The Dublin office market still “has a long way to go” to regain its pre-recession peak, according to a new Investment Property Databank (IPD) report, and this will make the city attractive to investors for years to come.
Office rents in Dublin fell some 50 per cent from peak to trough from 2008-2013, but since the recovery began, rental growth has averaged 4.3 per cent per quarter, according to IPD, to reach 28 per cent above trough levels. However, at current growth rates, office rents in Dublin will not be back to their pre-recession peak until at least 2016.
Capital values, which collapsed during the crash, have since rebounded by 29 per cent. In fact, in the year to the end of last June, capital growth at 26.5 per cent was the primary driver of the 36.6 per cent total return achieved in the Dublin office market as income return contributed 8.2 per cent.
Dublin’s potential for growth is also enhanced by another key investment indicator – yields. At the height of the boom, yields on prime Dublin offices were close to 4 per cent. They subsequently widened to 8.8 per cent at the height of the crash but, as risk associated with the market receded and investor confidence grew, they had fallen to 7 per cent by last June.
“Both rents and yields remain significantly off where they were at the last peak, suggesting an additional strengthening may be likely, particularly as the constrained supply drives office rents further upwards,” according to the report. “This will boost capital values, which will in turn drive investor total returns.”
Colm Lauder, senior associate at MSCI, said: "The Dublin office investment market is almost unrecognisable compared to three years ago. Improved confidence in the economic prospects of Ireland, along with the stability and predictability injected into the market following the allaying of fears surrounding rent review reform, has boosted investor confidence, especially in Dublin.
“The Dublin office sector has benefited the most from this renewed confidence,” he adds, “with yields falling back to more normal levels as perceived risk levels abate, while growing demand for office space has boosted market rental values.
“While this stage of the recovery has been brisk, historic trends would suggest yield and rents still have some way to go, and as these are the key drivers of income and capital return, further gains may be expected.
“Indeed, as the broader Irish economy strengthens investor and occupier demand is likely to remain strong for Dublin offices, particularly prime, as a limited development pipeline means supply for both investors’ acquisitions and occupiers seeking space will remain limited for the next few years.” The IPD provides real estate benchmarking and portfolio analysis services in more than 30 countries. Each year, IPD produces more than 200 indexes helping real estate market transparency and performance comparisons, as well as nearly 600 benchmarks for client portfolios.
