5
OCCUPIER TRENDS INVESTMENT TRENDS MARKET OUTLOOK RESEARCH WITH SPECIAL FOCUS: WHO OWNS DUBLIN OFFICES? DUBLIN OFFICE MARKET OVERVIEW Q2 2019
OCCUPIER TRENDS INVESTMENT TRENDS MARKET OUTLOOK
RESEARCH
WITH SPECIAL FOCUS: WHO OWNS DUBLIN OFFICES?
DUBLINOFFICE MARKET OVERVIEW Q2 2019
32
Q2 OVERVIEWDespite a quiet second quarter, the first-half of the year sees the strongest-ever level of take-up.
DUBLIN OFFICE MARKET OVERVIEW Q2 2019 RESEARCH
EconomyIndustrial production in the Eurozone beat expectations in May, increasing by 0.9% on the previous month according to Eurostat. It was not, however, enough to drag the index into positive territory on an annual basis, with a contraction of 0.5% recorded compared to May 2018. While production in Ireland increased by 8.2% annually, Germany saw a 4.3% contraction as global trade uncertainty hit output with other large European economies also facing headwinds. Inflation also remains weak, standing at 1.3% at the end of Q2, well below the ECB’s target of close to, but under, 2%. This softness in the economy means that accommodative monetary policy measures will likely be re-introduced in Q3 in the form of interest rate cuts and quantitative easing. This will place further downward pressure on sovereign debt
FIGURE 3
Office take-up sq ft
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
2014
2017
2018
Q2
2019
2015
2016
2013
2010
2011
2012
2008
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2009
Source: Knight Frank Research
FIGURE 2
Forecast population growth of European Cities, 2020-2035
-10%
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Rig
aB
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rest
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ublin
SUMMARY1. Macro weaknesses in the Eurozone
economy increase the likelihood of further monetary stimulus
2. Dublin is expected to be the fastest growing capital city in Europe between 2020-2035, with it’s population predicted to rise by 18%
3. 355,000 sq ft transacted in Q2 to bring take-up at the half-way point of the year to 1.7 million sq ft
4. €257.1 million worth of office investment transactions changed hands in Dublin during Q2, with a number of large sales expected to boost volumes in the second half of the year
5. Our analysis of investment flows since 2013 shows the ownership structure of the Dublin office market to be globally diversified
The primary determinants of these forecasts are based on three net inward migration scenarios of population growth at a national level (namely 10,000, 20,000 and 30,000 per annum) and are combined with internal distribution of this population growth under ‘Dublin Inflow’ and ‘Dublin Outflow’ scenarios. The latter are likely to be influenced heavily on whether infrastructural issues in Dublin – particularly those related to housing – are addressed.
The analysis shows that the 18% forecast by the UN is in-line with the third highest CSO projection for Dublin for the period, with the range of forecasts going from just 2% at the lower end to 28% under the highest scenario. The wide range in potential outcomes highlights that, while Dublin has the greatest potential according to the UN, it must undertake the necessary infrastructural investment for this potential to be realised.
KNIGHT FRANK VIEW ON RISK
Property Tenant Sector Size (sq ft)
Belfield Office Park, Dublin 4 Paddy Power Other 90,484
Block I, Central Park, Dublin 18 Genesis Aviation Finance 24,706
Phoenix House, Dublin 8 OPW State 22,683
George’s Quay House, Dublin 2 WeWork Coworking 17,139
Ballast House, Dublin 2 Pembroke Hall Coworking 15,946
Top 5 office leasing transactions
Source: Knight Frank Research
0
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2019
2018
2017
Source: Knight Frank Research
FIGURE 6
Dublin prime office rents € per sq ft per annum
STATE
MEDICAL
PHARMA
PROFESSIONAL SERVICES
TMT
FINANCE
14%
6%
6%
9%
10%
37%
10%
9%
OTHER
COWORKING
Source: Knight Frank Research
FIGURE 4 Take-up by sector
CITY CENTRE38%
34% FRINGE
SOUTHSUBURBS
16% 9% WESTSUBURBS
4% NORTHSUBURBS
FIGURE 5
Take-up by location
Source: Knight Frank Research
Source: UN
Occupier market 355,000 sq ft of office space transacted in Q2, less than half the Q2 five-year average of 735,000 sq ft and the lowest quarterly figure since Q3 2014. However, due to the 1.4 million sq ft that transacted in Q1, it was enough to make it the highest-ever level of take-up for the first-half of a year.
The largest deal of the quarter was the letting of 90,484 sq ft to Paddy Power at the Belfield Office Campus in Dublin 4, where they occupy 119,000 sq ft since moving their HQ from Tallaght in 2011. The latest letting comprises two deals, namely 49,291 sq ft at Blocks 7 and 8 on a short-term basis to accommodate staff while a 41,193 sq ft extension is being constructed at their current HQ and for which an agreement for lease has been signed.
Elsewhere, Genesis Aviation, became the first tenant at Block I, Central Park in Dublin 18, taking 24,706 sq ft at the recently completed building. The deal follows a €50.0 million investment in the firm by the Ireland Strategic Investment Fund last year, a move designed to support the company’s plans to scale its business in Ireland. At Phoenix House in Dublin 8, the OPW have leased two floors of newly refurbished space from Bartra Capital totalling 22,683 sq ft. The remainder of the space in the 38,000 sq ft building is also occupied by the OPW, meaning that the State is now the sole occupant of the building.
It is noteworthy that three of the top five deals took place outside the city centre, with non-city centre locations accounting for a
FIGURE 1
Eurozone inflation
-0.5%
0.0%
0.5%
1.0%
1.5%
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2.5%
2019201820172016
One of the most compelling reasons to invest in Dublin real estate comes from its positive long-run population growth prospects. Population forecasts undertaken by the United Nations show that, not only is Dublin expected to be the fastest growing capital city in Europe between 2020 and 2035, it is expected to be the fastest growing city of any of the 162 European cities greater than 300,000 people over the period.
Overall, the city is expected to grow by 18%, three times the average expected growth rate of 6%. Of course, while this is the most expected scenario according to the UN, it is just one of a number of paths that population growth may take. Consulting the CSO’s Regional Population Projections published in June helps give a better understanding of the range of scenarios that may unfold, as it provides six scenarios for population growth in Dublin covering the same period as the UN forecast.
total of 62% of take-up. This is in contrast
to Q1 when only 38% of deals were outside
the city centre. The growing importance of
the Coworking sector was again evident
in Q2 with WeWork taking 17,139 sq ft at
yields – Ireland’s are already close to zero – and increase the relative attractiveness of risk assets such as Dublin office investments which currently trade at a risk premia of 4.0%.
George’s Quay House – their seventh deal in Dublin since entering the market in Q4 2017 – while Pembroke Hall took 15,946 sq ft at Ballast House. Unusually, TMT accounted for a low share of the market with just 9% of take-up as Professional Services took the top spot with 14%.
Coworking and the State let 10% each, while Finance comprised 9%. Pharma and Medical followed thereafter with 6% each. A wide variety of sectors accounted for the remaining 37% of take-up. Prime rents remained stable at €62.50 psf.
Development land A number of notable applications obtained approval in Q2. Meyer Bergman, and Dublin-based partner BCP Asset Management, received planning for an additional 19,000 sq ft at their mixed-use office and retail development on Dawson Street which will extend to over 200,000 sq ft with completion due in Summer 2022.
Hines obtained the green-light to proceed with their 115,000 sq ft Two Grand Parade project, while Ronan Group Real Estate gained approval for
Source: Eurostat
54 54
DUBLIN OFFICE MARKET OVERVIEW Q2 2019 RESEARCH
AMIE
NS
STR
EET
PORTLAND ROW
O’C
ON
NELL STR
EET
BATH AVENUE
CITY QUAY
SHERIFF STREET UPPER
EAST
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OA
D
HADDINGTON RD
FITZ
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ST
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R
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ARE
ST
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SON
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CUFFE ST
LEESON
ST LOW
ER
GRAND CANAL ST LOWER
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AM
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STREET LO
WER
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D
EDEN QUAY
GEOR GES QUAY
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UM
BERLAN
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OA
D
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OU
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E RO
ADCHARLEM
ONT ST
BAGGOT ST LOWER
PEARSE STREET
VICTORIA QUAY
CHESTERFIELD AVE
USHER’S QUAY
ARRAN QUAY
SOU
TH C
IRC
ULA
R R
OA
D
DOLPHIN ROAD
SOUTH CIRCULAR ROAD
OLD KILMAINHAM ROAD
JAMES STREET
MARROWBONE LANE
CORK STREET
DONORE AVENU
E
KEVIN STREET UPPER
EAR
LSFO
RT
TERR
ACE
CLA
NB
RAS
SIL
STRE
ET
PA
TRIC
K S
TREE
T
BR
IDG
E STREETTHOMAS STREET
WOOD QUAY
CHAPELIZOD BYPASS
BLA
CK
HA
LL P
L
QU
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STR
EET
MANO
R STREET
SUMMERHILL
CO
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ITU
TIO
N H
ILL
SERPENTI
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AVE
NUE
PARNELL STREET
GARDINER STREET LO
WER
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NORTH C
IRCULAR ROAD
CONYNGHAM ROAD
Phoenix HouseDate: Q2 2019Rent: €25.00 psfTake-up: 22,683 sq ftTenant: OPWSector: State
No.4 & No.5 Dublin LandingsDate: Q1 2019Rent: Owner-occupied – purchased for €204.0 millionTake-up: 201,000 sq ftTenant: Central BankSector: State
The Distillers BuildingDate: Q1 2019Rent: N/ATake-up: 182,000 sq ftTenant: OPWSector: State
Spencer PlaceDate: Q1 2019Rent: N/ATake-up: 430,000 sq ftTenant: SalesforceSector: TMT
5 Hanover QuayDate: Q1 2019Rent: €51.50 psfTake-up: 98,628 sq ftTenant: DocuSignSector: TMT
5 & 6 Earlsfort TerraceDate: Q1 2019Type: RefurbishmentDeveloper: IPUTSpace Delivered: 80,000 sq ft
Ballast HouseDate: Q2 2019Rent: €47.50 psfTake-up: 15,946 sq ftTenant: Pembroke HallSector: Coworking
Ballast HouseDate: Q2 2019Yield: 5.62%Price: €26,900,000Purchaser: Union Investment
Maryland HouseDate: Q2 2019Yield: 5.50%Price: €10,250,000Purchaser: Private Irish
Two Park PlaceDate: Q2 2019Rent: N/ATake-up: 13,000 sq ftTenant: Gartner Sector: Professional Services
Charlemont ExchangeDate: Q1 2019Yield: 4.50%Price: €144,000,000Purchaser: Vestas Management
The Lennox BuildingDate: Q2 2019Yield: 4.80%Price: Approx €27,000,000Purchaser: Swiss Life
The One BuildingDate: Q1 2019Yield: N/APrice: €49,500,000Purchaser: BNP REIM
23 Shelbourne RoadDate: Q2 2019Yield: 3.00%Price: €25,250,000Purchaser: U+I
South PointDate: Q1 2019Yield: 5.75%Price: €12,675,000Purchaser: Corum Real Estate
77 Sir John Rogerson's QuayDate: Q1 2019Yield: 4.60%Price: €35,500,000Purchaser: N/A51-54 Pearse Street/
Magennis PlaceDate: Q2 2019Yield: 2.87%Price: €27,200,000Purchaser: N/A
10 Pembroke Place Date: Q1 2019Type: RedevelopmentDeveloper: D4P HoldingsSpace Delivered: 25,179 sq ft
1 SJRQDate: Q1 2019Type: DevelopmentDeveloper: Hibernia REIT Space Delivered: 112,000 sq ft
2 WMLDate: Q1 2019Type: RedevelopmentDeveloper: Hibernia REITSpace Delivered: 62,287 sq ft
The Lennox BuildingDate: Q1 2019Type: DevelopmentDeveloper: Canal Basin HoldingsSpace Delivered: 21,000 sq ft
Three Haddington BuildingsDate: Q2 2019Type: RefurbishmentDeveloper: Deutsche BankSpace Delivered: 22,961 sq ft
The Wythe BuildingDate: Q2 2019Type: DevelopmentDeveloper: Avam LtdSpace Delivered: 22,324 sq ft
Georges Quay HouseDate: Q2 2019Rent: €55.00 psfTake-up: 17,139 sq ftTenant: WeWorkSector: Coworking
Bishops Square ExtensionDate: Q1 2019Type: ExtensionDeveloper: HinesSpace Delivered: 28,857 sq ft
1GQDate: Q2 2019Rent: €58.50 psfTake-up: 12,017 sq ftTenant: PepsiCoSector: Other
Station Building TwoDate: Q2 2019Type: RedevelopmentDeveloper: Clancourt GroupSpace Delivered: 15,425 sq ft
The Hubble BuildingDate: Q1 2019Type: RefurbishmentDeveloper: The Creedon GroupSpace Delivered: 12,484 sq ft
Bishops SquareDate: Q1 2019Rent: €49.50 psfTake-up: 46,895 sq ftTenant: OPWSector: State
TRINITY COLLEGE
DUBLIN
CONNOLLYSTATION
THECONVENTION
CENTRE
GRAFTONSTREET
3ARENA
GRANDCANAL
ENERGYTHEATRE
AVIVA STADIUM
GOVERNMENTBUILDINGS
ST STEPHEN’SGREEN
MERRIONSQUARE
DORS
ET S
TREE
T UP
PER
PHOENIXPARK
HEUSTONSTATION
SMITHFIELD
HENRYSTREET
DART RAIL LINE
KEY
INVESTMENTSDEVELOPMENTS
LETTINGS
LUAS TRAM LINELUAS TRAM LINE
TOP TAKE-UP, INVESTMENTS AND DEVELOP MENTS IN H1 2019
76 76
DUBLIN OFFICE MARKET OVERVIEW Q2 2019 RESEARCH
Property Seller Buyer Approx. price
The Citywest Portfolio, Dublin 24
Davy Hickey Property Group & Private Vendor
Henley Bartra €105.0m
51-54 Pearse St & Magennis Place, Dublin 2
Green Liffey Ltd Confidential €27.2m
The Lennox Building, Dublin 2
Canal Basin Holdings Swiss Life €27.0m
Ballast House, Dublin 2
Zetland Capital Union Investment €26.9m
23 Shelbourne Road, Dublin 4
Friends First U+I €25.3m
Top 5 office investment transactionsFIGURE 8
Dublin prime office yields
Source: Knight Frank Research
their mixed-use development on Tara Street. Extending to 180,000 sq ft over 22 storeys, the scheme will be the tallest building in Dublin upon completion.
Investment €257.1 million worth of office investment transactions changed hands in Dublin during Q2, bringing volumes for the first-half of the year to €529.2 million, accounting for 30% of the €1.8 billion spent on Irish commercial property investments over the period. Although the volume of Dublin office investments are a third lower when compared to the same period last year, there are a number of significant transactions currently in the pipeline that will boost numbers for 2019 should they be realised. Chief amongst these are Starwood Property Trust’s
€530.0 million portfolio of Dublin office assets and the sale of Green REIT which carries a Dublin office portfolio with a fair value of €1.2 billion.
While Irish buyers comprised the largest share of the market in Q2 – accounting for 42% of transactions – the diversity of the capital active was notable with UK, European and Asian buyers doing deals. Following their joint venture acquisition of Phoenix House in Dublin 8 last year, UK private equity group Henley along with joint venture partner Bartra Capital acquired a portfolio of 11 office assets in the Citywest Business Campus. The portfolio was bought from the original developers of the scheme – the Davy Hickey Property Group – as well as a private vendor for €105.0 million, in what was the largest transaction of the quarter.
Elsewhere, U+I purchased 23 Shelbourne Road for €25.3 million from Friends First who recently refurbished the property having acquired it in 2016 for €18.0 million. In total, UK buyers accounted for 32% of the market.
European Buyers comprised 22% of the market, supported by the acquisition of The Lennox Building and Ballast House. The Lennox building was purchased by Swiss Life for approximately €27.0 million for a net initial yield of 4.80%, while Ballast House was sold to Union Investments for €26.9 million with the deal representing a net initial yield of 5.62%. Both buildings are also occupied by coworking tenants – Iconic Offices and Pembroke Hall respectively – which demonstrates the growing importance of the coworking sector to the investment market.
Source: Knight Frank Research
0%
1%
2%
3%
4%
5%
6%
7%
8%
2016
2017
2018
Q2
2019
2015
2014
2013
2010
2011
2012
2008
2009
2007
2006
2005
SPECIAL FOCUS: WHO OWNS DUBLIN OFFICES?
INTRODUCTION While the previous commercial real estate boom and bust cycle in Ireland was largely comprised of Irish buyers and sellers (and financed by same), the investment market has seen a diverse range of capital sources active this cycle. This analysis examines the €8.5 billion worth of office investment transactions that have occurred in Dublin since 2013 – the year the investment recovery began in earnest – to understand the ownership structure of the current Dublin office market.
Following a summary of cumulative investment flows by region since 2013, the timing of acquisitions and disposals by each geographic source is then undertaken. This allows us to discover the net investment position by region and helps us understand the current ownership structure of Dublin’s office market.
CUMULATIVE INVESTMENT FLOWS BY REGION
Source: Knight Frank Research
FIGURE 7
Dublin office investment volumes FIGURE 9
Buyer and vendor source
Source: Knight Frank Research
0
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2019
IRELAND EUROPE ASIAUK
BUYERS
VENDORS
32%
42%85%
15%22%
4%
€-3.5 bn
€-3.0 bn
€-2.5 bn
€-2.0 bn
€-1.5 bn
€-1.0 bn
€-0.5 bn
€0.0 bn
€0.5 bn
€1.0 bn
€1.5 bn
€2.0 bn BUYERSSELLERSNET FLOW
H1 2019201820172016201520142013
Source: Knight Frank Research
FIGURE 11
Irish Dublin office investment flows
FIGURE 10
Cumulative investment flows, 2013 – H1 2019
Source: Knight Frank Research
€0.0 bn
€0.2 bn
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€0.8 bn
€1.0 bn
H1
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2018
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H1 2019201820172016201520142013
BUYERSSELLERSNET FLOW
Source: Knight Frank Research
FIGURE 12
United States Dublin office investment flows
Irish direct investors in Dublin’s office market have accounted for 26% of office purchases since 2013 compared to 56% for foreign investors, with REITs – who are mainly used by indirect foreign investors – accounting for the remaining 17% of purchases. The United States have been the largest direct foreign investors – accounting for 23% of purchases – followed by Europe (19%), Asia (10%) and the UK (4%).
Looking at sellers, it is no surprise that Ireland accounted for the majority of sales (65%), as NAMA deleveraged the country’s exposure to the commercial real estate market. Interestingly, the United States accounted for 24% of sales – the same as for purchases – so that their overall net spend was close to zero.
IRISH
other regions, Irish investors employ a variety of strategies along the risk-return spectrum, from core to opportunistic.
UNITED STATES
Ireland has been a net seller of Dublin
office real estate since 2013 as Nama
dominated the market, with €5.0 billion
worth of assets sold compared to €2.0
billion purchased leaving a net reduction
of €3.0 billion. Irish funds that were
particularly active include IPUT and Irish
Life who made a number of substantial
investments during the period. Unlike
United States buyers were the largest source of private equity opportunistic capital and were net buyers in 2013 and 2014 and net sellers since then, in-line with the employment of a three to five-year investment strategy. While it is interesting to note that sales have equalled purchases so that the cumulative net flow is zero, the timing of the purchases and sales is important.
As they purchased early in the recovery – with capital values appreciating strongly since then – United States investors still retain a lot of equity in Dublin offices due to valuation gains. Furthermore, it is also worth bearing in mind that many United States buyers would have purchased a disproportionate amount of large bundled mixed-use portfolios before later re-trading them as individual office asset sales. This means that they would be included as office sales but not as office purchases, thus overstating the net reduction in Dublin office holdings.
US EUROPEAN
IRISH
UK
REITS ASIAN
BUYERS
SELLERS
26%
4%
19%
23%
24%
5%65%
17%
10%
2%
2% 2%
Knight Frank Research Reports are available at KnightFrank.com/Research
RECENT MARKET-LEADING RESEARCH PUBLICATIONS
© HT Meagher O’Reilly trading as Knight FrankThis report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by HT Meagher O’Reilly trading as Knight Frank for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of HT Meagher O’Reilly trading as Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of HT Meagher O’Reilly trading as Knight Frank to the form and content within which it appears. HT Meagher O’Reilly trading as Knight Frank, Registered in Ireland No. 385044, PSR Reg. No. 001266. HT Meagher O’Reilly New Homes Limited trading as Knight Frank, Registered in Ireland No. 428289, PSR Reg. No. 001880. Registered Office – 20–21 Upper Pembroke Street, Dublin 2.The Dublin PRS Report
RESEARCH
THE DUBLIN PRS REPORT
OUTLOOKTRENDS ANALYSIS
TH
E W
EA
LTH
RE
PO
RT
2019
The global perspective on prime property and investment
The Wealth Report 2019
RESEARCH
John Ring, Head of Research +353 1 634 2466 [email protected]
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Under Pressure #2
BREXITUNDER PRESSURE #2
#2BREXIT
WHAT WILL ITS IMPACT BEON THE EUROPEAN
REAL ESTATE MARKETS?
EUROPEAN
BUYERSSELLERSNET FLOW
€0.0 bn
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€0.9 bn
€1.2 bn
€1.5 bn
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Source: Knight Frank Research
FIGURE 13
European Dublin office investment flows
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FIGURE 15
Asian Dublin office investment flows
Source: Knight Frank Research
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BUYERSSELLERSNET FLOW
FIGURE 14
REITS Dublin office investment flows
Source: Knight Frank Research
Asian buyers have been a relatively recent entrant to the market buying over €800 million on Dublin offices since 2016. Buyers have tended to gravitate towards the larger lot sizes, and mainly focused on core and core-plus strategies, although value-add capital is also active. With a focus on large lot sizes, liquidity is the key risk concern for them. The ever increasing number of Asian investors coming to the Dublin market over the past year is helping to mitigate this risk and, in a positive reinforcement loop, attracting further Asian buyers to participate in the market here.
European buyers entered the market in a significant way in 2015 and have consistently built their exposure to the Dublin office market having spent a total of €1.5 billion since then. These buyers have been mostly comprised of pension funds pursuing core and core-plus strategies with a long-hold horizon. The attraction of Dublin to these investors is the absence of currency risk, the relative attractiveness of the spread of Dublin’s office yield above the risk free rate and the availability of investment grade assets in Dublin due to the strong tenant mix present here.
REITS
Hibernia REIT and Green REIT have made net purchases of €1.2 billion on the Dublin office market since 2013. By buying early – thus enjoying strong valuation revisions – and also by developing their own office assets, they now have a combined fair value of €2.4 billion worth of office investments according to their latest published valuations. The presence of the REITs has been an important part of the recovery in the market by enhancing liquidity and informational transparency.
ASIAN
Active Capital The Report 2019
