The Irish economy expanded by 7.8% in 2015, its fastest pace since 2000. The growth rates which surpassed all economic forecasts, was higher than the 6.9% growth rate recorded in China in 2015. The turnaround in Ireland’s economic fortunes has been remarkable given that Ireland contracted by 5.6% in 2009 at the height of the economic downturn. Ireland’s economic growth was more than four times higher than the wider Euro area growth rate in 2015 and was also four times higher than the growth rate of the euro areas largest economies, France, Germany and the United Kingdom. One of the most outstanding features of Ireland’s economic recovery has been the rapid decline in unemployment. 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.
Exports and investment continue to contribute strongly to growth. However, the most noticeable recent trend in the recovery is the increase observed in personal consumption which saw a significant increase in 2015 with spending on items such as motor cars, retail sales and household goods registering the largest year-on-year growth. The future prospects for the Irish economy also remain bright despite the emergence of a number of downside risks at the beginning of 2016. According to the ESRI, the Irish economy will grow by 4.5% in 2016, outperforming its main trading partners which include the wider euro area, the UK and the US which are forecast to grow by 1.7%, 2.8% and 2.4% respectively in 2016. This analysis suggests that Ireland has entered a sustained phase of economic expansion with many of the economies fundamentals, such as exports, investment and consumption, forecast to remain strong in 2016 and to grow by 7.6%, 19.2% and 3.4% respectively.
The performance of the Irish commercial property sector has also mirrored the outstanding performance of the national economy. The improving economic situation has stimulated investor interest which has emanated from many corners, both domestic and international, and included private investors, private equity funds, REITs and institutions. €3.5 Billion was invested in Irish commercial property in 2015, up from €600 million in 2012. Total returns for 2015 stood at 25%, outperforming both bonds and equities which stood at 4.4% and 6.4% respectively. Total returns from Irish commercial real estate were also twice that of UK commercial real estate which stood at 13.8% in 2015. Dublin, which has been at the heart of the economic recovery, was also one of the strongest performing cities globally. In Q3 2015, total returns from Dublin commercial real estate stood at 29.2%, comfortably surpassing global cities such as London (19.5%), New York (12.7%) and Los Angeles (14.5%). While returns from Irish commercial real estate have rebounded considerably since the economic downturn standing at 6.0% in the three months to December 2015, they are still some way off their peak in June 2006, when returns stood 8.8%. This suggests that there is still room for further growth.
The Dublin office market has performed steadily for the last number of years and has been the most stable of the main three commercial property sectors and has been consistently delivering strong returns since the economic downturn. The strong demand from technology companies has stimulated international investor appetite for the office market. Ireland and indeed Dublin’s, has been very successful in positioning itself as a global digital hub and as an international gateway to the EU market for technology companies. During the last five years, global names such as Google, Facebook, Amazon, Salesforce, LinkedIn, Yahoo, Microsoft and MasterCard have all located or expanded in Dublin. In Q3 Twitter occupied 85,000 sq. ft. of space in Dublin, while Workday, international software solutions, acquired almost 170,000 sq. ft. across three transactions in Q3 and Q4 2015. In total, 2014 and 2015, the technology sector accounted for 45% of Dublin’s total office transactions which totalled 5 million sq. ft. Strong demand from technology companies combined with a limited supply of suitable floor plates has resulted in significant rental price inflation, with rents forecast to continue rising until 2019. In light of this, international investors have built up considerable portfolios of office assets. Union Investment purchased 4-5 Grand Canal Square, the current headquarters of Facebook in Dublin, was purchased for €233 million.
Blackstone have also announced that it was on track to make profit of €43 million on two office buildings, the Bloodstone building and Central Quay, it bought in Dublin’s south docklands only two years ago. While British and American buyers have dominated the market in the last number of years, the next generation of buyers appears to be coming from more non-traditional locations such as France. In January 2016,
BNP Paribas Real Estate Investment Management announced that it would pay €32 million for the planned European headquarters for Airbnb, which is due to be completed next month at Hanover Quay in the south Dublin Docklands. Furthermore in March 2016, global French fund CNP Assurance purchased LXV house, which was pre let to global aircraft leasing company Aercap, for €85 million.
It is interesting to note, that total returns form Irish retail started to increase strongly in the last two quarters of 2015 as investor demand started to focus on the growing occupier recovery. Due to the improving economy and recovery of employment levels the retail sector has seen improving consumer confidence over the past 18 months. This renewed confidence is evident in the retail sales data which shows a strong increase in the purchases of larger items such as cars and furniture. With strengthening occupier demand there has been an improvement in retail vacancy rates on the Dublin’s high-streets. Massimo Dutti, occupied two units on the south end of Grafton Street, formerly occupied by HMV. Lifestyle Sports took a new twenty year lease on two refurbished and amalgamated units which has dual frontage onto South King Street and Grafton Street. Other premium occupiers include Space NK and Molton Brown. The effect of this improvement in the economy and consumer confidence has been especially felt in Dublin with prime retail streets such as Grafton Street and Henry Street reporting increases in rental levels. There were a number of high profile portfolio purchases during 2015. One of the most high profile loan sales of 2015 was the sale of the Sovereign Portfolio by
Royal London Asset Management to Irish Life for €154 million in Q2 2015. The purchase followed a competitive open market sales process, handled by
Knight Frank, with offers from six international and domestic institutions. Furthermore NAMA sold Project Jewell to
Hammerson and
Allianz for €1.85 Billion which included loans relating to the Dundrum Town Centre in Dublin, as well as loans relating to 50% of both the Ilac shopping centre in Dublin city centre and Pavilions shopping centre in Swords, Co Dublin. As the economic recovery continues to gather pace, one would expect the continued strong returns from the retail sector. Total returns from the industrial sector were also evident in 2015. As the online retailing phenomenon continues to gather pace, occupiers will continue to demand logistic properties. In this context, strong returns from the industrial sector should also continue.
Monday, 21.03.2016
