Is there still value in the Irish commercial property market?
Last year saw sustained recovery in the Irish commercial property market with Dublin leading the way. Investors from all corners of the globe have been enthusiastically acquiring discounted assets as the great deleveraging of Ireland accelerates.
With this growing demand, will Dublin remain globally competitive as values surge and yields normalise? People are now beginning to ask if there is still value in Irish real estate.
To date Dublin has seen capital values surge by 30 per cent in 2014. The recovery has followed a similar pattern to that of the UK market, with offices in respective capital cities driving performance but with retail and regional properties lagging behind.
The returns achieved in Dublin makes it the top performing office location globally, as measured by MSCI Real Estate, with a remarkable total return to investors of more than 37 per cent in the first nine months of 2014.
Overall, Irish property has provided investors with a return of 29 per cent to the end of third quarter. This represents the strongest performance registered since the heady days of the Celtic Tiger in the late 1990s.
Consequently, commercial property has significantly outperformed both Irish equities and bonds, despite the fact that these more traditional asset classes also performed strongly over the past year.
Investors have clearly noted this, as allocations to real estate in their portfolios have increased. This change is occurring not just in Ireland but globally, representing a trend likely to continue as interest rates remain low and returns from real estate attractive.
While the Dublin office sector may have led the way, the improving level of consumer confidence has now also boosted the retail sector. Since the start of the year, values in key locations such as Grafton Street and Henry Street grew by 24 per cent and 23 per cent respectively.
Outside of Dublin the market was still struggling. Significantly, the provincial retail sector, particularly in Cork, saw values finally return to growth in June. It is now likely that investors in such locations will record double-digit returns for 2014 due to a strong income return.
The income profile for Dublin and the broader Irish market continues to make the city an attractive and competitive location for investors. Despite the dramatic turnaround in values, annual income returns – upwards of 7 per cent – remain higher than many markets that would be deemed riskier, such as Edinburgh, Manchester and Barcelona.
This means that allocators should continue to see Dublin as a good value prospect. Coupled with the expectation of more rental value growth, with current rents still 30 per cent off their peak, return prospects seem promising, even for new entrants to the market. The recovery in Dublin office values has been driven by two key factors: growing investor demand and improving market rents.