Irish Investment Market Review

Irish Investment Market Review SPRING 2013 part of the UGL global network

Economic Background The Irish economy has endured a volatile journey over the past four to five years but an element of stability has begun to emerge. At the beginning of last year, the outlook for the economy was largely uncertain stemming from external pressures; in particular the euro zone financial crisis. However, as the year progressed a combination of policy initiatives implemented domestically and at EU level resulted in tentative signs of stabilisation emerging in the economy. The outlook for 2013 is now relatively optimistic as the Irish economy continues its course towards economic recovery. That said fragilities remain; in particular, slowing economic growth in the UK and the Euro area continues to pose downside risks to the growth outlook. Also of note is the recent IMF announcement in which they have highlighted their view that Irish banks have not made adequate progress in specific areas to date. Simultaneously, they have emphasized the need for growth to remain in line with all targets to avoid the country s debt becoming unsustainable. Notably, ten-year bonds have been re-issued by the National Treasury Management Agency. This marked Ireland s first return to the long-term debt markets since Overseas confidence in Ireland has improved considerably soaring yields forced it to take a 85 billion bailout in 2010; the yield on Ireland s 2020 bond had climbed to over 15%. Additionally, it brings Ireland closer to becoming the first bailed-out euro zone country to return to full market funding. Consequently, overseas confidence in Ireland has improved considerably. This was further boosted by the long-awaited deal with the ECB to restructure a costly promissory note into less expensive sovereign debt. The landmark deal should see Ireland regain its funding independence, by increasing our chances of exiting the bailout programme and re-entering the financial markets by year end. On a further positive note, both Standard & Poor and Fitch have upgraded Ireland s sovereign debt rating outlook from negative to stable. The Department of Finance have forecast that the Irish economy will achieve modest growth of 1.3% in 2013, followed by slightly stronger growth of 2.4% in 2014 and 2.8% in 2015. The recently released preliminary figures from the Central Statistics Office reveal that the Irish economy grew by 0.9% in 2012. This marks the second consecutive year of growth following three notable years of decline between 2008 and 2010. The GDP increase was in line with official government projections and higher than forecasts by the IMF and European Commission. The volume of GNP rose by 3.4% in 2012 compared with the previous year. Preliminary results for quarter four of 2012 indicate that GDP was flat when compared with the previous quarter while GNP contracted by 0.8%. Growth in 2012 was driven by net exports of approximately 4.4 billion. Exports performed strongly for the third consecutive year with growth of 2.9% in 2012. That said; exports fell sharply from 5.1% and 6.2% recorded in 2011 and 2010 respectively. Imports in 2012 were broadly in line with 2011 levels. Domestic demand remains weak. Personal consumption, which accounts for approximately two thirds of domestic demand, fell by 0.9% in 2012. While still in negative territory the annual decline was lower than the 2.4% fall recorded in 2011. However, it is difficult to imagine a major upward rise in personal expenditure in the coming months given the on-going uncertainty both economically and financially. Moreover, the introduction of a property tax could potentially further impact sentiment and therefore household disposable income and personal consumption in 2013. In relation to the other components of domestic demand; government expenditure was down 3.7% in 2012, however capital investment rose by 1.2%; the first annual increase since 2007. Figure 1 Annual % change Gross Domestic Product (GDP) Source: CSO/Department of Finance 2 SPRING 2013 Irish Investment Market Review

Irish Investment Volume Strongest start to the year since 2007 The total investment volume for quarter one of 2013 increased markedly with approximately 336m* invested during the three month period. This was the strongest start to a year since 2007. A comparison with the corresponding quarter in 2012 reveals a significant uplift in activity and indeed compares favourably to the total turnover for 2012 as a whole. Figure 2 Irish Investment Market Turnover, Bn The strong performance witnessed during the opening quarter of 2013 follows a notable uplift in market activity during the latter half of 2012 which saw the overall investment turnover for 2012 reach a five year high of 624 million. Furthermore, the number of deals transacted > 1m (21) was significantly higher than the corresponding quarter in 2012 (9). The average transaction size Solid recovery in investment volumes in quarter one stood at 16m up from 13m during the corresponding quarter of 2012. The five largest deals alone accounted for 237.5m and 70% of the total value. The most notable investment deal during the quarter included the sale of a prime office at Bishop s Square, Dublin 2 to New York based investor King Street Capital for approximately 65m, reflecting a yield of 9.87% for the six floor office building. The opening quarter of 2013 saw investment volumes boosted by a number of larger lot sizes. In particular, there were three transactions in the 50m+ category which accounted for half of the total value of transactions in quarter one. A further 25% of transactions were recorded in the 20-50m category. The largest deal in this category included the sale of retail units no 103/104 on Grafton Street, Dublin 2 to the German fund manager GLL Real Estate for 40m. An analysis of turnover by location reveals that the primary focus of investors remains on the capital and in particular Dublin city centre. This is highlighted by the fact that 82% of the total volume invested in quarter one was in the city centre. A further 10% was invested in the greater Dublin area. Outside of Dublin, investment activity was limited during the opening quarter of 2013. The most significant deal was the sale of the landmark River Lee Hotel in Cork for 24.5m. Building Bishops Square, Dublin 2 A&L Goodbody, Dublin 1 Table 1 Table of Notable Transactions in Q1 2013 Price ( ) Airlines Portfolio 50m 103 / 104 Grafton Street, Dublin 2 River Lee Hotel, Cork Sector 65m Office 9.87 Net Initial Yield (%) Vendor IPUT/ Ulster Bank 57m Office 6.70 N/A IPUT Mixed Use 7.16 40m Retail 7.04 24.5m Hotel 7.97 Irish Airlines Pension Fund David Daly /NAMA O Callaghan Properties Purchaser King Street Capital IPUT GLL Partners Bernie Gallagher / Jurys Group *Includes deals > 1m excludes loan sales and trading assets Irish Investment Market Review SPRING 2013 3

Irish Investment Volume Overseas capital remains fundamental in the Irish investment market. Capital investment from abroad accounted for a significant proportion of the share of investment sales in quarter one. In particular, US and German investors were most active during the three month period. Foreign investors have largely concentrated their activity in the office and residential sectors. The market also witnessed a strong level of domestic buyer activity. Domestic investor activity during the quarter was largely focused on private companies Strong demand from overseas investors during opening quarter purchasing smaller assets as they take advantage of the considerable opportunities that exist at present. Most notably, institutional buyers showed strong buying activity during the quarter. Institutional buyers such as the Irish Property Unit Trust (IPUT) were active during quarter one purchasing the A&L Goodbody headquarters in the IFSC in an off market deal for 57m and the Irish Airlines Pension Fund portfolio for 50m. The latest DTZ Fair Value Index reveals that Dublin offices are expected to perform relatively well over the next five years, with expected returns a great deal higher than required returns and giving Dublin a HOT classification in the Fair Value Index. This indicates that Dublin is where many of the attractive investment opportunities are concentrated in Europe; hence foreign investors are looking to Dublin. Figure 3 Investment Volume by Lot Size, Q1 2013 Figure 4 Investment Volume by Location, Q1 2013 Figure 5 European office total returns breakdown (2013-17, p.a.) and Fair Value classifications 20% 16% 12% 8% 4% 0% WARM HOT HOT HOT COLD WARM COLD HOT HOT 3 2 1 Income Returns Capital Growth Total Returns Source: DTZ Research 4 SPRING 2013 Irish Investment Market Review

Investment by Sector The office sector maintained its dominant position as the preferred sector during the opening quarter of 2013. This was followed by mixed-use at 15% and retail absorbing 13%. The opening quarter saw renewed interest in hotel investments accounting for 13% of activity. Residential investment activity accounted for 5% of sales during the three month period. The office sector remains the most sought after accounting for approximately half of the share of investment transactions during the opening quarter. In particular, the Dublin CBD office sector dominated much of the activity with pricing becoming more aggressive. Investments sold in these sectors have been much sought after by both international and domestic investors. The demand for this sector is driven by market fundamentals and expectation of both rental growth and capital appreciation. The Dublin office market has witnessed changing dynamics in occupier trends, more specifically; the stock of grade A space and in particular newer A1 space continues to diminish due to increased activity and has not been Office activity absorbed over half of quarter one turnover replenished. Office investments made up the largest deals transacted during the opening quarter. These included the sale of a prime office at Bishop s Square, Dublin 2 for 65m, reflecting a yield of 9.87% and the sale of the A&L Goodbody headquarters in the IFSC for approximately 57m, reflecting a yield of 6.70%. Other notable office deals include the sale of the Irish Airlines Pension Fund portfolio for approximately 50m; although mixed use, the portfolio is predominately office space. Furthermore, the SAP Buildings at Citywest Business Campus sold for approximately 14.2m. There are many tenants also emerging in this sector and considering a move away from leasing to owning their own headquarters building. This may be an interesting sector to watch as the year progresses. The office sector was the strongest performing sector during quarter one of 2013 according to the latest IPD figures which show a total return of 2.5% for the opening quarter, increasing from 1.7% in the previous quarter. Income returns continue to drive returns. Overall office capital values continued to decline in quarter one but at a much reduced rate of 0.04%. This compares favourable with a decline of 0.9% in the previous quarter and a fall of 1.8% during the corresponding quarter in 2012. The opening quarter of 2013 saw capital values for Dublin 4 offices grow for the first time since the downturn. The latest IPD results reveal positive quarterly capital growth, albeit modest, of 0.6% and 0.2% for offices in Dublin 2 and 4 respectively. Dublin offices in 1, 3 & 7 witnessed declining capital values of 2.7% during the three month period. The sale of retail assets increased during the opening quarter of 2013, accounting for 13% of the total investment volume. There were four deals > 1 million recorded during the three month period, the largest being the sale of two retail units on Grafton Street, Dublin 2 to the German fund manager GLL Real Estate for 40m. Figure 6 Investment Volume by Sector, Q1 2013 Turnover in 2013 is likely to significantly exceed 2012 levels with volumes expected to reach 2billion to include loan sales Michele Jackson, Director, DTZ Sherry FitzGerald Irish Investment Market Review SPRING 2013 5

Investment by Sector The latest IPD figures reveal on-going weakness with total return contracting by 0.2% during the three month period. The decline in capital values accelerated during quarter one to -2.3% outweighing the 2.1% increase in income return. The appetite for industrial investment was subdued during the opening quarter of 2013; this followed a similar trend in 2012. The industrial share of the total volume of Residential investment accounted for 5% of overall activity in quarter one investment transactions stood at just 2% in quarter one. This comprised of two small sized deals in the greater Dublin area. According to the latest IPD results total return rose to 1.8% in quarter one, up from 0.9% recorded during the final quarter of 2012. However, capital values remain weak declining by 1.2% during the three month period. This was offset by strong income growth of 3% in the same period. Residential investment activity was subdued in the opening quarter of the year. The most significant deals transacted during the three month period included the sale of Park Lodge House, North Circular Road, Dublin 7 for a reported 9.5m and Abbeyglen, Cabinteely, Dublin 18 for 6.3m. Both acquired by an overseas private investment funds. There is good appetite from investors for well-located income producing residential blocks. The second quarter of the year should see an improvement in supply levels with some larger residential portfolios including the long awaited Clancy Quay in Islandbridge, Dublin 8 which is guiding 70m. Prime Dublin office yields moved inward during quarter one 2013 and are in the order of 6.75%. The divergence between prime and periphery office yields continued in quarter one 2013 with periphery equivalent yields standing at 8.50%. Prime retail properties are yielding 6.5% while industrial yields remain stable at 9.25%. Figure 7 Irish Commercial Market Total Return (Quarterly) 6 SPRING 2013 Irish Investment Market Review Source: IPD

Outlook for the Future The opening quarter of 2013 witnessed solid performance in the Irish investment market. Looking to the year ahead, the expectation is that transaction levels will remain strong and exceed 2012 levels. At the end of quarter one, the volume of investment stood at 336m which equates to 54% of total turnover for 2012 as a whole. Furthermore, with over 200m worth of assets either sale agreed or under offer, transaction activity is expected to remain robust. The Dublin office market has been identified by the DTZ Fair Value Index as a hot market. This is further evidenced by the strength in demand for prime office space in the capital by both foreign and domestic buyers during quarter one of 2013. Formal sales in the market in the first quarter of 2013 were somewhat subdued. That said, buyers are anticipating a significant increase in volumes during the remainder of the year. The market is witnessing a strong level of both domestic and international buyer activity with many new partnerships marrying sector expertise with equity. Many of these new entrants have put platforms in place and have a strategy to assemble a property portfolio that they can actively manage. The capital gains tax window for investors up until December 2013 should see a push from both buyers and sellers to transact before year end. The key for 2013 is to see an increase in supply in response to demand levels which would allow volume to increase further. This should facilitate the attraction of additional funders into the market and help the recovery to a more functioning market. Irish Investment Market Review SPRING 2013 7

AUTHORS Marian Finnegan Chief Economist, Director Research +353 (0) 1 237 6341 marian.finnegan@dtz.ie Siobhan Moloney Research Manager +353 (0) 1 237 6317 siobhan.moloney@dtz.ie Michele Jackson Director of Investments +353 (0) 1 639 9296 michele.jackson@dtz.ie Patricia Ward Director of Investments +353 (0) 1 639 9249 patricia.ward@dtz.ie Rosemary Casey Director of Investments +353 (0) 1 639 9315 rosemary.casey@dtz.ie About DTZ Sherry FitzGerald DTZ Sherry FitzGerald is the sole Irish affiliate of DTZ, a UGL company, 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. DTZ has 47,000 employees including sub-contractors, operating across 217 offices in 53 countries. www.dtz.ie 2013