Dublin’s office market “has got a long way to go” before returning to pre-crisis levels, according to the IPD.
A new research report has shown that despite recent strong growth in office rents and a strong level of income return leading to competitive pricing in Ireland’s capital, the market still has a long way to go before it comes close to recovering fully.
The IPD Dublin Office Rental Report for Q2 shows that although rental growth has averaged 4.3% a quarter since the recovery began, were that trend of consistent growth to continue, office rents in Dublin would not be back to the levels of their previous peak until at least 2016.
At the height of the crash, equivalent yields for Dublin grew to 8.8%, but as risk associated with the market receded and investor confidence grew, this had fallen to 7% by June 2014, the IPD said.
According to the report, Dublin’s position is enhanced by the potential for growth in two key investment indicators: rents and yields.
Both remain significantly off where they were at the last peak, suggesting an additional strengthening may be likely, particularly as the constrained supply drives office rents further upwards.
This will boost capital values, which will in turn drive investor total returns, the IPD said.
In the year to the end of June 2014, the impressive level of capital growth, at 26.5%, was the primary driver of the 36.6% total return achieved in the Dublin office market as income return contributed 8.2%.
A recent rebound in confidence has boosted capital values by 29% since the market trough.
Colm Lauder, senior associate at IPD owner, MSCI, said: “The Dublin office investment market is almost unrecognisable compared with three years ago.
“Improved confidence in the economic prospects of Ireland, along with the stability and predictability injected into the market following the allaying of fears surrounding rent review reform, has boosted investor confidence, especially in Dublin.
“The Dublin office sector has benefited the most from this renewed confidence, with yields falling back to more normal levels as perceived risk levels abate, while growing demand for office space has boosted market rental values.
“While this stage of the recovery has been brisk, historic trends would suggest yield and rents still have some way to go, and as these are the key drivers of income and capital return, further gains may be expected.
“Indeed, as the broader Irish economy strengthens, investor and occupier demand is likely to remain strong for Dublin offices, particularly prime, as a limited development pipeline means supply for both investors’ acquisitions and occupiers seeking space will remain limited for the next few years.”
The analysis is based on a sample size of 80 properties as at the end of June 2014 with a combined value of €1.3bn (£1bn), making up circa 50% of the total IPD Ireland property market stock.
bridget.oconnell@estatesgazette.com
