CBRE Market Report May 2011

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

 
The Office Market
A total of 48,275m2 of take-up was achieved in the Dublin office market during the first three months of 2011. Even when the well-publicised sale of the Montevetro building is excluded, an impressive 38 lettings occurred in the city in Q1, demonstrating that occupiers continue to sign lettings regardless of the economic situation, buoyed to some extent by the competitive deals on offer in the current climate.
Some of the more significant office lettings signed in recent weeks occurred in the suburbs of the city. They include the letting of:

• 5,034m2 at Swift Square in Santry in the north suburbs to ESB
• 4,459m2 at Central Park in the south suburbs to Tullow Oil.
• In the city centre, one of the largest lettings signed in Q1 was the letting of 3,909m2 to Houghton Miflin Harcourt at the Trinity Central scheme

A number of other significant transactions are currently in legals and are due to sign over the coming months, suggesting that take-up will remain strong in forthcoming quarters despite the underlying economic situation. There are also a number of large requirements that have yet to be fulfilled, which is encouraging although with lease negotiations proving very protracted at present, many of these office lettings may not have signed by year-end.
Prime quoting rents in the city centre have remained stable in recent months. However, prime quoting rents in the suburbs of Dublin have continued to decline with prime rents in the north suburbs having declined from approximately €161 per square metre to €151 per square metre in recent weeks while prime quoting rents in the west suburbs are now in the order of €145 per square metre having declined from €151 per square metre earlier in the year.
There was a slight easing in the vacancy rate in the capital in recent months. Large-scale rationalisation in the banking sector and potentially the public sector will ultimately release more vacant office stock to the market and could compromise this downward trajectory. However, the quality of this accommodation is likely to be poor and will have little impact on the availability of prime third generation accommodation in the Central Business District. The development pipeline has now firmly come to a halt with no new office schemes under construction in the capital.
 
The Retail Market
While there has been some positive news in the retail market in recent weeks, it has been largely overshadowed by ongoing difficulties in the sector. Four stores in the Birthdays Ireland chain went into liquidation recently while Carpetright announced plans to close 7 of its 25 Irish stores. In Dublin, three Total Fitness gyms went into liquidation and the Arcadia Group publicly announced plans to exercise break options in some of their stores later this year. Last week, an interim examiner was appointed to the Xtravision chain.
On the other hand, there have been a number of encouraging announcements in recent weeks including:

• Debenhams are to anchor the Sligo Town Centre development, which is due to commence construction later this year
• The Millfield Shopping Centre in Balbriggan in north Dublin, the first shopping centre to open in Ireland in more than 2 years, commenced trading in recent weeks
• Phase 2 of the Monread Centre in Naas has been launched with Boots and Argos due to commence trading there next month
• In addition to refurbishing 34 stores across the country, Super Valu have announced plans to open two new stores this year, one in Mountmellick in Laois and one in Manorhamilton in Leitrim while Londis have announced plans to open 12 new stores in Ireland this year
• Discount retailer BuyLo has opened a new store at the Royal Liver Retail Park on the Naas Road in Dublin in recent weeks
• Boots are to open a new outlet at Blackpool Retail Park in Cork, its 58th Irish store.
• Fashion retailer Billabong is reportedly looking for opportunities in the Irish market
• Fitzpatrick Shoes are reportedly close to signing a deal on Grafton Street

According to our research, 26% of international retailers now have a presence in the Irish market, up from 25% last year, making Ireland the 32nd most international retail market in the world. It is clear that this leaves room for many more new entrants to set up operations in Ireland. This will be facilitated by the attractive terms and conditions now on offer in the Irish retail market.
The issue of upward only rent reviews in business leases has dominated in recent weeks. The new Government have proposed realigning rent costs to 2011 levels in all business leases. This has understandably been welcomed by the many retailers who are currently struggling to meet high rental payments. In many cases, reductions are merited, particularly where high rental costs are rendering the tenant’s business unsustainable. In many instances, landlords have negotiated rental reductions with their tenants who are in genuine distress. However, the Government’s proposal, as it stands aims to introduce a ‘one size fits all’ solution that effectively bails out all occupiers, regardless of whether their business is suffering or if they genuinely need assistance. What has been missed in the debate so far is that the Irish taxpayer will ultimately end up paying the price for introducing this measure. None is denying that a solution urgently needs to be put in place to provide legislative support to tenants in genuine need. However, implementing a solution that will enable all business tenants’ review their rent instead of those who genuinely need assistance will cause further unnecessary damage to Ireland’s international reputation and add further financial burden on the already beleaguered taxpayer.
 
The Industrial Market
There has been a healthy level of letting activity in the industrial sector in recent months although for the most part, conditions remain challenging and most transactions are short term in nature. Almost 40,000m2 of industrial take-up occurred in Dublin in the first three months of 2011 – a 28% increase on the previous quarter. However, this was influenced by a small number of larger transactions that buoyed the results to some extent. There were no industrial sales signed in Dublin in the first three months of 2011 and with debt funding still difficult to source, few sales are anticipated over coming months. Some of the more significant transactions signed in Q1 include:
The letting to Lidl of 9,836m2 in the former Jacob’s facility on Belgard Road in Tallaght

• The letting of 5,654m2 in the former Nissan building on the Naas Road to Fiat Ireland
• A 7,947m2 facility at Northwest Business Park was also let in recent weeks.
• A number of other smaller lettings agreed recently include 664m2 at 16 Northern Cross Business Park to SOS Healthcare; 348m2 at 71 Western Parkway Business Park to Printrun and 187m2 at D19 North City Business Park to Laserplant

Prime quoting rents in the industrial sector in Dublin now stand at approximately €65 per square metre although secondary properties continue to generate rental levels far lower than this. A number of industrial sites are currently being offered for sale including a 15.5 acre site at Cheeverstown/Citywest, which is guiding €350,000 per acre.
 
The Irish Investment Market
The Irish investment market is in stalemate at present, primarily as a result of the uncertainty prevailing regarding Government proposals to retrospectively review rent clauses in all business leases. Until such time as the Government outlines their specific intentions in this regard, investors will continue to hold off making large-scale investment decisions. This was clearly evidenced by the fact that only two transactions were signed in the Irish market in the first three months of 2011 –

1. The sale of Boole House in Clonskeagh in south Dublin for approximately €9.25 million and
2. The sale (albeit to a special purchaser) to Google of their Gasworks/Gordon House headquarters building in Dublin 4 for approximately €115 million.

This €124.25 million of investment spend in Q1 pales in significance to the €26.7 billion invested in European real estate in the period.
The scarcity of liquidity is another issue impacting on transactional activity in the Irish market and in this respect it is interesting that NAMA are now exploring the potential of providing funding solutions to enable transactions to take place. There have been some properties publicly offered for sale recently, including Block D at Parkgate Business Centre in Dublin 8, which has been brought to the market on the instructions of a receiver guiding €7 million and The Audi Centre at Pembroke Road in Dublin 4, which is guiding €5 million. While we expect to see more properties being brought to the market over the course of the coming months, few sales are likely to be agreed until such time as liquidity improves and there is more certainty with regard to the Government’s intentions on rent reform. While there is no transactional evidence to justify adjusting our prime yield series, the reality is that yields will potentially trend weaker over the course of the coming months if the current uncertainty is not alleviated. If the proposal is implemented as it currently stands, the Irish taxpayer will ultimately bear the financial burden.
The most recent results from the Investment Property Databank (IPD) show that income return from Irish property in Q1 2011 was eroded by some further slippage in capital values in the period, with a total return of 0% achieved. However, it is encouraging that the pace of depreciation is clearly slowing.
 
The Development Land Market
Transaction volumes have remained weak in the development land market in recent months although a number of sites are now beginning to be brought to the market, which should result in some sales activity being recorded over the course of the Summer.

• A 0.37 acre site at The Coombe in Dublin 8 has been sold in recent weeks for in excess of €550,000
• Aldi have recently completed the purchase of a site on Glenageary Road Upper in south Dublin. The discount retailer has also recently purchased a 1.5 acre site in Clonee, Co. Meath for a reported €3 million and a 1.5 acre site in Bray, Co. Wicklow which they reportedly purchased for €3.4 million.

The 144 acre Turvey Golf and Country Club in Donabate is currently being offered for sale on the instructions of a receiver, guiding €2.25 million. The 1.25 acre Loyola site on Eglington Road in Dublin 4, which has the benefit of planning permission for 18 apartment units but may also be of interest to owner-occupiers, has recently been put on the market guiding €2.5 million. A number of other sites will be offered for sale in the coming weeks.
Outside of the Dublin market, there are few development sites being offered for sale although trading in agricultural land remains brisk. The recent auction of distressed property demonstrated that buyers are willing to engage if pricing is realistic, with 82 of the 84 lots sold and many achieving prices in excess of their reserve. A 0.19 acre site at Estuary Road in Malahide sold at the auction for €230,000.
 
The Hotels & Licensed Market
Conditions in the hotel sector remain challenging, particularly outside of Dublin although anecdotal evidence suggests that tourist numbers are improving and Irish tourism chiefs hope to capitalise on international campaigns which are being launched ahead of the forthcoming visits of Queen Elizabeth and the US president Barack Obama.
With hotel transactions still few and far between in the Irish market, it is encouraging that a deal has recently been concluded on Kenmare Manor in Co. Kerry. This campaign generated a very encouraging amount of international interest and attracted bidders from Dubai, Norway, Australia, the UK and the US. The successful party was John Brennan, who along with his family operates the well-known 5 star Park Hotel in Kenmare. He intends to develop an Eco Park and Glamping (upmarket camping) facility at the hotel that should provide a major boost for tourism in the region.
There is also an encouraging level of international interest in Kilkea Castle Hotel in Kildare which was brought to the market recently guiding €6 million. It has been reported that Hyatt may be interested in purchasing the 169 bed Grand Canal Hotel in Dublin Docklands. Hostels operator Generator, part of the Patron Capital group in the US, will next month open Ireland’s biggest backpacker hostel in Smithfield in Dublin 7, which will have 530 beds.
NAMA, who now control 83 hotel properties around the country, has recently appointed a statutory receiver to 7 hotel properties owned by Paddy Kelly as well as appointing receiver to properties owned by Capel Developments including the Portmarnock Hotel & Golf Links. A receiver has recently been appointed to the Bayview Hotel in Killybegs, Co. Donegal, which closed down earlier this year while a receiver was also recently appointed to the Quinn Group which has hotels in Ireland, the UK, the Czech Republic, Poland and Bulgaria.
There appears to be an increase in banks appointing receivers to pub properties in recent months. Two pubs, Scholars on Clanbrassil Street and Hobblers Inn/Raytown Bar in Ringsend have recently been brought to the market.