CBRE Market Report July 2011

• The Office Market
• The Retail Market
• Retail Market Activity
• The Industrial Market
• The Irish Investment Market
• The Development Land Market
• The Hotels & Licensed Market

 
The Office Market
Take-up in the Dublin office market reached more than 34,000m2 in the second quarter of 2011, bringing total take-up in the first half of this year to almost 85,000m2 compared to approximately 50,000m2 in the same period last year - an impressive level of activity considering the economic climate. The largest letting signed in the Dublin office market in the last three months was the letting of 11,107m2 to Paddy Power plc in Belfield Office Campus in Dublin 4. Other significant lettings that signed during Q2 2011 included;

• The letting of approximately 1,022m2 to Zynga Games in The Oval in Ballsbridge, Dublin 4 and,
• the letting of 985m2 to Macquarie Bank at Connaught House, Burlington Road in Dublin 4

Although the pace of decline has eased considerably in recent months, intense tenant negotiation is continuing to force prime rental values down with prime headline rents in the Dublin 2/4 postcode now in the order of €323 per square metre. This represents a 52% decline from peak levels in 2007. The ability to negotiate more competitive transactions and the prevailing 12.5% corporate tax rate are the primary drivers of occupational activity in the Irish market at this point.
There have been a significant number of corporate job announcements in Ireland over recent months, which is encouraging. However, there is usually a time lag before these announcements translate into letting activity in the office sector. Despite the inherent demand for accommodation, getting transactions signed continues to prove challenging in the current environment. A number of landlords are delaying or in some cases losing transactions in their efforts to establish the strength of parent companies and obtain guarantees. A number of very significant office enquiries including requirements from CITI, the Central Bank and BNY Mellon have yet to be fulfilled, which bodes well for take-up in the Dublin office market in the second half of 2011. However, once many of these requirements have been catered for, there is little visibility on where the next wave of demand for office accommodation will come from.
 
The Retail Market
Despite being in the midst of the traditional Summer sales season, activity in the retail sector of the Irish economy remains fragile. The most recent data from the Central Statistics Office shows that Irish retail sales continue to struggle on both a value and volume basis. This has been clearly demonstrated by some retailers who have recently reported year-on-year declines in performance in the Irish market. There has continued to be some high-profile closures in the retail sector over recent months including furniture retailer Diamond Living who recently closed down 3 Dublin stores at Swords, Liffey Valley and Longmile Road.
The women’s fashion chain Jane Norman, which has 16 stores in Ireland including outlets in Debenhams, has also recently gone into administration. Despite this, many retailers are now beginning to report signs of stabilisation and we continue to see many retailers looking to take advantage of current market conditions to roll out new entry and expansion plans. Much of this activity is focused on securing premises in prime high streets and shopping centres.
Retail Market Activity:

• Hollister are due to open their first Irish store in Dundrum Town Centre later this month
• Abercrombie & Fitch are due to start fitting out a new unit at College Green in Dublin city centre
• Starbucks are to open a new café in the former EBS building on Westmoreland Street
• Avoca Handweavers are to set up a new store in Monkstown in South Dublin over the coming months
• River Island is to open a store in the Pavilions shopping centre
• Cassidy Travel has opened a new store at Liffey Valley Shopping Centre.
• Tesco are to open new stores in Cabra and Rush and Kildare and have plans to open seven new Tesco Express stores in Dublin and Kildare
• O’Brien’s Wines are to open their 30th Irish store in Blanchardstown Centre shortly
• US retailer Skechers who opened a unit on Henry Street last year have announced plans to open a new store on Grafton Street, where Disney recently opened their first Irish store
• Outside of Dublin, Meadows and Byrne have opened a new store at Fota Retail Park in Cork and are due to open a new store alongside Blarney Woollen Mills in Clonakilty later this Summer
• McDonalds have announced plans to open four new drive-thru restaurants over the coming months
• Londis have announced the rollout of 12 new stores
• Homestore & More are fitting out their 8th Irish store in Drogheda Retail Park and are currently looking for new premises in Cork
• Discount retailer EuroGeneral Retail have announced plans to enter the Irish market and open 12 new stores in Ireland this year, which is leading to competitive bidding from Poundland and 99p stores in some locations

One of the most significant property transactions to occur in this sector in recent months was the acquisition by UK-based Odeon UCI of nine Irish cinemas from Entertainment Enterprises.
Many international retailers are becoming increasingly interested in the Irish market, taking into account the improvement in competitiveness that has occurred in the Irish economy in a relatively short period of time and the ability to negotiate attractive deals in the current climate. However, despite the oversupply in some sectors of the market, securing premises on prime high streets and in major shopping centres is proving challenging. This will no doubt be eased as new properties are brought to the market including 50 Irish Nationwide premises and 7 Boyle Sport premises, which have recently come available. The considerable delay in getting transactions agreed and signed at present is also causing some frustration. An increasing number of retailers are seeking to negotiate turnover-related deals. Most involve an element of base rent with a turnover-related top-up although some retailers are seeking to negotiate pure turnover deals.
 
The Industrial Market
Conditions in the industrial sector of the Irish commercial property market remain challenging at the mid-year point, with short-term lettings continuing to be agreed but few sales being completed. A significant number of former manufacturing facilities continue to come to the market around the country, in many cases on the instructions of receivers. However, liquidity is very limited and few sales are being achieved. In fact, there were only four sales completed in the Dublin industrial sector in the first half of 2011, all of which signed in the last three months. The sales included:

• Unit 30 Broomhill Road in Dublin 24, which extends to 2,640m2 and,
• Unit 138a Slaney Close in Dublin Industrial Estate, Dublin 9 that extends to 557m2

According to our research, in addition to 8,010m2 of sales there was almost 19,600 m2 of industrial lettings completed in Dublin in Q2, bringing total take-up in the Dublin industrial market to more than 66,700m2 in the first half of the year.
There were a large number of smaller transactions completed in the last three-month period but relatively few larger premises leased. Some of the more significant lettings signed recently include:

• A 7,947m2 facility at Northwest Business Park in Ballycoolin, Dublin 15
• A 1,188m2 facility at Pearse Street in Dublin city centre to Thrifty Car Rental
• A 836m2 facility to Autobar Vending at City North Business Campus
• A 491m2 to CBS Outdoor at Unit B1 at Kingswood Business Park and,
• A 325m2 Unit B3 Kingswood Business Park to Morrison Utility Services

Prime headline quoting rents remain stable at approximately €65 per square metre although tenants continue to negotiate hard and are securing very favourable terms and conditions, particularly on secondary accommodation. Despite the oversupply of accommodation in the Dublin industrial market generally, there are a number of highly sought after locations such as the N7/N81 corridor where there is a scarcity of modern industrial buildings. As a result, a significant gap has emerged between rents for modern and secondary accommodation along this corridor. We expect that speculative development, which hasn’t been a feature of the industrial market for over 4 years now, is likely to be focused along this corridor once rental values improve to the point where development is once again feasible.
Across Europe, many industrial occupiers are relocating from outdated or poorly located space to more modern industrial facilities. In the Irish market, this trend is less evident with occupiers primarily driven by cost savings and willing to compromise on the quality of buildings in order to cut costs.
 
The Irish Investment Market
As we await the publication of a Draft Bill on the issue of retrospectively reviewing rent review mechanisms in existing leases, overseas investors, who are realistically the only potential buyers of Irish commercial investments at present, have remained on the sidelines in recent months. There were only 3 significant investment transactions totaling under €150 million signed in the Irish market in the first six months of 2011, with two of these comprising owner occupier sales. The only transaction to sign in the last three months was the sale on the instructions of a receiver to Penney’s of their headquarter building Chapel House in Dublin 1 for approximately €25 million.
Despite the absence of transactional evidence, we have adjusted our prime yield series to take account of the impact the current uncertainty is having on property values in the Irish market. We believe that prime yields for high street retail premises in Dublin are currently in the order of 6.5% with prime office yields now in the order of 7.5%, prime industrial yields around 9.5% and double digit yields prevailing for secondary and provincial properties.
All of the investment properties that have recently come to the market are forced sales, either receivership sales or properties being sold on the instructions of a bank. Properties that are currently being marketed include:

• Merrion House on Merrion Road in Dublin 4
• The Northbrook Clinic in Dublin 6, which is guiding €3.8 million
• Gardner House in South Mall in Cork which has come to the market guiding €4 million and,
• Two Bank of Ireland bank branches in Drogheda, Co. Louth and Ballinasloe, Co. Galway, guiding €4 million and €3.1 million respectively

NAMA recently announced plans to provide ‘vendor finance’ to enable transactions to take place. However, while liquidity continues to be a major stumbling block for the investment sector and any efforts to address this are welcome, the lack of clarity on the upward only rent review issue is the main reason why transactional activity remains subdued. Until this issue has been dealt with, investors will stay away and there is unfortunately potential for yields to continue to weaken.
 
The Development Land Market
There has been a notable increase in the number of development sites being offered for sale in Ireland recently. More high-profile sites are expected to be released to the market over the coming months. However, other than the sale of agricultural land and the sale of some strategic sites to retailers such as Tesco, Aldi and Lidl, sales activity remains subdued. Demand is likely to remain limited until such time as the value of the end product starts to stabilise and increase and development once again becomes viable.
74 acres at the K Club in County Kildare recently sold for €1.3 million. Meanwhile, a sale has now been agreed on a 1.25 acre site with planning permission for 18 apartments at the corner of Sandford Road and Eglington Road in Ranelagh in Dublin 6. A deal has also been agreed on the former Crawford’s Motors site in Dun Laoghaire in South Dublin. Outside of Dublin, the Industrial Development Authority (IDA) recently brought two sites to the market – a 8.57 acre site in Mullingar Business Park in County Westmeath, which is guiding €675,000 and a 7.14 acre site in Ardee, Co. Louth, which is on the market guiding €210,000. Other sites that have recently come to the market include:

• A 1.98 acre site at Railway Avenue in Sutton with planning for 60 apartments, which is guiding €1.55 million
• The former Sunday World site in Terenure, Dublin 6W, which extends to approximately 1.15 acres and is guiding €5 million and,
• A 0.7 acre site at Northbrook Lane in Ranelagh in Dublin 6 was recently withdrawn at auction and is now guiding €500,000

There has been an increase in enquiries for properties that are being brought to the market at attractive prices. However, there is an understandable reluctance to tie up working capital in land, particularly considering the lack of liquidity that continues to prevail. Vendors who are prepared to accept license deals will ultimately fare best in selling land for the foreseeable future.
 
The Hotels & Licensed Market
Following three very difficult years in the Irish hotels sector, there has been somewhat of an improvement in trade in recent months, most notably in Dublin where both occupancy and average room rates have witnessed a rebound in performance. The all-important RevPar statistics for Dublin have been in positive territory for 9 straight months now, which is an extremely significant and encouraging trend.
Official tourism statistics show that visitor numbers into Ireland increased for the first time in two and half years in Q1 2011, showing an increase of almost 9% year-on-year. The recent State visits from Queen Elizabeth and President Obama have undoubtedly helped promote Ireland abroad and should help boost overseas tourism numbers in the coming months and years. This new momentum will be boosted over the high season months from July 1st as from that date the controversial airport travel tax will be temporarily abolished and the rate of VAT on restaurant meals and hotel accommodation will be reduced from 13.5% to 9.0%. By making these changes the Government seems to have accepted the sectors advice and recognised that tourism can make a substantial contribution to our economic recovery and lead to much-needed job creation. It is important that hoteliers now pass on the VAT reductions to their customers and that the Government proceed with reforming Sunday premium pay rates in the hotels sector, which will further stimulate tourism and create jobs.
Another announcement in the recent jobs budget that should boost tourist numbers even further is a new visa arrangement to enable Asian, Middle Eastern and Eastern European tourists who already have a valid UK visa, to visit Ireland without having to obtain a separate visa. This excellent initiative is very welcome but its potential will only be fully exploited if Ireland is being marketed effectively in these locations. It is regrettable that the Golden Trekker scheme, which allowed overseas tourists aged over 66 to travel free on public transport in Ireland, has been scrapped. Had this initiative been properly promoted, it had the potential to attract significant additional tourist business to this country at very little cost to the taxpayer, given that the user times were restricted to off-peak.
In the property sector, there has been some increase in the number of hotel properties being publicly offered for sale and we expect this trend to continue over the coming months. Encouragingly, there have been some significant hotel sales achieved in recent months. Contracts have now been signed for the purchase of the prestigious Four Seasons Hotel in Dublin 4 by the Livingstone Brothers, owners of one of the largest privately held property investment companies in Europe, following an intensive marketing campaign that generated huge international interest. Other hotels that have sold recently include:

• The 71 bed Fleet Street Hotel and former Bewley’s premises on Westmoreland Street in Dublin
• The former Imperial Hotel in Castlebar, Co. Mayo, sold for alternative use for approximately €800,000
• The Hazel Hotel in Monasterevin, Co, Kildare, achieved approximately €630,000 and,
• The 48 bed Ostann na Rosann hotel in Dungloe, Co. Donegal, which sold for approximately €500,000

This welcome increase in sales activity will no doubt be encouraging for NAMA who now control the loans attached to 123 hotels, with 83 of these located in Ireland. The Kinlay House Hostel in Eyre Square in Galway was recently brought to the market on the instructions of a receiver and has to date generated an encouraging level of bids from a range of Irish and international buyers, as has the well-known Kilkea Castle Resort Hotel in Co. Kildare, for which offers in the region of €6 million are being sought. Other properties that have recently been offered for sale include:

• The 168 bed Quality Hotel in Killarney which is guiding €4 million and,
• The four star guesthouse and restaurant Heron’s Cove in Rossnowlagh, Co. Donegal, which is guiding excess €500,000

Conditions in the Dublin licensed sector remain difficult with a large number of pub properties being offered for sale, both on and off market. There is good interest in both the Kestrel in Walkinstown, which is currently on the market guiding excess €2.5 million and the Stout Bar in Rathmines, Dublin 6, which is for sale or lease and guiding excess €1.75 million. Cassidy’s Bar on Westmoreland Street has recently been sold on the instructions of a receiver. The Purty Kitchen Group is the most recent high-profile pub group to go into receivership and there are likely to be more properties going into administration as the summer progresses.