In the latest Bayfield Training Webinar, David Hourihan and Rod Nowlan present: An Introduction To The Dublin Commercial Office Market. In 2019, the Irish commercial property investment market recorded its highest ever level of turnover in one year at €4.7bn. The headline data looks impressive; however, concerns persist over the impact of Brexit, and other external factors will have on the Irish economy. In this webinar, David Hourihan reviews the Dublin office investment sector and considers key trends for 2020.

Market Overview

Since 2012 the Dublin office market has experienced significantly strong growth.  In 2019, investment activity in the office market was substantially high. As David explains, there was €2.23bn worth of office deals in 2019, with the Green REIT share sale of €1.34bn making up a significant proportion of transaction value. Within those transactions, there is a distinct focus on the Dublin central business district (CBD). Headline rents for offices in the CBD are stable at €60 per square foot (pfs), and prime yields are currently stable at 4.15%. David explains that suburbs account for only sub-10% of the transaction value.

Key Players

The Prime Market in Ireland has been dominated by foreign capital, including European, US, and Asian capital. The introduction of foreign capital has substantially changed the nature and structure of the Dublin office investment scene. Since 2008, the span of investors has risen considerably. Rodd explains that post the Celtic Tiger (Irish economy from 1995 to 2007), the Irish economy has seen a proliferation of foreign-based private equity (PE) firms, such as Blackstone, who have acquired office property. Consequently, Ireland has received greater international relevance.

 

Case Study: Bishops Square

Next, David and Rod reviewed the €182 million 2020 sale of the Bishop’s Square office scheme in Dublin city centre. Rod chose Bishops Square as a case study because it encapsulates the cycle that the Dublin office market has experienced in the last two decades.

Bishops Square was developed in the early 2000s in a 50-50 joint venture between local Irish Developer Bernard McNamara and the Irish Property Trust. In 2012, the property was sold to US private equity firm King Street Capital. In 2016, King Street Capital sold the scheme to Hines Global Strategic Fund as a standing asset with value-add potential. Between 2016 and 2019, Hines implemented an active asset management programme that significantly improved the building, including an expansion that added 27,000 square feet, energy-conservation upgrades, and the provision of six new lifts. In April 2020, Hines completed the sale of the building to GLL Real Estate Partners.

Current Status & Trends

David explains that the office space market’s total size is approximately 45 million square feet, of which there is a vacancy rate of around 5% (predominantly in the CBD). The demand is driven mainly by the technology sector. Pre-Covid-19, there was an active requirement of 3.5 million square feet.

 

What will happen Post-Covid-19?

According to Rod, a large tranche of the office supply under construction (approx. 49%) is deal agreed. Thus, the uncertainty pertains to how much of the supply under construction will continue to go ahead. In addition, Rod believes the pandemic will make tenants re-assess their true office capacity needs. Moreover, it is unlikely the pandemic will hit all sectors evenly. For example, the city centre is expected to remain much more robust relative to other areas.

Investment Market SWOT Analysis

The Dublin office investment market has several strengths. Firstly, its low corporation tax rate (12.5%) coupled with a transparent and mature investment market is a significant pull-factor. Secondly, with no oversupply of new office developments expected it is an appropriate market for long-term core investors. On the other hand, there are also a few weaknesses. Namely, stamp duty of 7.5% that may increase to 9%. However, as Rod argues, it is unlikely stamp duty will increase in light of Covid-19 as governments will try to promote, rather than restrict, investment activity.  In terms of threats, the pandemic has taken centre stage. Rodd believes retail assets will be most affected. For offices, a reassessment of required office space will be in the minds of most tenants. Nonetheless, the CBD office market is expected to remain robust. David provides two primary opportunities for the office market. Firstly, an institutional opportunity in the private rented sector (PRS). Moreover, many Dublin-based technology firms continue to increase their footprint resulting in continued demand for more space.

 

Written by,
Khathu Nematswerani, Research Intern