Lower investment predicted for Irish commercial property in 2017

Total returns, rental growth and investment spend volumes in the Irish commercial property market are all expected to be lower in 2017 than last year.

This is according to the latest research from agent CBRE who says that 2016's investment market turnover figure of more than €4.5 billion "surprised on the upside" and was skewed by a number of "trophy transactions" like the sale of the Blanchardstown Centre and Liffey Valley shopping centre.

"Returns from Irish commercial real estate have been slowing for some time now following the extraordinary growth experienced in 2014 and 2015," says Marie Hunt, head of research at CBRE Ireland. "This easing is expected to continue in 2017, particularly considering the unexpected tax changes announced in Budget 2017, which are likely to impact negatively on pricing this year.

“Prime yields are expected to remain relatively stable in 2017 and as a result returns from Irish real estate will be largely generated from income from this point forward. Although total returns are likely to be in single digits in 2017, the return profile will continue to compare well with alternative forms of investment. Irish real estate remains a sought-after investment class although, considering the more uncertain backdrop, investors will be focused on achieving safe, reliable returns as opposed to putting capital at risk”.

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Dublin office rents

CBRE believes prime Dublin office rents will peak in 2017 as the first meaningful increase in supply (225,000sq m) for more than five years hits the market. Take-up reached 245,000sq m last year over 264 transactions – 147 of these were to Irish companies, followed by 58 to US firms and 33 to UK enterprises.

The agent is also expecting a “notable” increase in retail planning applications this year with some schemes going on site – quite a shift given that very little retail space has been built since the crash.

In terms of development land, CBRE is forecasting that the State and its semi-State organisations will bring some sites to market during 2017 while turnover in this sector will be similar to 2016’s total of €795 million from 109 land sales.

The shortage of modern industrial and logistics space in the Dublin market saw rents in the sector rise 25 per cent in 2016 even as take-up was down a third on 2015. CBRE believes industrial rents could rise by 14 per cent in 2017, which would increase the viability of new schemes and spur development.

Following two record years, the agent forecasts “some slowdown in transactional activity” in the hotel sector. Sixty-six hotels, for example, were sold in 2016 for a total of €805 million – the third consecutive year when more than 60 hotel transactions were completed in the Irish market.

“Some Dublin hoteliers may capitalise on the strong demand for hotels by bringing some properties to market in advance of an increase in new supply coming on stream from 2017 onwards,” according to CBRE.

The agency says 30 Dublin pubs were sold in 2016 for a total of more than €43 million but this was lower than anticipated as “improved trading conditions made some vendors reluctant to sell”. It forecasts that up to 40 pubs will change hands in Dublin in 2017 but limited supply in the city centre will drive demand for suburban pubs over the next 12 months.