

2 3

6 111

3 4

3 17

3

5 24

2 2

3 1 1

1

1 16

1 1

5 2

2 5 1

2 13

3 2

4 2

1

4 26

European Small - 5,000 - 19,999 M

Irish Small - <5,000 M

European Medium - 20,000 - 39,999 M

European Large - 40,000 - 79,999 M

European Very Large - 80,000 M +

2

2

2

2

2


The nature of the occupier market has changed considerably from a market dominated by multiple fashion retailers from the UK, Europe and Ireland to a market which now centres on a select few retailers with a more focused appetite. The majority of the fashion occupiers are not expanding and as such the demand for large space has declined. At the same time there has been an increase in online sales particularly in the fashion, music and book industries with many retailers responding well to this new market. That said, there are still retailers seeking to take advantage of the flexible lease terms available to develop their portfolio. A typical example of this is the Swedish retailer H&M who are opening a store measuring approximately 11,900 sq ft in The Square in Tallaght. They, similar to others, are looking at deals that are predominantly turnover related; thus offering a form of protection from adverse market conditions.

Other expanding retailers seeking flexible deals include the Danish Bestseller Group whose brands include Jack & Jones, Vero Moda, Name It and Only. Boots are also reported to be on the expansion trail. Other active retailers on a piecemeal basis include Holland & Barrett, fashion retailer DV8, Skechers, Schuh and Edinburgh Woollen Mill, who also now own the Jane Norman facia and Peacocks.

The decline in rents on Dublin’s prime streets has attracted some new entrants to the Irish retail market. The much discussed US retailer Abercrombie & Fitch is due to open its long awaited Irish flagship store in the former Habitat building on College Green in September of this year. The opening of this store has been well documented and is a welcome addition to the Grafton Street area following the success of its sister company, Hollister, in Dundrum Town Centre.

Another fashion retailer that will be well received in the Irish market is Banana Republic, which is a brand owned by Gap, who are currently fitting out their store on Grafton Street. They will occupy the amalgamated buildings of Richard Alan and Zerep shoes. Richard Alan relocated to their sister company Pamela Scott’s store on Grafton Street.

The only new retailer to open in Grafton Street in the opening six months of the year was the Irish retailer John Brereton jewellers who took over the former West Jewellers unit.

In contrast, there have been no new lettings completed on Henry Street, during the first half of the year, although demand remains strong but availability is limited. Ongoing demand for prime retail opportunities would suggest that the trend of new entrants into the Irish market is likely to continue.

The retail market is currently experiencing an influx of discounters/fixed priced retailers who are almost a sub market of their own. The retailers that are keen to gain market share include Dealz - who trade as Poundland in the UK - Euro 50 stores, Euro 2/Euro Giant and Poundstretcher. Dealz have been

The retail park sector remains a difficult market, however there has been some activity in the first half of 2012. The home-ware sector has perhaps been hit harder than most and despite that there are a few retailers bucking the trend and expanding in this market. Irish retailer ‘homestore & more’ have opened two new stores in Clonard Retail Park in Wexford and Sligo Retail Park. In addition, they have a requirement for six new stores nationwide.

One of the more interesting announcements this year is the arrival of sofa retailer DFS who opened their first republic of Ireland store in Blanchardstown Retail Park. It is understood this will be the first of a number of Irish stores. The UK retailer’s decision to open this store and to consider future expansions in Ireland confirms their confidence in the Irish market.

Furthermore, the Irish furniture retailer EZ Living are due to open in Airside Retail Park Swords, while Next Home opened their first stand-alone home store in The Park, Carrickmines, Dublin. Cost Plus Sofas are also understood to be actively seeking new stores.

Other retailers who are active in the retail park market include pet retailers Maxi Zoo who opened two new stores so far this year in Clonmel and Sligo. Pet Stop also has a new store planned in south Dublin. Decathlon and Toy-R-Us have requirements for Dublin, however it is believed that these requirements have not yet been fulfilled as the required floor-plate is not available.

The retail park development pipeline remains stagnant. The ongoing issue of planning remains and it appears that there continues to be questions over open use retailers in retail parks and the definition of what is and

Occupier Market

22

very aggressive in their expansion and have opened twelve stores already in Ireland and plan to deliver a further twenty stores over the next twelve month period.

Interestingly, there has been strong activity from traditional retailers such as butchers, pharmacies, hair salons, barbers and coffee shops in the year to date. The pharmacy chain Unicare/Doc Morris are also expanding, seeking new stores throughout Ireland. Coffee operators who are looking to expand their portfolio include Costa coffee, Starbucks, Quigley, BB’s and Esquires.

There is also reasonable activity around other elements of the food industry particularly in casual dining with retailers such as Milano, Nando’s, Mao and Cafe Del Arte seeking additional premises. TGI’s Fridays are due to open a new restaurant in the former Bewleys premises on Westmoreland Street. Many of the coffee and food retailers have seen relative growth in sales.

In the convenience sector Tesco, the Musgrave Group, Aldi and Lidl continue to expand their operations in Ireland.

Retail Park Market

Irish Retail Market

Outlook for the Future

The combination of a weak indigenous and global economic environment and a rapid expansion of online shopping, there is every reason to believe that the retail market will remain a challenging environment in the short to medium term.

Location and the ability to respond to market demands will be key to survival in the retail sector. Asset management is a very important factor in the success of shopping centres, Rents have yet to stabilise and the market will remain challenging for those retailers who are committed to the high rents on upwards only rent review leases.

That said, there is continued demand from national and international retailers either seeking to expand or gain representation in Ireland due to the flexible terms available and therefore leading in increased activity in transactions particularly in the key shopping destinations. For the moment there is little planned new stock in the pipeline and as such this supply side constraint could help the recovery of the Irish retail market and bolster retail vacancy levels in the short to medium term.

23

isn’t bulky goods. Without some element of open use many secondary and tertiary retail parks will be unable to ever reach full occupancy or have any chance of survival and may end up running into disrepair and dereliction.

Rents are continuing to fall in most sectors of the retail market, notably in Grafton Street where early indications for the forthcoming Sketchers deal is that the new headline rent will be in the order of €4,000 per sq. m. Zone A.

24

Regional Commercial Markets

Summary

Performance across the regional commercial markets largely improved during the second quarter of the year. Although off a low base, it compares favourably to the mixed and largely weaker performance experienced in the opening quarter; a sign of potential stabilisation.

In the office market both the Limerick and Galway regions witnessed stronger levels of take up during the three month period. That said, transaction levels remain below the long run averages. In contrast, the Cork office market remained fragile with a notable increase in supply.

Following a challenging opening quarter, the industrial market witnessed an improvement in activity across all locations. Combined transaction activity saw a welcome uplift, while supply levels continued to show signs of stability during the three month period. However, there remains significant disparities in vacancy rates across the regions.

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The Regional Commercial MarketsKey figures Q2 2012

Office Market Galway Cork Limerick

Market Stock 293,000 Sq M 510,650 Sq M 305,300 Sq M

Take Up 2,500 Sq M 2,000 Sq M 3,050 Sq M

Availability 38,400 Sq M 128,550 Sq M 74,700 Sq M

Vacancy Rate 13.1% 22.6% 22.3%

Under Construction 0 Sq M 26,700 Sq M 0 Sq M

The Regional Commercial MarketsKey figures Q2 2012

Industrial Market Galway Cork Limerick

Market Stock 463,950 Sq M 1,037,100 Sq M 923,100 Sq M

Take Up 2,300 Sq M 10,400 Sq M 14,300 Sq M

Availability 59,550 Sq M 221,500 Sq M 262,250 Sq M

Vacancy Rate 12.8 % 16.0% 28.4%

Under Construction 0 Sq M 25,750 Sq M 0 Sq M




Regional Office Take-Up; Q2 2012

2626

The volume of transacted space stood at approximately 2,550 sq m at the end of June; bringing to light a significant increase in activity when compared to the previous quarter with transaction activity of just 850 sq m.

An analysis of the quantity of accommodation transacted in the twelve months to quarter two stood at approximately 11,900 sq m. This reflects a welcome uplift in activity when compared to activity levels

during the corresponding period in the previous year when take up stood at 7,150sq m.

Take up during quarter two comprised five small to medium sized deals. The

most sizable of these deals was the sale of a unit in the ‘Faustina Building’ on the Tuam road measuring 825 sq m, which was sold to an adjoining medical centre for their own occupation. This deal accounted for 33% of total take up in the quarter thus fluctuations in the market remain an issue with a smaller number of larger deals having the potential to skew take up levels.

With regards to location, the suburbs remain the preferred location

over the past twelve months holding 87% of all transaction activity. This compares to 92% transacted in the previous year. The remaining space, 13%, was taken up in the city centre. It is important to note that these activity levels are a reflection of available stock rather than choice.

Availability in the Galway office market fell during the second quarter of the year; aggregate availability falling by 6%. The total quantity of available space now stands at approximately 38,400 sq m, compared with a total of 40,950 sq m in the previous quarter. This quarterly reduction reflects a moderate slowdown in the quantum of second hand space being released to the market combined with an uplift in demand. Smaller sized properties, under 500 sq m, remain plentiful; accounting for 37% of total availability in the market. A comparison with the same period in 2011 reveals a 1% increase in the overall volume of available offices in Galway.

The reduction in supply levels, albeit modest, is further highlighted by the reduction in the vacancy rate which dropped to 13.1% at the end of the second quarter. This compares to 14% recorded in the previous quarter and 13.1% recorded in the corresponding period last year. While the vacancy rate has now declined modestly, it remains significantly greater than the equilibrium rate of 7%. Nonetheless, it is the lowest vacancy rate of all the regional markets.

Galway Office MarketThe second quarter of 2011 witnessed a stronger level of transaction activity in the Galway office market following a somewhat disappointing start to the year.

Smaller sized deals continue to dominate the market


Galway Office Market: Total Availability and Vacancy Rate


2727

In terms of the distribution of available space, the suburbs remain accountable for the majority of space absorbing 64% of all accommodation. Demand within the suburbs remains driven by IDA tenants rather than indigenous companies. The remaining 36% is located in the city centre. Demand remained subdued for city centre space in the second quarter, which may be as a result of city centre accommodation being quite dated. Consequently, the lack of new accommodation coming to the market is increasingly becoming an issue for prospective tenants looking for modern office space.

The gradual reduction in the suburban vacancy rate continued as the vacancy rate stood at 14.4% at the end of quarter two. This compares to 16.1% during the corresponding period in 2011.

There is currently nothing under construction in the Galway Office market. However, it is understood that Hewlett Packard have agreed a design and build with a local construction company for their new 9,290 sq m headquarters. This is expected to commence construction before the end of the year. The total stock of office accommodation remained unchanged at 293,000 sq m at the end of June.

Approximately 2,350 sq m of industrial accommodation transacted during the three month period. This compares to a weaker take up level of just 350 sq m in the previous quarter.

The total quantity of accommodation taken up in the twelve months to quarter two stood at 4,950 sq m, demonstrating a marginal increase in transaction activity of 1% when compared to activity levels during the corresponding period in 2011 which stood at 4,900 sq m. That said, activity in the market continues to reflect significant fluctuations in take up due to a small number of large deals skewing take up.

It has become increasingly evident that industrial occupiers are adopting a “wait and see” approach with a view to purchasing a unit rather than renting. Moreover, rental deals

that are being transacted are for shorter lease terms and covenant strength of tenants is primarily weak.

The North East region remains the preferred location accounting for all of the space transacted during the twelve months to quarter two 2012. The trend for out of town industrial space on good road networks continues, although demand for this has fallen back somewhat.

The overall volume of available industrial space stood at approximately 59,550 sq m at the end of June, a minimal reduction of 0.3% when compared with the previous quarter. A comparison with the same period in 2011 reveals a 2% increase in supply levels. The corresponding vacancy rate for the market overall fell to 12.8% at the end of the second quarter, down marginally from 12.9% recorded three months previously. The comparable rate twelve months previously was at a lower level of 12.5%.

The North East region, which accounts for the majority of the available space, 98%, witnessed an increase in space during the year, resulting in a climb in the vacancy rate to 18.6% from 16.2%. Despite stronger demand in this region, the rate is considerably higher that the market equilibrium rate of 7%. This may be due to the fact that no new stock has been added to the market in a substantial amount of years, leading to a higher vacancy rate in the older, dated industrial parks such as Ballybane and Monivea road. The remaining 2% of available space is located in the North West where the corresponding vacancy rate remained unchanged at 0.9%.

There is currently nothing under construction in the Galway industrial market. Consequently, the total stock of accommodation remains at 463,950 sq m and therefore shortages in the stock of industrial accommodation are set to continue.

Galway Industrial MarketFollowing a disappointing opening quarter to the year in which an extremely low level of take up was recorded, there was a welcome uplift in the volume of transaction activity in the second quarter of the year. This is the highest level since Q3 2010. That said, the individual number of deals transacted during the quarter remained subdued.

North East region absorbed all transacted space


28

Galway Industrial Availability by Eaves Height, Q2 2012



Quarter two of 2012 saw the total quantity of space taken up rise to approximately 3,050 sq m at the end of June. This represents a 30% climb when compared with the previous quarter and a 5% increase when compared with the corresponding period in 2011. However, it is important to note that activity levels remain considerably lower when compared to the long run average.

Transaction activity in the quarter comprised a significant amount of smaller-sized deals; the most sizable of these deals measuring 905 sq m. However, this deal is just a short-term letting until the end of 2012. Moreover, the increased appetite for smaller sized deals continues to dominate the market.

An analysis of the deals completed during quarter two reveals that demand was strongest in the city centre standing at 58%, however this is a reduction on last quarter’s figure of 68%. The remainder focussed on the suburbs, accounting for 42%. In addition, Castletroy/National Technology Park is the most sought after location by new companies due to its proximity to the University of Limerick. This is a trend which became evident last year. However, supply levels of good quality, modern office accommodation is reducing significantly. Local authority

rates are also playing a part in attracting tenants to locations such as the National Technology parks with many city centre tenants unsatisfied with the high level of rates currently being charged.

On an annual basis, the city centre accounted for just over half of all newly occupied space during the twelve month period. The total quantum of space transacted in the year to quarter two stood at 10,300 sq m. This represents a marginal decrease on the comparable level recorded twelve months previously; 10,450 sq m.

Prime office rents remained broadly stable in both the city centre and the suburban markets; having narrowed considerably. Consequently, occupiers are now in a stronger position to secure superior quality accommodation in the city centre.

An analysis of the profile of tenants revealed that companies are expanding within the Limerick market. Furthermore, new tenants from Dublin and abroad are showing increased interest in the market. That said, many companies are opting for suburban locations rather than the city centre. The majority of deals transacted in the city centre are for smaller office accommodation with many terms agreed on flexible month to month licence agreements. The more significant larger deals are being transacted outside of the Central Business District.

The level of enquiries remains at a steady level, however there has been

Limerick Office MarketFollowing a relatively subdued opening quarter to 2012, an increase in transaction activity was witnessed in the Limerick office market during quarter two. This upgrade in activity highlights the unpredictable behaviour evident in the Limerick office market as of late.

Quantity of good quality modern accommodation reducingsignificantly

Limerick Office Market: Total Availability and Vacancy Rate

29

30

Substantial improvement in both total volume and number of deals

a shift in the nature of enquiries. Additionally, enquiries have begun to focus on purchasing office accommodation rather than rental options. Furthermore, reserved accommodation now accounts for 17% of all available stock. This should positively affect the Limerick office market through increased transaction activity in the coming quarters.

The overall volume of available space remained relatively stable rising marginally to 74,700 sq m during the second quarter of 2012, representing a minimal increase of 1%. A year-on-year comparison reveals a 3% increase in accommodation. The quantity of second hand space being released to the market continued to increase, totalling 5% compared to 3% in the previous quarter and a lower level of 1% in the corresponding quarter in 2011. However, a moderate increase in demand during the quarter resulted in relatively durable supply levels during the three month period.

An analysis of the vacancy rate reveals a marginal rise to 22.3%, up from 22.2% in the previous quarter. The comparable rate during the same period in 2011 was slightly lower at 21.7%. The current rate remains over triple the equilibrium rate of 7%, emphasising the strength of the existing level of supply.

With respect to the location of available space, the city centre continues to account for the largest proportion of available space, 42%, dropping from 44% in the previous quarter. The suburbs and the Shannon Free Zone both account for 29% respectively.

The total stock of accommodation remained unchanged at 305,300 sq m at the end of June. This is due to the fact that no development activity has taken place in the Limerick office market since the third quarter of 2009. In addition to this, no new developments commenced construction during the three month period and there is currently no space under construction in the office market. As a result of the high vacancy rate in the market, it appears unlikely that any space will commence construction in the immediate or near future.

Similar to the office market, activity in the industrial market has seen an uplift in transaction activity during the three months to the end of June.

An analysis of the total quantity of accommodation transacted during the quarter revealed a significant increase to 14,300 sq m, from 1,900 sq m in the previous quarter. This represents a substantial improvement in both the total volume and individual number of deals. Furthermore, the market has witnessed an increase in larger sized deals transacted, measuring above 500 sq m, in the three months to June.

The most sizable of these deals was the occupation of 6,200 sq m by ‘Greentech Plastics’ in the National Technology Park in Castletroy. Other relatively sizable deals included the occupation of 1,400 sq m in Raheen Industrial Estate and the occupation of 1,300 sq m in Shannon Industrial Estate. Furthermore, there remains a healthy level of space reserved, totalling approximately 9,600 sq m, which is expected to have a positive impact on activity levels in the coming quarters.

The total quantity of accommodation taken up in the year to quarter two stood at 28,050 sq m, representing a reduction of 9% when compared to the same period in 2011. Demand was strongest in the North East, accounting for 43% of all newly occupied space during the

twelve month period. A further 23% and 22% was absorbed in the South West and South East respectively; the Shannon Free Zone accounting for 12%. Additionally, demand is strongest in the Ballysimon/Castletroy area due to its connectivity to the new road network and city centre. Accordingly, the majority of newer industrial accommodation is located in this area.

An analysis of the space transacted during the quarter revealed that 91% comprised lettings. Furthermore, lettings have dominated market activity over the past twelve months, accounting for 95% of all transactions. This is a reflection of the cautious behaviour of potential occupiers with many opting to lease in the short term and adopting a “wait and see approach”. Consequently, short term leases remain the occupational preference. Flexible leasehold transactions continue to dominate sales, with ‘month to month’ licence agreements being the norm with very little fit-out expenditure taking place.

Enquiry levels are sporadic, however the change in the nature of enquiries continues; focusing on purchase options rather than lettings. Furthermore, the majority of the enquiries are from owner occupiers.

A reduction in the volume of available accommodation has been witnessed in the Limerick industrial market in the three month period. This followed ongoing signs of stability during 2011 and in the opening

Limerick Industrial Market

quarter of 2012. The total quantity of available space stood at 262,250 sq m at the end of June, a reduction of 3.2% on the previous quarter. Stability during the quarter was driven largely by demand side factors, outweighing the increase in the quantity of second hand space that entered the market during the three month period; most of which was in the eastern regions. A comparison with the same period in 2011 reveals a 1% drop in availability levels. Furthermore, a number of larger properties are expected to come to the market in the third and fourth quarter of the year.

It is important to note that some of the vacant accommodation is in poor condition hence there are very few modern industrial units included in the vacant space. In addition, alternative uses are being sought for industrial units in a good location.

Supply levels remain the highest in the South West region, accounting

for approximately 36% of the industrial space currently available in Limerick. This is the highest level recorded for this region to date. The Shannon Free Zone and North East absorbed a further 27% and 21% respectively. The remaining space is accounted in the South East and the North West; 10% and 6% respectively.

The overall market vacancy rate has slipped to 28.4% from 29.4% at the end of June, reflecting more stable supply side conditions during the quarter. The corresponding rate in 2011 was 28.6%. The vacancy rate level continues to fluctuate at an excessively high level; standing at four times the desired equilibrium rate of 7% and thus highlights the strength of supply in the market at present.

The total stock of accommodation in the market also remained unchanged at 923,100 sq m. There has been no space under construction in the Limerick industrial market since the third quarter of 2008.


31

Limerick Available Industrial Space by Eaves Height, Q2 2012


3232

The aggregate level of take up was notably lower when compared to the previous quarter, 2,700 sq m. The profile of the space transacted in quarter two continued to be largely dominated by smaller sized deals.

The total quantity of space transacted in the twelve months to quarter two stood at approximately 10,650 sq m. A comparison with the same period in 2011 reveals a reduction of 26%. Furthermore, this level of

transaction activity remains significantly lower than the long term annual average. An analysis of the profile of space taken up during the year

to quarter two reveals that smaller sized deals remain the dominant occupier preference.

On a positive note, the number of individual deals transacted during the quarter rose again. Furthermore there has been an evident increase in the amount of space reserved in the three months to June. This should positively impact take up in the forthcoming quarters.

Regarding location, the demand for space in the city centre dominated

in the three months up until June. An analysis of space transacted in the past year has revealed that 56% of all transactions occurred in the city centre while the remaining 44% was transacted in the suburbs.

Having decreased throughout 2011, supply levels rose sharply during quarter one 2012. This trend continued in quarter two with available accommodation now back at quarter three 2010 levels. The total quantum of available space climbed to 128,550 sq m. A comparison with the previous quarter reveals a 4% increase, while on an annual basis supply levels rose by 7%. The increase in supply is being driven by a continual rise in the quantity of second hand space being released to the market. The rate of release of second hand space began to accelerate in 2011 and it has yet to show any signs of easing. In addition, weaker levels of demand during the quarter also contributed to the increase in supply.

An analysis of the spread of available space reveals that the suburbs continued to account for the majority of available accommodation in the region, standing at 68%; a marginal increase on the previous quarter. The remaining 32% was accounted for in the city centre.

Cork Office MarketActivity in the Cork office market remained fragile during the second quarter of 2012, following a disappointing introductory quarter to 2012. The total volume of space transacted during the second quarter of the year stood at 2,000 sq m.

Supply levels continue to rise



Cork Office Market: Total Availability and Vacancy Rate

3333

The notable increase in supply levels during the second quarter is reflected through an increase in the overall vacancy rate which rose to 22.6% at the end of June. This compares to 21.7% in the previous quarter and 22% during the corresponding period in 2011. It is important to note that the current rate remains triple the equilibrium level of 7%. The individual vacancy rates in the city centre and the suburbs have also edged upwards to 19.6% and 24.8% respectively.

No new space c o m p l e t e d construction during the second quarter of the year and no new space commenced construction during the three month

period. As a result, the quantity of space under construction remained unchanged at 26,700 sq m. Furthermore, no new stock entered the market; thus the total stock of accommodation in the office market remained unchanged at 510,650 sq m at the end of quarter two.

The Cork industrial market entered 2012 in a weak position; however the second quarter of 2012 has seen relatively robust transaction activity. Approximately 10,400 sq m of space transacted during the three month period.

This compares to just 2,600 sq m transacted in the opening quarter thus highlighting the variable movement in the market. A comparison with the same period in 2011 reveals a significant increase in activity, with take up levels having stood at 2,700 sq m.

The total quantity of space transacted in the year to quarter two totalled 20,850 sq m. This represents a 4% reduction when compared to the corresponding period in 2011. An overall analysis of all transacted space over the past twelve months disclosed that 95% of the transactions completed comprised lettings. This is a reflection of the uncertainty and volatility in both the domestic and international market. Moreover, flexible leasehold transactions are still the occupational preference over freehold purchases among those active in the market at present. Consequently, landlords continue to adapt their leases and incentive packages.

Transaction activity continues to remain focussed around smaller sized deals. The most sizable of these deals was a transaction in Mahon Industrial Estate of 3,900 sq m in the South East. In addition, there appears to be an increase in sales for investment purposes. Furthermore, an increase in the quantity of space reserved has been witnessed with 73% of these in the South West region. A boost in take is therefore expected in the coming quarters.

In the year to quarter two, demand for industrial space was driven by the North East region, which accounted for 44% of the space transacted. This was followed by the South West which absorbed a further 24% of the space. The remaining space was transacted in the South West, North West and City Centre; 21%, 8% and 3% respectively.

The quantity of available space continues to fluctuate as evidenced by the reduction recorded for the three months to June. This followed an increase in the previous quarter. The strength of demand during the quarter outweighed the 2% increase in the release of second hand space to the market. Thus, favourable demand levels this quarter have hindered a further acceleration in supply levels. The total quantity of available space fell to 221,500 sq m at the end of June. A comparison with the previous quarter reveals a modest decrease in supply levels of 1%. When compared with the corresponding period of last year, accommodation levels remain broadly unchanged. Moreover, supply levels are expected to continue to fluctuate over the coming quarters.

The North East region continues to account for the largest proportion of available industrial space at the end of quarter two; 35%. A further 31% is located in the South West region. The South East and North West regions account for 19% and 9% respectively, while the remaining space was located in the city centre.

The vacancy rate for the market remained that same at 16%, marginally higher than 15.8% recorded during the corresponding quarter in 2011. The overall rate continues to be considerably greater than the equilibrium rate of 7%. Further analysis of the vacancy rate on a regional basis highlighted that all vacancy rates have remained broadly stable during quarter two. No new space completed construction during the second quarter of the year and as a result the total stock of accommodation in the industrial market remained unchanged at 1,037,100 sq m. In addition, no new developments commenced construction during the three month period; leaving the quantity of space under construction unchanged at 25,750 sq m.

Cork Office Market: Total Availability and Vacancy Rate

Quarter two displayed a robust level of transaction activity

Cork Industrial Market

Rents and Capital Values

Indicative Regional Office Rents

Location Third Generation City Centre Third Generation Suburban

Cork €205 - €230 €100- €155

Galway € 161 - €183 €108 - €129

Limerick €86 - €172 €86 - €129



Indicative Regional Rents and Capital Values for Modern Industrial Buildings

Location Cork Galway Limerick

Units <1,000 sq m Rent/Capital Value Rent/Capital Value Rent/Capital Value

South East €40-€55/€550-€850 €43 - €54 €38-€54/€538-€753

South West €50-€60/€750-€850 €43 - €54 €38-€54/€538-€753

North East €45-€55/€600-€800 €43 - €54 €38-€54/€538-€753

North West €40-€50/€ 450-€650 €43 - €54 €38-€54/€538-€753

Units >1,000 sq m

South East €33/€400 €27 - €38 €38-€54/€480-€645

South West €38/€450 €27 - €38 €43-€54/€480-€645

North East €38/€450 € 27 - €38 €43-€54/€480-€645

North West €33/€400 €27 - €38 €43-€54/€480-€645


34

Irish Investment Market

35

2012 has proven to be something of a turning point for the Irish investment property market with some positive signs of recovery in demand within specific sectors. Both occupiers and investors have become increasingly discerning in terms of pricing the location and suitability of a property and there is strong demand for certain properties.

Investors are gravitating towards opportunities where the pitch and building are fit for purpose and poised for growth, as there is an emerging view that such well located buildings have over-corrected. This has resulted in a greater divergence in yields within sectors with a flight to quality by many private investors.

A key obstacle for investors during 2011 was the proposal to enact legislation which would ban upward only rent reviews in existing leases. However, the Governments position was clarified in Budget 2011, thereby removing any uncertainty regarding legislative change. The December 2011 budget also introduced welcomed changes to taxation charges for commercial property transactions. The rate of stamp duty payable fell from 6% to 2%, making investment into this sector much more attractive. Furthermore, a tax incentive was also provided for those who purchase a property before year end 2013 and hold this property for seven years. Such a transaction will not be liable for capital gains tax on any profit made in the same period.

An improvement in market fundamentals in certain sectors combined with the reduction of many of the barriers to entry has contributed to an uplift in demand from investors. While funding remains an issue, it is not the key factor deterring market activity. This is primarily a function of the lack of available supply of institutional grade investments. Availability of product is obviously driven by pricing and there continues to be a gap between vendors and purchasers expectations, which time has failed to fully solve. Specifically vendors are reluctant to sell the investments that buyers want to transact as they both see this as the bottom of the market.

That said, a concern remains about the volume of investment stock held by a small number of funding entities and the impact on pricing if there was a dramatic increase in supply. Strategically those parties would damage the value of their remaining portfolio if stock was released in large volumes and therefore this is seen as unlikely to happen.

Finally, confidence in the eurozone is an ongoing concern; although overseas investors do appear to view Ireland’s response to the economic crisis positively. The yes vote to the fiscal treaty at the end of May has further endorsed this view. However, the instability in Greece, Portugal and more recently Spain continues to impair wider confidence in the eurozone.

Despite the positive Budget announcements, transactions remained subdued during the opening quarter of the year. However, the second quarter saw a notable uplift in transaction activity with the sale of two prime Dublin office investments and a Dublin 4 residential investment block.

Warrington Place, Dublin 2 is a modern office building let to Bord Gais with eight and a half years remaining until the break option, which sold for €27million. This equates to a net initial yield of 7.53%. The lease had an upwards/downwards rent review clause and it is understood to have been purchased by Northwood Investments, an American property fund.

Riverside II, Dublin 2 is a riverside office building with income of €3,196,050 per annum from two tenants, Beauchamps Solicitors and Bank of New York Mellon. The investment sold for a reported €35.5 million, reflecting a net initial yield of 8.62% and it is understood to have been purchased by AM Alpha, a German property fund.

The Alliance building, a 210 unit apartment block in ‘The Gas Works’ development in Dublin 4 was acquired by Kennedy Wilson, an international real estate investment firm, for approx €40 million. The vendor was Grant Thornton, acting as receiver for Ulster Bank.

These sales bring the combined investment volume for 2012 to approximately €122 million. This compares to a figure of €192 million in 2011 as a whole.

Transaction Activity

The gap between buyer and seller expectations is becoming closer with demand focussed on the best in class. An increase in activity will provide the necessary market intelligence to give the market confidence. Also there is a real sense that 2012 will see the start of this. Michele Jackson,

Director of InvestmentsDTZ Sherry FitzGerald

available. However, we would expect that there is a relatively large amount of new stock in the pipeline for disposal over the medium term. There is clearly a concern surrounding the impact that a significant increase in a stock will have on price. As such potential sellers would be well advised to move quickly to benefit from the current shortage of competition in the market.

Capital ValuesCapital values continued to decline in the year to date although the rate of decline has moderated when compared to previous quarters.

The latest available IPD/SCSI equivalent yields - Q1 2012 - are shown in the table 1:

SCSI / IPD Ireland Quarterly Property Index - Total Return

Source: SCSI/IPD

SupplyThere is a relatively low level of investment for sale in the market, while demand is strong for solid investments where the property is fit for purpose, such as a prime CBD office block or a well let regional car park. Despite the strong appetite for such properties, investors are becoming increasingly frustrated by properties which are technically available for sale but with an unrealistic price level.

The first notable prime retail investment to come to the market is Edward Square in Galway. Notably, NAMA are offering staple finance on this sale as a solution to the illiquid debt markets. The guide price is excess €27 million, which reflects a net initial yield of 8.6%.

For the sustainable recovery of the market there will need to be an increase in supply of funding. However, it is worth noting that there are strong levels of cash buyers in the market and in many cases there is competition from special purchasers for the asset who may analyse performance on a different basis. This demand tends to be for smaller lot sizes, typically sub €5 million.

Supply remains uncertain for the remainder of 2012. Despite the fact that an increase in disposals was anticipated by NAMA and banks, there has been a marginal increase in stock

Equivalent Yields

Retail 8.6%

Office 9.0%

Industrial 9.9%

All Property 8.9%

Source: SCSI/IPD

36

Outlook for the FutureActivity levels are anticipated to rise in the second half of 2012 with many deals that were agreed in the opening months coming to fruition. This transactional activity should provide the market with some much needed confidence in yields and provide an insight into values across the sectors. High profile sales such as the Edward Square Shopping Centre in Galway will be watched with interest to further assess the market.

The clarity gained from transactional activity should also encourage banks and NAMA to move forward with the sales of key assets and further test the market, which will lead to a welcomed increase in available stock.

Demand is currently strong from both domestic and international investors, which should continue for the remainder of 2012. That said, demand is still quite fickle and can vary greatly in short periods of time, particularly due to unfolding events in eurozone.

The availability of finance continues to be an issue and competition from new entrants to the market is needed to improve the liquidity of the market and encourage a more normal market environment.

The investor flight to quality is likely to continue and a further widening in the divergence in pricing between prime and secondary stock. Buyers tended to anticipate pricing growth during boom times and secured deals on this basis. Today investors need to be equally prudent yet realistic, focusing perhaps on vendors perspective of the market if they want to secure assets.

Irish Investment Market

37

Market Definitions

INDUSTRIAL MARKET DEFINITIONS:

Clear Internal Height: The height between the structural floor and the underside of the lowest point of the structural ceiling or roof.

Eaves Height: A. Internal- the height between the floor surface and the underside of the roof covering, supporting purlins or underlining (whichever is lower) at the eaves on the internal wall face.

B. External- the height between the ground surface and the exterior of the roof covering at the eaves on the external wall face ignoring any parapet.

Take Up: Occupation of a building by a tenant.Net Take Up: This is a measure of the change in occupied space during the quarter.Reserved: Under active negotiation with single tenant.Pre-let: Contract is signed by tenant but premises are not yet occupied.Pre-sold: Contract is signed by tenant but premises are not yet occupied.

OFFICE MARKET DEFINITIONS:

3rd Generation: Modern Buildings, post 1990, with raised access floors.2nd Generation: Older Buildings, pre-1990, with floor trunking.Georgian: Approximately 1725 - 1830.

Dublin Categories:Prime: Prime locations within Dublin 2 and Dublin 4Central Business District : This incorporates the prime area of the city

and extents to the IFSC and North and South Docklands.

Secondary: Locations adjacent to the CBD.Suburban: Locations outside city boundaries such as Clonskeagh, Blackrock, Tallaght, Sandyford and the M50.

Cork Categories:City Centre: The central business district and adjoining

areas.Suburban: Locations outside city boundaries such as Little Island, The Airport, and areas adjacent to the South Link Road system.

Limerick Categories:City Centre: The central business district and adjoining

areas.Suburban: Locations outside city boundaries such as Raheen and the National Tenhnological Park.Shannon Free Zone: Shannon Free Zone, Shannon, Co. Clare.

Galway Categories:City Centre: The central business district and adjoining

areas.Suburban: Locations outside city boundaries such as Oranmore and Mervue.

38

Specialist advice is provided in the following key areas:

• CommercialAgency-Offices/Industrial/Retail• Valuation• LandlordandTenants• CorporateConsultancy• InvestmentPurchasesandSales• LandDevelopmentandEstateManagementAdvice• PropertyandRelatedResearch• CorporateSectorConsulting• FinancialServices• CorporateRecoveryandInsolvencyAdvice• PropertyManagement• BuildingSurveying

For any advice on the Commercial Market please contact:

Chief Executive Mark FitzGeraldManaging Director Fintan TierneyBusiness Space Ronan CorbettCorporate Services Peter WallerDevelopment Land Peter LynchInvestment Michele JacksonResearch Marian FinneganRetail Karl StewartProfessional Services Sean McCormack

Northern Ireland

DTZ McCombe Pierce Billy McCombe / Michael PierceBelfast: Tel: + 44 - 28 - 9023 3455 Fax: + 44 - 28 - 9023 3444 Email: [email protected]

(Phoning from the Republic of Ireland please dial 048 9023 3455)

Regional Contacts

Cork Frank RyanLimerick John BuckleyGalway Aidan Gavin

Dublin: Tel: + 353 - 1 - 237 6300 Fax: + 353 - 1 - 237 6347 Email: [email protected]

Limerick: Tel: + 353 - 61 - 418 111 Fax: + 353 - 61 - 418 112 Email: [email protected]

Cork: Tel: + 353 - 21 - 427 5454 Fax: + 353 - 21 - 427 7246 Email: [email protected]

Galway: Tel: + 353 - 91 - 569 181 Fax: + 353 - 91 - 569 182 Email: [email protected]

39

.

CONTACTMarian FinneganDirector of Research, Chief Economist Siobhán MoloneyEconomist

Tanya DuffyResearcher

DUBLIN164 Shelbourne RoadBallsbridgeDublin 4T: +353 1 237 6300F: +353 1 237 6347

This report should not be relied upon as a basis for entering transactions without seeking specific, qualified, professional advice. It is intended as a general guide only.This report has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. While reasonable carehas been taken in the preparation of the report, neither Sherry FitzGerald nor any of directors, employees or affiliates guarantees the accuracy or completeness of theinformation contained in the report. Any opinion expressed (including estimates and forecasts) may be subject to change without notice. No warranty or representation,express or implied, is or will be provided by Sherry FitzGerald, its directors, employees or affiliates, all of whom expressly disclaim any and all liability for the contentsof, or omissions from, this document, the information or opinions on which it is based. Information contained in this report should not, in whole or part, be published,reproduced or referred to without prior approval. Any such reproduction should be credited to Sherry FitzGerald.

© 2012

[email protected] | www.dtz.ie

DTZ is now part of UGL Services, a division of UGL Limited. The combined business creates one of the largest property services companies in the world, providing corporate/occupier clients with a global, integrated end-to-end service offering and best-in-class investor services capabilities in investment

agency, leasing agency, property and facilities management, project and building consultancy, valuation, and investment and asset management. The organization has 27,000 permanent employees and 43,000 contractors, operating across 225 offices in 45 countries.

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