Irish Retail Investment Review 2015

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1 Irish Retail Investment Review 2015

2 Introduction The following report provides an overview of the performance of the Irish retail investment market. The report includes a review of the economic conditions underpinning a recovering retail sector together with an analysis of trends in the retail investment market in Ireland over the past year. Retail sales and consumer confidence have improved notably over the past year, underpinned by rising disposable incomes and strengthening confidence within the Irish economy Following a strong year for retail investment in 2014, the total value of retail investments in the nine months to September 2015 stood at 460m Retail turnover accounted for approximately 21% of overall investment activity in the year to September 2015 saw a continuation in the trend of retail portfolios as a method of disposal A key trend in 2015 was the rise in the volume of retail investment outside of the Capital Prime rents on the main shopping streets are rising, particularly in Dublin; high street rents for the regional centres are recovering more slowly 2 Irish Retail Investment Review 2015

3 Economic Overview 2015 has proven to be a buoyant year for the Irish economy, with current estimates suggesting this could well be the second consecutive year in which Ireland is the strongest performing economy in the euro area. Having emerged from recession in 2013, the Irish economy has outperformed all expectations. At the mid-point of 2015, economic conditions were more favourable than at the same time twelve months previous. GDP is now growing strongly, employment levels are expanding, exports are at historic highs and the public finances are in a much healthier position. Following GDP growth of 5.2% last year, momentum in the Irish economy continued in 2015 with the pace of growth accelerating. After a solid start to the year with GDP growth of 2.1% in the first quarter, the latest CSO Quarterly National Accounts data for the second quarter show that GDP increased further by 1.9% in the three months to June. GNP also grew by 1.9% in the second quarter. The level of GDP and GNP are now above their pre-recession peaks in 2007 and strong growth is set to continue. The Department of Finance has also recently revised their growth forecasts upwards; GDP growth for 2015 is expected to come in at 6.2% and 4.3% for 2016, while GNP is forecast to grow by 5.5% and 3.9% in 2015 and 2016 respectively. The most encouraging aspect is the pick-up in domestic demand, which turned positive in 2014 for the first time since the financial crisis. Notably, capital investment increased by 19.2% in the second quarter and was up by a significant 34.2% year on year, government expenditure was up 1.7% in quarter two annually. A notable trend is in the recovery in personal consumption, the largest component of domestic demand, which rose by 2.8% year on year. These factors combined contributed to total domestic demand growth of 3.5% in the second quarter. Import growth of 6.3% during quarter two exceeded export growth of 5.4%. That said, seasonally adjusted total exports are forecast to grow strongly by 11.9% in A positive outlook is envisaged for Irish exports due to the depreciation of the euro against the dollar and pound sterling, combined with continued domestic growth in the US and the UK economies. Based on projections of strong investment growth combined with improving personal consumption, domestic demand is envisaged to strengthen further for the year ahead. The latest forecasts from the Department of Finance sees investment levels rising by 13% and 12.5% in 2015 and 2016 respectively, while personal consumption is expected to increase by 3.5% this year and next year. While the outlook for the Irish economy is bright, concerns exist amongst an uncertain outlook for global growth, the cool down in China s economy and the ramifications for the US and UK, which could pose challenges for Irish trade indirectly. Figure 1 Personal Consumption of Goods and Services (%) Source: CSO/Department of Finance Irish Retail Investment Review

4 Economic Overview The labour market continues to improve; the latest data from the CSO reveals an annual increase in employment of 3.0%, or 57,100 in quarter two of 2015, bringing total employment to 1,958,700. On a seasonally adjusted basis, employment rose by 1.0% compared to the previous quarter. Interestingly, employment increased in twelve of the fourteen economic sectors in the twelve months to Q2 2015; the Retail and Wholesale sector accounts for the largest share of employment standing at 273,000. The sector increased by 2,100 people in the year to the second quarter of Most notably, the unemployment rate in Ireland continues to shrink; the seasonally adjusted standardised unemployment rate has dropped to single digit figures for the first time since the financial crisis, falling notably to 9.6% in the second quarter of 2015, from a crisis-high of 15.1% in February It is also noteworthy that Ireland s unemployment rate is significantly below the euro area standardised unemployment rate which stood at 11.1% at the end of June Despite some monthly volatility, consumer confidence remains on the upward trend. The latest KBC Bank Ireland/ ESRI Consumer Sentiment Index edged higher in October to 101.3, reversing a slight weakening seen in September when the index was Furthermore, the 3-month moving average, which removes some of the monthly volatility, also increased in October to from in September. Overall, despite some month on month volatility taking place over the year to October across all sub-sectors, the overall trend in consumer sentiment remains broadly positive and on the upward trend. Consumer prices were 0.5% lower in September compared with August, the biggest monthly fall since January, while they were 0.3% lower on an annual basis, continuing its trend in negative territory. Inflationary pressures are likely to remain contained, mainly due to lower oil prices. Meanwhile, the HICP rate, the measure used for EU comparative purposes, decreased by 0.5% in the month while it was unchanged on an annual basis. The return of the Irish consumer is signalled by a strengthening in retail sales over the past year. According to the latest figures from the CSO, the volume of retail sales are up 8.6% on an annual basis. Retail sales rose marginally by 0.3% in September 2015 when compared with August. When motor trades are excluded, retail sales increased by 0.7% in the month and by 8.0% year on year. Overall while retail sales remain volatile on a monthly basis, the underlying trend is positive. During September, the sectors with the largest month on month volume increases were Other Retail Sales (+1.9%), Non- Specialised Stores (+1.2%) and Fuel (+0.6%), while the sectors with the largest monthly decreases were Furniture and Lighting (-2.6%), Food Beverages & Tobacco (-2.2%) and Bars (-1.6%). Figure 2 Consumer Sentiment Index Source: KBC Bank/ESRI 4 Irish Retail Investment Review 2015

5 Economic Overview Figure 3 Retail Sales Index (Volume & Value) Source: CSO - All retail businesses *excluding motor trades Irish Retail Investment Review

Retail Investment Following a robust year for retail investment in 2014, the retail sector has had a very buoyant opening nine months of 2015.

6 Retail Investment Following a robust year for retail investment in 2014, the retail sector has had a very buoyant opening nine months of While retail investor activity got off to a somewhat slow start in 2015 with approximately 45m transacted during the opening quarter, the second quarter witnessed a significant leap in activity with over 257m worth of retail investment transacted during the period. The third quarter also witnessed robust demand with approximately 158m invested, bringing the total value of retail investments to 460m in the nine months to September; this compares to 607m during the corresponding period in Retail turnover accounted for approximately 21% of overall investment activity in the year to September, on par with the corresponding period in However, an analysis of the rolling annual level of retail investments reveals strong gains over the past twelve months relative to earlier in the recovery cycle. While 2015 has seen strong performance in asset sales, the high point for the retail market in 2015 has been the sale of NAMA s Project Jewel. The loan portfolio secured against prime Dublin retail property, which attracted several bidders from across the globe, was acquired by a joint venture between Hammerson plc and Allianz Real Estate Germany GmbH for a reported 1.85 billion. The portfolio of loans, anchored by Dundrum Town Centre, Ireland s only super prime shopping centre, also includes a 50% interest in the ILAC Centre and Swords Pavilions, together with a number of development sites and other assets. The sale demonstrates a vote of confidence in Ireland s retail property market and the strong appetite that exists for prime retail investment opportunities at present. Figure 4 Retail Investment, YTD Q vs YTD Q Source: DTZ Sherry FitzGerald Research 6 Irish Retail Investment Review 2015

7 Retail Investment Figure 5 Investment Volume by Sector, Rolling annual Source: DTZ Sherry FitzGerald Research Irish Retail Investment Review

8 Retail Investment 2014 saw an increase in retail portfolios as a method of disposal and this trend continued during A number of significant portfolios transacted in the year to date, including The Cornerstone Portfolio which was acquired by New Yorkbased hedge fund Davidson Kempner for a reported m. The portfolio consists of six shopping centres including Athlone Town Centre and a major stake in MacDonagh Junction shopping centre in Kilkenny. Also included are Gorey Shopping Centre in Wexford, Tipp Town Centre in Tipperary, Westside Shopping Centre in Galway and Orwell Shopping Centre in Templeogue, Dublin 6W. Other notable portfolio sales include the sale of the Bank Portfolio for a reported 48m and the Harvest Portfolio, comprising five regional shopping centres, sold by NAMA to Davy s for a reported price of 40m. Other notable single asset sales during the nine month period include the sale of the Frascati Shopping Centre in Blackrock, Co. Dublin, acquired by US investment firm, Invesco Real Estate for in excess of 69.1m. Furthermore, Manor West Shopping Centre and Retail Park in Kerry was purchased by Marathon Asset Management for approximately 58.55m. A key trend evident in the retail investment sector in 2015 was the rise in the volume of retail investment outside of the Capital. Approximately 57% of overall investment turnover took place outside of Dublin, with activity strongest in Co. Kerry, Co. Cork and Co. Meath. Table 1 Top 5 Retail Transactions, YTD September 2015 Asset Price ( ) Location Quarter Vendor Purchaser Cornerstone Portfolio m Nationwide Q AIB Davidson Kempner Frascati Shopping Centre 69.1m Dublin Q Private Invesco Manor West Shopping Centre 58.55m Kerry Q Private Marathon Bank Portfolio 48m Dublin Q Gannon AIB Harvest Portfolio 40m Nationwide Q NAMA Davy Source: DTZ Sherry FitzGerald Research Figure 6 Retail Investment by Type, YTD September 2015 (%) Source: DTZ Sherry FitzGerald Research 8 Irish Retail Investment Review 2015

Retail Investment In terms of location, the opening nine months of 2014 saw the share of retail activity concentrated in Dublin, while the comparable period this year has seen a reversal of this

9 Retail Investment In terms of location, the opening nine months of 2014 saw the share of retail activity concentrated in Dublin, while the comparable period this year has seen a reversal of this trend. The volume of retail investment occurring outside of Dublin stood at 57% at the end of September, significantly higher than the corresponding period in Activity outside of Dublin is spread across the country, with stronger levels recorded in Kerry, Cork, Tipperary and Westmeath. Overseas investors continue to look to Ireland to deploy capital accounting for 55% of overall retail spend, with US investors at the forefront followed by the UK. That said, the share of domestic investors has increased in 2015 accounting for 38% of investment, up from 21% on the comparable period in The latest available figures from the IPD reveal that the retail sector continued to improve with a total return of 5.8% in the third quarter of 2015, up from a return of 4.2% in the second quarter. Performance in the retail sector however continues to lag the office sector, while it surpassed the industrial sector in quarter three. The past twelve months have seen the prime retail sector record a significant pickup in rental performance. Retail rents continued to rise steadily by 1.2% in the third quarter and by 4.1% annually. Capital values were also up by a notable 4.4% in the three months to September. Performance in the retail sector is expected to remain strong in the fourth quarter, supported by improving retail headline indicators such as consumer spending, retail sales and sentiment. In addition, there is a significant quantum of retail investment currently sale agreed, including a number of shopping centres and the National Portfolio, comprising five retail parks. Figure 7 Retail Investment by Source of Capital, YTD September 2015 (%) Source: DTZ Sherry FitzGerald Research Irish Retail Investment Review

10 Retail Investment Figure 8 Retail Performance Measures, (%) Source: IPD 10 Irish Retail Investment Review 2015

Prime Rental Performance Prime headline rents on Dublin s main shopping street, Grafton Street, stood at approximately 5,750 per sq m at the end of September, up significantly on the comparable

11 Prime Rental Performance Prime headline rents on Dublin s main shopping street, Grafton Street, stood at approximately 5,750 per sq m at the end of September, up significantly on the comparable period in Individual units may achieve a premium above this given size and configuration. The current levels represent a significant reduction from the prime Zone A achieved in 2006 of 11,800 per sq m. Rental values are expected to increase further in the short term into 2016 in response to more limited supply and reach in the region of 7,500 per sq m over the next three to five years. Prime rents on Henry Street are currently in the region of 3,800 per sq m, representing a 50% reduction from peak 2006 levels. Retail activity on Dublin City s Northside is expected to dramatically increase with the planned redevelopment at Arnotts, Clerys and the Hammersons purchase at Dublin Central. Over the course of the downturn, the gap between rents on Grafton Street and Henry Street narrowed significantly, however, as the recovery gains momentum this gap is expected to widen. High street prime rents for the regional centres which came under pressure during the downturn are recovering, albeit slowly. Prime headline rents on Shop Street in Galway stood at approximately 1,883 per sq m at the end of quarter three and are forecast to rise to 2,200 over the next twelve month period. Similarly on Cork s Patrick Street, retail rents stood at approximately 2,000 per sq m at the end of September, up 5% on the comparable period in 2014 and are forecast to rise moderately to 2,200 per sq m by year end before increasing to 2,400 per sq m by end Furthermore in Limerick, prime retail rents have remained stable at 810 sq m over the past year, however, they are anticipated to rise to approximately 900 sq m in 2016 and 1,000 by Figure 9 Dublin - Zone A High Street Rents and Forecasts, ( Per Sq M) Source: DTZ Sherry FitzGerald Research Irish Retail Investment Review

Authors Marian Finnegan Chief Economist, Director Research +353 (0) 1 237 6341 marian.finnegan@dtz.ie Siobhán Corcoran Associate Director +353 (0) 1 237 6317 siobhan.corcoran@dtz.

12 Authors Marian Finnegan Chief Economist, Director Research +353 (0) marian.finnegan@dtz.ie Siobhán Corcoran Associate Director +353 (0) siobhan.corcoran@dtz.ie Deirdre O Reilly Researcher +353 (0) deirdre.oreilly@sherryfitz.ie Kevin Donohue Head of Investment +353 (0) kevin.donohue@dtz.ie About DTZ Sherry FitzGerald DTZ Sherry FitzGerald is the sole Irish affiliate of DTZ, a global leader in property services. With Irish offices in Dublin, Cork, Galway, Limerick and an associated office in Belfast, we are the largest commercial property advisory network in Ireland and are part of Sherry FitzGerald Group, Ireland s largest real estate adviser. We provide occupiers and investors around the world with best-in-class, end-to-end property solutions comprised of leasing agency and brokerage, integrated property management, capital markets, investment, asset management and valuation CONFIDENTIALITY CLAUSE This information is to be regarded as confidential to the party to whom it is addressed and is intended for the use of that party only. Consequently and in accordance with current practice, no responsibility is accepted to any third party in respect of the whole or any part of its contents. Before any part of it is reproduced, or referred to, in any document, circular or statement, our written approval as to the form and context of such publication must be obtained.

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