The Search for Value in the Irish Commercial Property Market
Rod Nowlan
Rod Nowlan

The recovery of the Irish commercial property market has been nothing short of exceptional. Almost all sectors of the market are nearing where they were before the crash. So is there still value to be had? If we look at prime Dublin offices, values have more than doubled since its cycle low in 2012. The international nature of the office occupational market has been the driving force behind this growth as “Ireland Inc” (and largely “Dublin Inc”) has attracted tech, pharma and financial giants from around the globe resulting in prime rents growing from the late €20’s per sq.ft. to the mid-€60’s. The prime office yield now rests at approx. 4.5% and may tighten marginally but it is generally accepted that both capital and rental growth is tapering in the sector.

It’s the same for Prime Retail. On Grafton Street rents have grown from a cycle low of €325 Zone A to €650 Zone A, with yields falling from excess 6% to close to peak levels at 3%. Even the office sector can’t claim this “accolade”. Grafton Street Capital values have more than doubled since the cycle low in 2012, again driven by the confidence flowing from the occupational market comprising both domestic and international tenants like Victoria’s Secret, And Other Stories, Boss and Nespresso. Experienced international investors like Hines, Deutsche Bank, Partizia and Thor are actively seeking opportunities despite the massive growth already priced in. It would appear that growth in the occupational market is the key force driving major capital market activity.

So is it too late to enjoy the fruits of the recovery in the commercial property sector?
In the retail market there is still substantial opportunity for upside outside the Prime High Street. Shopping centre & retail park yields have stayed stubbornly high as have Dublin suburban retail and high streets outside Dublin. There is clear evidence of reduced vacancy and increased rental levels across these markets. However the return from these properties has stayed extremely high, especially in the context of interest rates and the gap between them and their peer groups in other commercial property markets. We are acquiring quality product for yields in the 7.5%-9% bracket based off sustainable rents. The same product was exchanging in the 4%-5% yield bracket off much more aggressive rents at the peak of the last cycle, resulting in a scenario where the sector reflects a mere 28% of the “cycle peak” according to the IPD index.

Why the anomaly? We think it’s principally down to a lack of suitably funded purchasers. Traditionally the Starbucks, Boots or Centra stores were bought by a private investor supported by bank debt. However these purchasers are absent from the market. In fact a large proportion of the available investments are owned by investors who are currently off-loading them as part of a debt resolution process. So we have lots of supply and limited demand. We believe demand levels will significantly increase when the funding market reverts to some type of normality.

It feels like a Warren Buffet moment. It might be “time to be greedy” and take advantage of the value in the sector. The decision to do so would appear to be supported by nearly all the key sector impacting metrics, namely consumer confidence, retail sales, unemployment, employment and demand derived from new housing supply.

Rod Nowlan has over 20 years’ experience in the commercial property business and has been the Director in Bannon since its establishment in 2005. Over the past 24 months Rod has been involved in a broad spectrum of portfolio and individual asset sales and acquisition including the high profile sales of the €128m Hazel Retail Portfolio, the Harvest Portfolio, the Spectrum Portfolio and the Acorn Portfolio.

Please note this article is for information purposes only. The views expressed are those of the author and not Cantor Fitzgerald Ireland Limited (“CFIL”). CFIL has not contributed to this article in any way. It is not intended to and does not constitute personal recommendations/investment advice.

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