Overview
The investment market remained subdued during the second quarter of 2010 with activity limited to a small number of transactions. Although yields have stabilised for prime properties, the sustained downward movement in market rents continues to exert pressure on capital values. However, there is some solace in the slower pace of decline as IPD recorded a fall in capital values of only 1.8% in the three months to the end of March. On a more positive note and despite the fall in capital values, Q1 figures from IPD also show that 'All Property Total Returns' witnessed the first positive movement in the last two years with a modest growth of 0.4%.
Activity
Following a turnover of €60m in Q1 2010, no significant transactions occurred in Q2. However, there are a number of key transactions at advanced stages. After being withdrawn in December 2009, AIB Grafton Street was brought back to the market in April. We understand that a deal is agreed with a foreign investor at a yield of approximately 6%. Based on a rent roll of €1.8m, the agreed price is in the region of €27.7m. As the transaction is post-28th February 2010, it is subject to the provisions of the Land & Conveyancing Law Reform Act 2009 and consequently the new lease to AIB will contain an upwards and downwards rent review clause. It is worth noting that the most recent price agreed is at a similar level to that established in Autumn 2009 when the lease to AIB would have pre-dated the legislation and had an upwards only review clause.
Investments sold on Grafton Street in the last two years (Tommy Hilfiger, Boodles and AIB) are all let to strong tenants and each have been purchased by foreign investors ostensibly content to accept rentals ahead of market levels provided the tenant covenant is secure. The more recent deals suggest that while initial yields on the street seem to have settled at about 6% - 6.5% for well-let properties, equivalent yields are below this level in some instances.
Earlier this year, AIB also released a portfolio of smaller bank branches onto the market. These were spread throughout the country and the total lot size was about €40m. Approximately €24m of this portfolio sold in Q1 with the sale of further branches likely to complete shortly.
Other deals close to completion include Liffey Valley Shopping Centre and the National Irish Bank (NIB) building in Dun Laoghaire. Liffey Valley is at a price level of approximately €350m and when it completes, will be the largest transaction in two years. The NIB property at 9/10 Upper Georges Street has 11 years remaining on the lease and is agreed at approximately €2m, which is providing an initial yield of over 7%.
Overseas investors continue to cement their foothold in the market. Including Liffey Valley and AIB Grafton Street, almost 90% (measured by lot size) of purchases so far this year will be by foreign investors.
Supply
Lisney recently brought a modern office building, Boole House in Clonskeagh, to the market. This property is being offered by way of a sale and leaseback to Ericsson. The new lease will be for a term of 20 years and will contain a break option in year 10. The initial rent will be €870,000 pa, which will be subject to a fixed 15% increase at the end of the 5th year of the term. At a quoting price of €10.05m, the return on offer is 8% rising to 9.20% once the rental increase becomes effective. Interest to date has been encouraging. This sale will provide a useful benchmark for the market as the only other two completed office investment sales this year have been off-market, hence little information is available.
A filling station let to Fareplay Energy Limited (a wholly owned subsidiary of Topaz Energy Group Limited) on the old Belgard Road in Tallaght was brought to the market in May through a receiver. With over 25 years remaining on the lease, offers are being sought in the region of €3.5m providing a net initial return of 7.5%. Receiver sales are becoming a more common source of supply, although not to the degree many would have anticipated and to date, they have not flooded the market.
Despite the fact that there are a number of off- market deals available at present, publically available opportunities are limited. The market is likely to remain as such over the summer months with most disposals being deferred until the autumn.
Outlook
The supply of credit continues to remain constrained. The transfer of loans to NAMA is progressing and tranche one with the loans of the top ten borrowers is now complete. Further tranches are underway. In an effort to mend their balance sheets, some lending institutions are enforcing loan-to-value warranties and seeking additional equity. NAMA had been the primary focus of many lending institutions but with this process now well underway, attention is being spread to other areas. We believe this will lead to more sales and should provide some opportunities in the autumn.
Demand will continue to be centred on well-located properties with long lease commitments and strong tenant covenants. Cash rich domestic investors continue to seek bargains. Many smaller investors have unfulfilled requirements up to €5m for self-administered pension funds. Overseas investors, particularly UK institutions have minimum requirements of €20m.
Investors are focused on the initial yield and with the persisting distress in the occupational markets, values will continue to slip marginally for multi-let properties to maintain these initial yields. Prevailing yields for prime property in Dublin have not changed this quarter and are set out below.
