dublin - microsoft · q2 2015 27-33 upper baggot street, dublin 4 bank of ireland finance 129,500...
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RESEARCH
OCCUPIER TRENDS INVESTMENT TRENDS MARKET OUTLOOK
DUBLINOFFICE MARKET REVIEW AND OUTLOOK 2016
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Source: Central Statistics Office
FIGURE 2
Standardised unemployment rate
EconomyIreland’s economic recovery gained further momentum in 2015 as Gross Domestic Product (GDP) expanded by 7.8%, with the economy expected to grow by approximately 5% in 2016 according to most estimates. Unemployment has fallen to 8.8%, which represents a 42% decline on the 15.1% rate recorded in February 2012, as employment grew to approximately two million. Importantly, there remains significant spare capacity for further contractions as the unemployment rate is still double the low point of 4.4% recorded in 2005.
The pick-up in the economy has been reflected in tax receipts which are estimated to have reached €46.60bn in 2015, marginally below the €47.25bn taken during the peak of 2007 and 47% above the trough of €31.73bn recorded in 2010. The level of receipts were ahead of target and led to an improvement in the budget deficit to 1.5%, with the government achieving a balanced budget when one includes the sales of government stakes in AIB and Permanent TSB. Tax receipts were much higher than expected due to a surge in corporate tax income, which was 75% higher than forecast, helping to further improve
Ireland’s sovereign debt risk profile. The reason for these better than expected tax inflows will not become clear until later in the year when the Central Statistics Office (CSO) releases a more detailed analysis of corporate earnings. Nevertheless, it is clear that corporate Ireland is currently in a very healthy position at the moment, with Central Bank of Ireland figures showing that the economy is at its most competitive position since the early 2000’s. The robust expansion of the
OUTLOOK FOR 20162015 saw the office market transition from opportunistic to stable; 2016 will see the market mature and normalise further.
1. Economic growth of 7.8% in 2015
2. 2015 take-up was 2.67 million sq ft, the highest level since 2007
3. Prime rents at the end of 2015 stood at €57.50 per sq ft
4. 2016 will be the first year in over half a decade that a significant quantum of new space will be delivered to the market
5. Investment activity, although down from the high of 2014, remained extremely robust with €3.5 billion worth of deals transacting
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EU 28-8%
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Source: European Commission
FIGURE 1
GDP Growth
SUMMARY
While the domestic recovery continues to surpass expectations, the international picture is increasingly mixed due to uncertainty over what effect China’s slowdown will have on the global economy. With limited direct exposure to China, the prognosis for Ireland will depend on how severely the United States and the United Kingdom are affected, whose robust recent growth has spurred Ireland’s economic out-performance. While the strength of economic growth in the United States prompted the Federal Reserve to increase interest rates for the first time
KNIGHT FRANK VIEW ON RISK in nine years in December, the volatility emanating from China may spur a review of the path of previously expected rate rises during 2016, which will have complex implications for real estate capital markets flows. This increased risk to the global economy will raise the cost of funds, however this should be counter balanced by the strong comparative returns real estate will continue to offer in a low global interest rate environment. As a high-income city with strong growth prospects, Dublin is well positioned to continue to attract a significant share of these real estate allocations.
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Source: Knight Frank Research
FIGURE 3
Dublin prime office rents € per sq ft per annum
economy is also being felt by consumers with household debt per capita now at its lowest level since Q1 2006, although it remains the third highest level in Europe. Car sales, a key indicator of consumer confidence, were also up 30% in 2015.
Occupier marketAs projected, office letting activity grew again last year with 2.67 million sq ft let across 255 deals in 2015 compared to 2.39 million sq ft let over 227 deals in 2014, making it the best performing year since 2007. Strong occupier demand and a lack of new construction continues to underwrite rental inflation, with rents now in the order of €57.50 per sq ft, up from €47.50 per sq ft at the beginning of 2015. This represents year-on-year growth of 21%, down from 36% in 2014.
Following on from the 75,000 sq ft acquired in Q3, Workday took a further 95,000 sq ft at The Kings Building in Smithfield in Q4, in what was the largest letting of the quarter. These two lettings helped boost the market share of the fringe market from 11% in 2014 to 19% in 2015. The north suburbs also saw its market share increase, doubling from 3% in 2014 to 6% in 2015. The increase was largely driven by the ESBl’s securing of 90,000 sq ft at the soon to be completed One Airport Central. It is understood that ESBI will pay a rent of €27.60 per sq ft at their new premises in what was the second largest deal of Q4. The successful letting of this speculative
development is expected to add further impetus to the Dublin Airport Authority’s vision for creating a business campus of significant scale at Dublin Airport.
The increase in activity outside of the CBD saw the city centre’s market share decline to 50% in 2015, down from 62% in 2014. Accenture’s taking of 66,000 sq ft at 7 Hanover Quay was the largest city centre letting in Q4, and follows on from their recent announcement that they plan to create 250 jobs in Dublin as part of the establishment of a new Innovation Centre, one of the few such centres the management consultancy firm has established worldwide. Other significant city centre lettings in Q4 included Indeed’s leasing of 55,000 sq ft at 124-127 St. Stephen’s Green and Stripe’s taking of 45,000 sq ft at the renovated The One Building on Grand Canal Street.
Interestingly, the average 2015 deal size was 10,477 sq ft, making it the third year in a row that the average deal size has been in the 10,000 sq ft to 11,000 sq ft range. While 74% of the deals completed were 10,000 sq ft or under, together they represented just 28% of the market based on total square feet let. At 10,154 sq ft, the typical city centre deal size was close to the city-wide average. However, this headline figure obscures variances within the city centre postcodes, with the average deal size of 8,907 sq ft in Dublin 2 considerably less than the average deal size of 13,149 sq ft in Dublin 4.
Technology, Media and Telecommunications (TMT) continues to account for the largest market share by sector, comprising 46% of the market in 2015, which represented the same share
as 2014. Finance had the second highest market share with 17%, up from 14% in 2014. Professional services declined from 11% in 2014 to 8% in 2015, while pharma increased from 5% to approximately 8% over the same period.
Development marketIn a further sign of the normalisation of the Dublin office market, 2016 will see the delivery of new office space for the first time in over half a decade. In excess of 1.5 million sq ft will be supplied to the market during the year, approximately half of which is already let. Some of the major schemes to come on the market in 2016 include Remley Development’s Miesian Plaza, Green REIT’s 32 Molesworth Street and Block H Central Park, Rohan Group’s 21 Charlemount Place, IPUT’s 47-49 Stephen’s Green and Hardwicke/Ardstone’s Velasco.
Quarter Property Tenant Sector Size (sq ft)
Q2 2015 27-33 Upper Baggot Street, Dublin 4
Bank of Ireland Finance 129,500
Q3 2015 The Kings Building, Smithfield, Dublin 7
Workday TMT 95,000
Q4 2015 One Dublin Airport Central ESBI State 89,997
Q3 2015 Cumberland House, Dublin 2 Twitter TMT 85,000
Q2 2015 Marlborough House, Dublin 1 HCL Information Systems
TMT 82,374
Top 5 office leasing transactions
Source: Knight Frank Research
DUBLIN 2016 OFFICE MARKET REVIEW AND OUTLOOK RESEARCH
Source: Knight Frank Research
FIGURE 4
Office take-up sq ft
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LinkedIn HQ SiteGrand Canal/Fitzwilliam SqFloorspace: 100,000 sq ft Delivery date: Feb 2017
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GRAFTONSTREET
3ARENA
THE CONVENTIONCENTRE
AVIVA STADIUM
GOVERNMENTBUILDINGS
ST STEPHEN’SGREEN
MERRIONSQUARE
GRAND CANALENERGY THEATRE
27-33 Upper Baggot Street Type: LettingDate: Q2 2015Tenant: Bank of IrelandSector: FinanceSize: 129,500 sq ft
Cumberland House Type: LettingDate: Q3 2015Tenant: TwitterSector: TMTSize: 85,000 sq ft
2 Grand Canal PlazaType: LettingDate: Q1 2015Tenant: GoogleSector: TMTSize: 24,500 sq ft
4 & 5 Grand Canal SquareType: InvestmentDate: Q2 2015Price: €230.0 million Vendor: NAMAPurchaser: Union Investment
Riverside OneType: InvestmentDate: Q2 2015Price: €80.5 million Vendor: Harcourt Life Assurance CompanyPurchaser: IPUT
Block R, Spencer DockType: InvestmentDate: Q3 2015Price: €104.0 million Vendor: RecieverPurchaser: The Central Bank
Bishop’s SquareType: InvestmentDate: Q1 2015Price: €92.0 million Vendor: King StreetPurchaser: Hines
Project Molly Type: InvestmentDate: Q1 2015Price: €450.0 millionVendor: Lone StarPurchaser: Starwood Capital
Marlborough House Type: LettingDate: Q2 2015Tenant: HCL Information SystemsSector: TMTSize: 82,374 sq ft
Iveagh Court Complex
The Watermarque Building
Marsh House
11-12 Hogan Place
DUBLIN CENTRAL CITY CORE
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DART RAIL LINE
KEY
LUAS TRAM LINENEW LUAS CROSS CITY LINESDZ BOUNDARY
LUAS TRAM LINE
DUBLIN 2016 OFFICE MARKET REVIEW AND OUTLOOK RESEARCH
Note: All areas and delivery times noted above are approximate estimates only and subject to change
NORTHSUBURBS
WESTSUBURBS
SOUTHSUBURBS
COREDUBLIN BAY
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Investment market2015 represented another very strong year for commercial property sales in Ireland, with €3.5 billion worth of investment transactions changing hands during the year, of which 46% was comprised of office transactions. Although there was a further broadening of investment beyond Dublin, the capital still accounted for 75% of investment activity. Office yields held steady to stand at 4.5% at the end of Q4.
The largest deal of the year was the sale of Project Molly by private equity firm Lonestar to Starwood Property Trust, a United States REIT, for €450 million. The sale was reflective of the wider transition that took place in the Dublin investment market in 2015 as distressed players locked in returns while the decreasing risk profile of the Dublin office market allowed a new wave of international capital with a different risk-return appetite to enter the market. We expect
the ownership structure of the market to continue to mature in 2016.
Another major private equity player, Blackstone, was involved in the largest sale in Q4, this time to the domestically listed REIT, Hibernia, who paid €70 million for the Bloodstone Building located in the South Docklands. It is an indication of the strength of the recovery in values that Blackstone had acquired the Bloodstone Building along with two other prime buildings just two years previously for €100 million.
Suburban investment was also evident in the final quarter as London based SW3 Capital purchased the Eir network management centre in City West for €32 million. The vendor, London and Regional, had purchased the facility on a sale and lease back basis for just under €20 million in 2010. This involved a term of twenty-five years from September 2010 incorporating fixed five yearly rental uplifts to reflect 2.85% annual compounding.
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Source: Knight Frank Research
FIGURE 5
Irish commercial investment volumes € million
6%7%
NORTHSUBURBS
CITY CENTRE
50%
SOUTH SUBURBS
FRINGE
19%17%
WEST SUBURBS
Source: Knight Frank Research
FIGURE 6 Take-up by location
3%
4%
5%
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7%
8%
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Source: Knight Frank Research
FIGURE 7
Dublin prime office yields
The most significant development transaction of Q4 was the purchase by The Ronan Group of a 3.7 acre site adjoining the AIB Bankcentre in Ballsbridge for €67.5 million. It is expected that there will be a significant intensification in usage of the existing site given its current low coverage and plot ratio, making it one of the largest prime developments that will come on stream in the coming years.
Top 5 office investment transactions
Source: Knight Frank Research
Quarter Property Seller Buyer Approx price
Q1 2015 Project Molly Lone Star Starwood Capital €€450.0 million
Q1 2015 4 & 5 Grand Canal Square, Dublin 2
NAMA Union Investment €€230.0 million
Q3 2015 Block R, Spencer Dock, Dublin 1 Reciever The Central Bank €104.0 million
Q2 2015 Bishops Square, Dublin 2 King Street Hines €€92.0 million
Q2 2015 Riverside One, Dublin 2 Harcourt Life Assurance Company
IPUT €€80.5 million
worth of investment transactions changed hands during 2015
€3.5bn
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DUBLIN 2016 OFFICE MARKET REVIEW AND OUTLOOK RESEARCH
DELIVERY OF NEW ANDREFURBISHED SPACE TO BE
€3.0bnINVESTMENT SPEND OF
DOWN FROM €3.5BN IN 2015
€60.00-€62.50 per sq ftRENTS WILL INCREASE TO
UP FROM €57.50 PER SQ FT IN 2015
1.6m sq ftFIRST TIME SINCE 2010 IN
EXCESS OF 1M SQ FT
+2.0M SQ FTTAKE-UP OF
BUT DOWN FROM 2.7M SQ FT IN 2015
OUR PREDICTIONS FOR 2016
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Adrian Trueick, Director +353 1 634 2466 [email protected]
Ross Fogarty, Associate Director +353 1 634 2466 [email protected]
Damien McCaffrey, Associate Director +353 1 634 2466 [email protected]
John Ring, Investment Analyst +353 1 634 2466 [email protected]
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Declan O’Reilly, Director +353 1 634 2466 [email protected]
Paul Hanly, Director +353 1 634 2466 [email protected]
Jim O’Reilly, Director +353 1 634 2466 [email protected]
Daniel Shannon, Director +353 1 634 2466 [email protected]
© 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.
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