Savills World Research Ireland Investment INVESTMENT REPORT 2015

(1)

INVESTMENT

REPORT 2015

(2)

savills.ie/research

02

Commercial property investment spending more then doubled in 2014 and the total turnover of €4.5 billion represents a 40% increase on the previous record for the Irish market which was set in 2006. In terms of transactions numbers, almost 300 deals were done in 2014 – nearly three times the number completed in 2006.

This dramatic upsurge in activity reflects a combination of factors that have led to very strong demand for Irish investment property and, at the same time, very liquid supply arising from the financial institutions’

deleveraging programmes.

Focusing firstly on demand, the global appetite for risk bearing assets has been driven by falling bond yields; as the risk free rate of return has declined investors have had to move into higher yielding assets - including commercial property - in search of better returns. With the ECB commencing its long-awaited quantitative easing (QE) programme on 9th March it is clear that bond rates are set to remain very low for the foreseeable future. Therefore there will continue to be a weight of money with ambitions to buy into real estate investments.

A significant amount of this capital has specifically targeted Ireland. In part this reflects the value that has been available in the market after the economic crisis. However, it also reflects the fact that investors have responded to the Irish macro-economic recovery story. Ireland currently has the fastest growing economy in the EU with GDP expanding by 4.8% in 2014. Total employment has rebounded by 6.2% since the 2012 trough and, as the labour market has improved, so have the public finances. This enabled Ireland to exit its bailout programme in December 2013 and, with the fiscal adjustment programme now well

in hand, the Government was able to introduce its first expansionary budget for seven years in October 2014.

Reflecting the improved macro-economic situation occupational markets have picked up strongly and investors have been attracted by a positive rental growth story for both prime offices and retail. Office take-up across Dublin reached over 240,000 sq m in 2014 - its highest level since 2007. With expansions and new entrants accounting for an increasing proportion of lettings, vacancy rates are falling sharply and this is driving strong rental growth. The retail recovery has taken longer. However, a sustained improvement in the consumer economy is now feeding through to stronger demand for shopping space. With no significant commercial development having taken place over the last five years, and with relatively little scheduled for completion before 2017, this is driving strong rental growth in prime locations, with expectations of further and more widespread growth to come.

Just as these factors have led to unprecedented demand for Irish real estate investments, the supply of available product has also increased.

Deleveraging activity, led by NAMA and the withdrawing foreign banks, has resulted in large quantities of commercial property being released to the market. These properties have been offered both as direct assets and packaged portfolios. Looking ahead, just as we see investment demand continuing to be underpinned by a growing economy and low bond rates, we also see the supply of investment product remaining elevated in the short term. There is still substantial deleveraging to be done. Moreover, re-trades of properties bought earlier in the cycle, along with portfolio and loan sale break-ups will ensure a continued pipeline of supply for the remainder of 2015 and beyond.

Source: Savills Research

GRAPH 1

Investment Transactions and Turnover

0 50 100 150 200 250 300 350

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 No. of Deals

(€m)

Turnover( €m) No. of deals

Introduction

"2014 saw an

unprecedented

level of commercial

property

investment in

Ireland. Overall,

nearly €4.5bn of

income-producing

property assets

were directly traded

during the year."

(3)

03

One of the most striking features of the current investment cycle is the

appetite for very large deals. On average, over the last three years, 57% of all spending on Irish commercial property investment has been transacted in deals of over €50m.

In the early stages of the recovery the most active buyers were private equity players who naturally favour large deals. On one hand, because they have shorter time horizons, large lot sizes allow these players to build up their positions more quickly. Similarly, because they trade more often the bigger lots help to dilute fixed transactions costs. Moreover, in purely practical terms, the cost of setting up an offshore team often requires these players to buy in scale. In the latter half of 2013 private equity was involved in a number of mega-deals including the purchase of the Opera (€306m) and Ulysses (€152m) portfolios. This continued into 2014 with US private equity investors HAIL/Hines buying Liffey Valley Shopping Centre (€250m) and Vӓrde Partners buying the Acorn Portfolio (€171.5m). However, with yields hardening we are likely to see a gradual withdrawal of private equity capital over the medium term, and a critical question is whether the depth of demand exists to maintain momentum in the market.

So far the signs look good. In contrast to the preceding years, core institutional investors did three of the five biggest deals in 2014. Indeed, these players accounted for 54% of all spending in the €50m plus category last year, demonstrating that they also have the ability to digest very large transactions.

As shown in Graph 3, while 80% of the capital invested in 2014 was deployed in deals of over €20m, the majority of transactions involved much smaller investments. In fact, 68% of all investment transactions last year were of lot sizes of €5m or less. Within this price range, investors were most likely to buy mixed use properties (25%), offices (24%) and neighbourhood retail units (14%). Smaller multi-family investments accounted for 7% of transactions at the sub-€5m price point.

Investment by Lot Size

GRAPH 3

Investment Spending by Lot Size - 2014

1%

6%

7%

62% 18%

≤1m 1m-5m 5m-10m 10m-20m 20m-50m

>50m

1%

6%

7%

62% 18%

≤1m 1m-5m 5m-10m 10m-20m 20m-50m

>50m

0 10 20 30 40 50 60 70

2012 2013 2014

GRAPH 2

Percentage of Investment Spend in Deals

over €50m (%)

(4)

04

Graph 4 illustrates the sectoral breakdown of commercial property investment in Ireland over the last three years. Apart from the dramatic increase in overall turnover three additional points are evident. Firstly, offices have been a key target for investors and this continues to be the case. This notwithstanding, a second point is that retail is becoming an increasingly important part of the investment mix. Finally multi-family residential, which emerged as a new investment sub-sector in 2012, has now become a mainstream part of the investment market. Each of these sectors is examined in detail below.

Investment by Sector Office Investment

In the early stages of the market recovery much of the investor focus was on offices. This is not surprising as prime office buildings with a quality covenant are generally considered a low risk investment. As such they typically lead the way in a recovery cycle. Although offices are no longer the fastest growing sector of the investment market, total turnover increased by 25% in 2014, and more than €1.6bn of office property changed hands. This continuing flow of capital reflects the underlying strength of the occupational market. While Ireland sustained a 16% employment shakeout during the economic crisis, office based employment actually increased. And, in the overall labour market recovery that has followed, 29% of the newly created jobs can broadly be described as office based. This has driven strong net absorption which, in the face of fixed supply, has resulted in rapid rental growth.

As shown in the map, the vast majority of office investments over the last three years have been located in Dublin. This is particularly true of the transactions that occurred in 2012. However, as yields have moved in, investors have increasingly been willing to look at locations outside the capital. Four office deals, at a combined value of approximately

€46m, were done in the major regional cities of Cork and Galway during 2013. This continued in 2014 with seven office buildings sold in Cork, along with further properties in Galway, Limerick, Kildare, Laois, Louth and Westmeath.

Within Dublin, 84 office investments changed hands in 2014. These lots comprised almost 400,000 sq m of space, 42% of which was in the core Dublin 2 location. A further 14% of space was in Dublin 1 - a city centre location just to the north of the River Liffey. This reflects the fact that syndicated investors who were originally attracted into the International Financial Services Centre (IFSC) by capital allowances are now divesting of properties which have reached the end of their tax life.

The bulk of the remaining space was in suburban locations.

FIGURE 1

Office Investment Transactions by

Location - 2014

2014 2012 2013

GRAPH 5

Dublin Office Investments by Postcode

(Sq M) - 2014

55,698

166,427

8,348 22,693 10,673

112,181 ^D1D2

D3 D4 D7 D8 Suburban

The average size of the office buildings that were sold in 2014 was 4,759 sq m – somewhat greater than the average size of all modern office buildings located in Dublin (2,987 sq m). However, the size of traded units varied by postcode, with the buildings sold in Dublin 1 & 2 being significantly larger – see Table 1. Grade A buildings accounted for 35%

of all the tenanted space that changed hands during the year, despite the fact that only 18% of Dublin’s office stock is currently classified as Grade A.

GRAPH 4

Investment Turnover by Sector (€m)

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

2012 2013 2014

Other Hotel Mixed Industrial Multi-Family Retail Offices

55,698

166,427

8,348 22,693 10,673

112,181

D1 D2 D3 D4 D7 D8 Suburban 0

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

2012 2013 2014

Other Hotel Mixed Industrial Multi-Family Retail Offices 0

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

2012 2013 2014

Other Hotel Mixed Industrial Multi-Family Retail Offices

(5)

05 Office Investment

GRAPH 8

Prime Dublin Office Rents Forecast (€/ Sq m)

Source: Savills Research 0

100 200 300 400 500 600 700 800

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (f) 2016 (f) 2017 (f)

TABLE 1

Summary of Dublin Office Investment - 2014*

Postcode Deals Total Sq M Average Sq M Grade

A (%) Grade B (%) Grade

C (%)

1 10 55,698 5,570 19 76 5

2 34 166,427 4,895 39 37 24

4 6 22,693 3,782 48 3 49

Total Dublin 84 399,724 4,759 35 43 22

Source: Savills Research *Approximate value Note: Excludes office assets in mixed portfolios

TABLE 2

Top 10 Office Investment Deals - 2014

Property Quarter

Sold Price € Postcode

The Platinum Collection Q1 165,000,000 D2 The Atrium Building, Sandyford Q4 100,000,000 D18 Guild House & Commerzbank

House, IFSC Q3 90,750,000 D1

Montague House & Hardwicke

House Q2 60,000,000 D2

1 Harbourmaster Place, IFSC Q4 50,000,000 D1 Hanover Reach, Grand Canal

Dock Q2 50,000,000 D2

New Century House, IFSC Q1 47,000,000 D1

29-31 Adelaide Road Q2 45,000,000 D2

1 Warrington Place Q2 42,000,000 D2

5 George’s Dock, IFSC Q4 39,000,000* D1

140,974

171,799 86,950

A B C GRAPH 6

Dublin Office Investments by Building Grade

(Sq M) - 2014

It is interesting to examine the changing pattern of Grade A transactions by buyer type over time. In the early stages of the recovery private equity buyers were by far the most active players and were able to target Grade A properties at discounted prices. However, as the recovery has gained strength hardening yields have led PE buyers to increasingly look at older buildings and value-add opportunities which meet with their IRR requirements. At the same time the institutions, and the REITs that have come into the market since 2013, have become more active and, with longer time horizons and lower funding costs, they have been able to out-compete private equity for core assets.

Looking ahead we expect investors’ appetite for Dublin offices to remain strong. Occupier demand will be underpinned by forecast GDP growth of around 3.7% per annum out to 2018. However, with little if any net additional office space in the pipeline over the next two years, and with just over 100,000 sq m pencilled in for 2016, the supply of new business space in Dublin will not be sufficient to meet this

demand. Inevitably, therefore, vacancy rates will fall further and rents will continue to rise rapidly. Compounding on rental growth of 36% in 2014, our econometric models indicate that rents for the best offices in Dublin will reach €760 per sq m in the current market cycle. At the same time, with bond rates set to remain low, we believe that there is scope for further yield compression which will combine with rental growth to drive capital values and overall returns.

GRAPH 7

Investment in Grade A Dublin Offices by

Buyer Type - 2014 (%)

0 10 20 30 40 50 60 70 80 90 100

2012 2013 2014

Institutional / REIT Other Private Equity

0 10 20 30 40 50 60 70 80 90 100

2012 2013 2014

Institutional / REIT Other Private Equity

140,974

171,799 86,950

A B C

Source: Savills Research *Includes offices traded directly and as part of portfolios

(6)

06

06 Retail Investment

Retail investment has been slower to get going. However the touch paper was lit last year with transactions jumping from €144m in 2013 to over €1bn in 2014. There are several reasons for this. Firstly it reflects the fact that the retail recovery has lagged some way behind the office market recovery - while office rents have been rising since early 2013, retail rents only began to show positive growth in the second half of 2014. However, with 114,000 new jobs since 2012, and with consumer sentiment at a nine year high, the retail recovery is now gaining traction and inevitably this is attracting investors’ attention. A second reason for the upsurge in retail investment relates to the mix of opportunities that have been available in the market. With offices leading the way during 2012 and 2013, many of the best assets were traded earlier in the cycle. These properties are now finding their way back to the market through re-trades and loan book break-ups. However, this has taken time and, in the interim, investors have increasingly turned to retail. A final reason for the resurgence in retail investment is that concentrated activity in offices during the early phase of the recovery saw stronger yield compression in offices than retail. This has naturally channelled buyers into new opportunities.

In order to capitalise on the recovering consumer economy several large shopping centres were brought to the market in 2014. The biggest retail deal of the year was Liffey Valley Shopping Centre which was sold in Q1 2014 to private equity investors HAIL/Hines for €250m.

The Acorn Portfolio, a package of regional shopping centres located in Cork, Clonmel and Balbriggan, north County Dublin, was sold to a US private equity investor for €171.5m. Meanwhile the Spectrum Portfolio, which contained five suburban and regional shopping centres, sold in Q4 2014 for €124.75m (retail element only).

There was also significant activity in the retail parks sub-sector with The Parks Portfolio trading in late 2014. The most prime asset within this portfolio was The Park in Carrickmines – arguably Ireland’s premier retail park. Interestingly, this was broken out and sold to IPUT, an Irish institutional investor, for €95m. In contrast the higher-yielding regional

assets were sold as a package to US private equity investor Marathon Asset Management.

Despite the upsurge in overall retail investment, there have been relatively few sales of prime high street retail assets. Overall, high street units accounted for €137m of turnover in 2014 – just 13% of the total spending on retail property, and just 3.1% of total investment turnover.

This reflects the fact that many of the best high street assets are institutionally owned and have not been available for sale. To illustrate the illiquidity that exists in this part of the market, only twelve properties in Dublin’s prime retail thoroughfares – Grafton St., Henry St., and Mary St. – have been traded since the beginning of the market recovery in 2012.

Recent research by economists at Savills and the ESRI shows that jobs growth is the dominant factor in determining retail rents in Ireland. Given the strong recovery in the Irish labour market it is therefore not surprising that the IPD retail rents index is rising once again. Undoubtedly the strength of this recovery remains highly variable by location and retail sub-sector. However, with approximately 50,000 net additional jobs expected this year, and a further 55,000 forecast for 2016, we believe that further and more widespread growth in retail rents is likely going forward. Again, this should underpin demand for retail investments and we expect large scale trading in this sector through the remainder of 2015 and beyond.

FIGURE 2

Retail Transactions by Location - 2014

GRAPH 9

Retail Investments by Sub-Sector (%)

10 20 30 40 50 60 70

2012 2013 2014

Retail - H/S Retail - N/S Retail - S/C Retail - R/P

0 10 20 30 40 50 60 70

2012 2013 2014

Retail - H/S Retail - N/S Retail - S/C Retail - R/P Retail NS

Retail HS Retail SC

Retail R/P

(7)

07

€918.5m worth of multi-family residential properties have been bought by investors since the beginning of 2012. These investments incorporate some 4,521 dwelling units, the vast majority of which are located in Dublin. This means that over 13% of all residential sales in Dublin over the last three years have been to multi-family investors.

At the outset of this buying cycle, and as a result of the housing market crash, a number of newly or partially completed developments were available to buy. This allowed the early movers to secure full or near-full ownership of entire schemes. Clearly, this gives them greater control over the tone of rents within a scheme. However, as developments have been bought up, fewer entire lots have come onto the market and investors are increasingly having to accept fragmented ownership. As shown below, in 2012 all of the multi-family assets that traded were bought on a full-ownership basis. This figure declined to 61% in 2013 and fell further to 53% in 2014.

Total multi-family turnover in 2014 was €621m, and two distinct buyer types were active within the market. At the upper end IRES, a listed residential REIT, bought the three largest lots that were offered for sale during the year. These were Project Orange, a portfolio of 761 residential units across four schemes (€211.25m), The Rockbrook Estate, a South Dublin scheme of 270 apartments (€88.9m) and the Marker Residences, a prime 84 unit scheme located in Grand Canal Dock in Dublin’s Central Business District (€50.1m). Private equity also remained active with Marathon Asset Management, Kennedy Wilson and Oaktree Capital all doing deals in the €5m-€20m size category. However, with the institutions dominating the bigger plays, PE accounted for a smaller proportion of multi-family turnover in 2014 than in previous years.

At the other extreme private investors dominated the market for sub-

€5m lots and accounted for almost three quarters of all deals in this price range. Interestingly, 73% of the spending at this price point occurred in Q4, indicating a rush of smaller private investors into the market to avail of the Capital Gains Tax incentives which were withdrawn last December.

Looking ahead, there are a number of developments to watch for in 2015.

With residential prices rising and new mortgage lending restrictions now in place, it has become harder for first time buyers to get onto the housing ladder. As such, there would appear to be a stable platform of demand for rented accommodation, particularly in Dublin. This should support rents and yields, and will provide income opportunities for investors. However, as prices rise the argument for breaking-up multi- family investments and selling them off unit-by-unit becomes stronger.

Indeed, these schemes were originally designed for owner-occupation and, particularly where investors only have fragmented ownership, they may be alive to this opportunity. In saying this, a significant amount of core institutional money has gone into the multi-family sector and, where investors have full ownership and have been able to drive rents by creating tenant amenities, a longer hold is likely. Indeed, we may see some of the longer term investors develop new purpose-built multi- family blocks on a design-build-operate basis; both IRES REIT and Kennedy Wilson have sites available for residential development and have expressed the intention of building these out.

GRAPH 11

Sub-€5m Multi-Family Deals by

Quarter (%) - 2014

10 8

9

73 Q1

Q2 Q3 Q4

Multi-Family Investment

TABLE 4

Top 10 Multi-Family Deals – 2014

Property Sold Price (€) Units

Rockbrook Estate, Sandyford Q4 88,900,000 270 The Marker Residences, Grand Canal Square Q2 50,100,000 84

Richmond Gardens, Fairview Q4 20,000,000 91

Liffey Trust Building, IFSC Q4 14,850,000 81

Alto Vetro, Grand Canal Docks Q4 11,000,000 26

Shieling Square, Raheny Q2 8,000,000 75

Alexander Court, 25 Upper Pembroke St, D2 Q4 6,500,000 23

Oxmantown Green, D7 Q1 6,000,000 25

Sartini Court, D7 Q4 4,500,000 27

128 Lower George’s St., Dún Laoghaire Q1 2,400,000 12 Source: Savills Research Note: Excludes multi-family assets in mixed portfolios. The Orange Collection, which mainly contained multi-family residential, sold for €211.25 in Q3 2014.

10 8

9

73

Q1

Q2

Q3

Q4

0 10 20 30 40 50 60 70 80 90 100

2012 2013 2014

GRAPH 10

Multi-Family Assets Bought With Full

Ownership by Year (%)

(8)

08

08 Investment by Seller Type

One of the defining characteristics of the recent investment market resurgence is the liquidity of supply arising from bank deleveraging. In this context it is not surprising to see that receivers have been behind 42% of all transactions by value since the beginning of 2012. In saying that, the proportion of sales originating from receivers fell in 2014. This is largely due to the pension funds and institutions divesting of buildings in order to acquire new stock. In this sense we are seeing the resumption of a normal recycling of space within the market as institutional holders sell-off their older buildings to make way for more modern stock, thereby providing opportunities for developers and value-add investors.

GRAPH 13

Investment Turnover by Seller Type (%)

0 10 20 30 40 50

2012 2013 2014

Receiver Private Syndicate Private Equity Private Individual Unknown Institutional / REIT Other Prop Co. Confidential

10 20 30 40 50

2012 2013 2014

Receiver Private Syndicate Private Equity Private Individual Unknown Institutional / REIT Other Prop Co. Confidential

Ireland’s economic crisis created a pool of distressed assets that investors were able to access at rock-bottom prices in 2012 and 2013.

As shown in Graph 12, many of these early opportunities were seized by private equity funds whose business model is to invest in higher risk, high return assets with an intended 3-5 year hold before profit-taking and recycling. Initially, and given the value that was available in the Irish market after the economic crash, this PE money was mainly invested in prime Dublin offices. However, as office yields have hardened some of the private equity money has moved into higher yielding asset classes (particularly retail) and, inevitably, some has moved on to other markets.

As a result, private equity’s share of total investment turnover has fallen from 53% in 2012 to 36% in 2014.

In contrast core institutional investors came back into the market in 2013 and 2014. In part this reflects a structural change in the market with the Finance Act (2013) allowing the formation of REITs, and the three Irish REITs have been aggressive buyers over the last 12 months.

More fundamentally, however, it represents the recovery in occupational markets which has allowed the core institutions to bid competitively for prime assets on a buy-and-hold strategy. As outlined above, there has been a debate about whether sufficient core demand exists to sustain the Irish market when the private equity capital eventually moves on.

However, in addition to the Irish REITs and funds, we have seen foreign institutions such as Standard Life (UK), Union Invest and Real I.S.

(Germany) and Hines Global REIT (US) all investing in Irish commercial property assets in recent months, suggesting an ongoing depth of core institutional demand.

Investment by Buyer Type

GRAPH 12

Investment Turnover by Buyer Type (%)

10 20 30 40 50

2012 2013 2014

Private Equity Private Syndicate Private Individual Other Confidential / Unkown Institutional / REIT

0 10 20 30 40 50

2012 2013 2014

Private Equity Private Syndicate Private Individual Other Confidential / Unkown Institutional / REIT

(9)

09

09 OUTLOOK

On 9th March the ECB began its long-awaited quantitative easing programme. This is scheduled to pump €1.1tn into the Eurozone financial system by September 2016 and will set the context for Irish commercial property investment over the next eighteen months. On one hand, by driving down the value of the Euro it will support exports which, in turn, will underpin occupational markets. In addition, with Central Banks across Europe engaging in wholesale purchases of Government debt, interest rates will be compressed further. This will force investors up the risk curve in search of returns and will drive money into real estate. As shown below, despite significant yield compression over the last three years, the spread between commercial yields and the risk-free bond rate remains well above the 20-year average, suggesting scope for a further squeeze on yields. In practice this will be realised through competitive bidding which causes prices to run ahead of rental growth.

With a real scarcity of Grade A office space in Dublin, and very limited new building on the horizon until 2017 at the earliest, very strong rental growth will continue in this sector. This will underpin the demand for office investments. The retail recovery is a slower-burn, and is more variegated by location. However rents will continue rising strongly in prime high street locations and the best shopping centres. At the same time, with the jobs market recovery bringing renewed prosperity and confidence to the regions, the better provincial schemes will also see rising rents.

In addition to ongoing strong demand we will continue to see an abundant supply of product in the market. This reflects the fact that there is still significant deleveraging to be done, particularly of retail assets. But it also reflects second round trading effects. A key trend for the year ahead will be re-trades of buildings bought earlier in the cycle as assets move from the hands of opportunistic short-term owners into those of their natural longer term holders.

Moreover, an estimated €30bn of loan books were traded in 2014

and, as these are worked through, the assets that collateralise the debts will eventually come to the market. Finally, we are likely to see many of the asset portfolios that were bought over the last 18 months broken-up and re-traded as individual investments. All of this should ensure strong supply to meet the expected level of demand.

Summarising the short-term outlook, a number of key trends will dominate the market;

■ Further yield compression and strong rental growth will drive capital values and total returns.

■ Indeed early estimates indicate that approximately €1bn of investment property will have been sold in the first quarter of 2015 – an increase of 8% of last year.

■ With QE providing cheap money, debt will play a bigger role.

Lending margins have come in sharply since the beginning of 2015 and this will continue as banks find themselves with large quantities of cash that they have to put to work.

■ There will be continued re-trades of prime assets as short-term money seeks to recycle capital.

■ A deepening base of institutional investors will continue to compete for core assets. As an example, the largest trade in Q1 2015 was the sale of a prime Dublin office portfolio – Project Molly – to a US REIT.

■ With the economic recovery now well established, some private equity will inevitably move out of Ireland. Other short-term investors will remain in the country, but will seek opportunities in secondary and regional markets.

■ Arising from this we expect continued strong investment in regional retail property. We are also likely to see more money flowing into industrial real estate in 2015.

■ There will be a general swing from wholesale to retail as the big portfolio sales gradually give way to re-trades and individual asset deals.

Looking further ahead, the assumption that quantitative easing will continue after September 2016 is not necessarily assured. The ECB has committed to buying bonds for as long as is necessary to restore inflation to close to 2%. However, a range of indicators are now suggesting that the Euro Area economic recovery is gaining traction - albeit from a low base. Moreover oil prices, rather than more widespread deflationary pressures, have played a big part in the negative headline rates of inflation across Europe. In this context the monetary authority will be cautious to avoid an over-stimulus. Therefore our current view is that we may see a tapering of quantitative easing towards the end of next year. At the same time, as new building supply comes on-stream from 2017 – particularly in the Dublin office sector – the very rapid rates of rental growth we are currently seeing will inevitably ease off.

As a result, we believe that investment market activity is likely to gradually return to a more normalised level from 2017.

0 1 2 3 4 5 6 7 8

1994 Q4 1995 Q3 1996 Q2 1997 Q1 1997 Q4 1998 Q3 1999 Q2 2000 Q1 2000 Q4 2001 Q3 2002 Q2 2003 Q1 2003 Q4 2004 Q3 2005 Q2 2006 Q1 2006 Q4 2007 Q3 2008 Q2 2009 Q1 2009 Q4 2010 Q3 2011 Q2 2012 Q1 2012 Q4 2013 Q3 2014 Q2 2015 Q1 DE Bond Prime Dublin Office Yield

0 1 2 3 4 5 6 7 8

1994 Q4 1995 Q3 1996 Q2 1997 Q1 1997 Q4 1998 Q3 1999 Q2 2000 Q1 2000 Q4 2001 Q3 2002 Q2 2003 Q1 2003 Q4 2004 Q3 2005 Q2 2006 Q1 2006 Q4 2007 Q3 2008 Q2 2009 Q1 2009 Q4 2010 Q3 2011 Q2 2012 Q1 2012 Q4 2013 Q3 2014 Q2 2015 Q1

DE Bond Prime Dublin Office Yield

GRAPH 14

Dublin Office Yields vs. German 10 Year

Govt. Bonds (%)

(10)

savills.ie/research savills.ie/research

010 10

Location: Leopardstown, Dublin 18

Sector: Office & Multi-family & Future Development Land

Sale Date: Q1 2014

Sale Price: Region €311.5 million

Initial Yield: 5.53%

Term Certain: Approximately 5.5 years (WAULT) Size: Approximately 67,434 sq m (725,879 sq ft)

of commercial space, 272 multi-family units split over 8 separate buildings in addition to approximately 7.4 acres of development land.

Vendor / Agent: PWC as Receiver on behalf of NAMA / Savills

& JLL

Purchaser / Advisor: Green REIT, Kennedy Wilson & Pimco / CBRE Central Park comprised a mixed-use development including offices, multi-family units and ancillary retail totalling approximately 67,434 sq m (725,879 sq ft) in addition to approximately 7.4 acres of development land.

The overall income was €17.98 million per annum including approximately

€13.87 million of office rent per annum which had a WAULT of 5.46 years.

Location: George's Quay and George's Court, Dublin 2 and Westend Retail Park, Blanchardstown, Dublin 15

Sector: Office and Retail

Sale Date: Q2 2014

Sale Price: Region €375 million Initial Yield: Approximately 6.00%

Term Certain: Approximately 4.8 years (WAULT)

Size: Portfolio comprised the 23,011 sq m (247,693 sq ft) George’s Quay Blocks A, E & F, the 9,194 sq m (98,968 sq ft) George’s Court and the 28,069 sq m (302,128 sq ft) Westend Retail Park in Blanchardstown, Dublin 15.

Vendor / Agent: Cosgrave Property Group / JLL Purchaser / Advisor: Green REIT / Unadvised

The portfolio comprised two modern third generation offices located in Dublin’s CBD and Westend Retail Park, a substantial open use retail park located in Blanchardstown. The portfolio produced a rent of approximately

€23.7 million per annum from 58 tenants and had a weighted average unexpired lease term of approximately 4.8 years. The portfolio benefited from an occupancy rate of approximately 97%.

FIGURE 2

Central Park

FIGURE 1

Sapphire Portfolio

Appendix 1: Key Property Transactions

(11)

011 11

Location: No. 2 Grand Canal Square, South Docklands,

Dublin 2 / The Observatory, Sir John Rogerson’s Quay, Dublin 2 / One Clarendon Row, Dublin 2 Chatham Court, Dublin 2

Sector: Office & Retail

Sale Date: Q3 2014

Sale Price: €215 million

Term Certain: Approximately 10.7 years (WAULT) Size: Approximately 30,550 sq m (328,831 sq ft) Vendor / Agent: RSM Farrell Grant Sparks and GVA Donal O’

Buachalla as Receivers on behalf of NAMA / Savills & Knight Frank

Purchaser / Advisor: Irish Life / CBRE, Hibernia REIT / Unadvised, Lone Star / Unadvised

The Redwood Portfolio comprised a number of prime office and retail properties located in Dublin City Centre including No. 2 Grand Canal Square and The Observatory. The portfolio benefited from effectively full occupancy with tenants including Morgan Stanley, William Fry Solicitors, Capita and Hutchison 3G. The total current rent for the portfolio was in excess of €8.47 million per annum.

Location: Clondalkin, Dublin 22

Sector: Retail

Sale Date: Q1 2014

Sale Price: €250 million (72.8% stake)

Initial Yield: 6.7%

Term Certain: Approximately 8 years (WAULT)

Size: Approximately 46,452 sq m (500,000 sq ft) Vendor / Agent: Aviva / DTZ & Savills

Purchaser / Advisor: HSBC Alternative Investments Limited (HAIL)

& Hines

Liffey Valley is one of Ireland’s leading shopping centres and comprises approximately 500,000 sq ft of retail accommodation in addition to an adjoining 17.3 acre development site. The scheme had occupancy levels in excess of 98% and produced an overall income of approximately €24 million per annum.

FIGURE 4

Redwood Portfolio

FIGURE 3

Liffey Valley Shopping Centre

(12)

012 12

Location: Blackpool Shopping Centre and Retail Park, CorkMillfield Shopping Centre, Balbriggan, Co.

Dublin

Showgrounds Shopping Centre, Clonmel, Co.

Tipperary

Sector: Retail

Sale Date: Q3 2014

Sale Price: €171.5 million

Term Certain: Approximately 9.72 years (WAULT) Size: Approximately 66,890 sq m (720,000 sq ft) Vendor / Agent: Grant Thornton as Receiver on behalf of NAMA

/ JLL & Bannon Purchaser / Advisor: Vӓrde / HSBC

The Acorn Portfolio included a suburban Dublin shopping centre, two provincial shopping centres and a large open use retail park with an overall gross passing rent of approximately €13.25 million per annum. The portfolio had a total area of approximately 66,890 sq m (720,000 sq ft).

Location: Charlestown, Finglas, Dublin 11 Lansdowne Gate, Drimnagh, Dublin 12 Beacon South Quarter, Sandyford, Dublin 18 Bakers Yard, North Circular Rd and Portland St, Dublin 1

Sector: Multi-family Portfolio

Sale Date: Q3 2014

Sale Price: €211.25 million Initial Yield: 4.85% (Gross)

Term Certain: N/A

Size: 761 Apartments, approximately 3,386 sq m (36,447 sq ft) of commercial accommodation and 4 development sites extending to approximately 0.70 hectares (1.74 acres) Vendor / Agent: Mazars and ODPM as Receivers on behalf of

NAMA/ Savills & Hooke and MacDonald Purchaser / Advisor: IRES REIT / CBRE

The Orange Collection comprised four suburban Dublin multi-family developments with a total of 761 apartments. The gross passing rent was approximately €10.4 million per annum.

FIGURE 6

The Acorn Portfolio

FIGURE 5

Orange Collection

(13)

013 13

Location: The Park, Carrickmines, Co. Dublin

M1 Retail Park, Drogheda, Co. Louth

Poppyfields Retail Park, Clonmel, Co. Tipperary Four Lakes Retail Park, Dublin Road, Co.

Carlow

Lakepoint Retail Park, Mullingar, Co. Westmeath

Sector: Retail

Sale Date: Q4 2014

Term Certain: Approximately 11 years (WAULT)

Size: Approximately 71,885 sq m (773,769 sq ft) and 31 acres of development land

Vendor / Agent: Grant Thornton as Receiver on behalf of NAMA / CBRE & DTZ

Purchaser / Advisor: Marathon & IPUT / Savills

The Parks Portfolio included the Park Carrickmines in addition to four regional retail parks with an overall gross passing rent of approximately

€9.46 million per annum. The portfolio had a total area of approximately 71,885 sq m (773,769 sq ft) in addition to 31 acres of development land.

Location: Block B Riverside, Sir John Rogerson’s Quay, Dublin 2

Riverside IV, Sir John Rogerson’s Quay, Dublin 2 Hume House, Pembroke Road, Ballsbridge, Dublin 4

Grand Mill Quay, Barrow Street, Dublin 4

Sector: Office

Sale Date: Q1 2014

Term Certain: Approximately 4.2 years

Size: Approximately 29,837 sq m (321,162 sq ft) Vendor / Agent: Grant Thornton and RSM Farrell Grant Sparks

as Receivers on behalf of NAMA / Knight Frank

& CBRE

Purchaser / Advisor: Blackstone / CBRE & Google / Unadvised The Platinum Portfolio comprised four office properties including three Grade A office buildings extending to a total area of approximately 29,837 sq m (321,162 sq ft). The total passing rent of the portfolio was approximately €8.1 million per annum.

FIGURE 8

Parks Portfolio

FIGURE 7

The Platinum Collection

(14)

014 14

Location: Dundalk Retail Park, Dundalk, Co. Louth Douglas Court Shopping Centre, Douglas, Cork Bloomfields Shopping Centre, Dun Laoghaire, Co. Dublin / Kilbarrack Shopping Centre, Kilbarrack, Dublin 5 / The Mill Shopping Centre, Clondalkin, Dublin 22 / B1 & B2 Ninth Lock Road Offices, Clondalkin, Dublin 22 Sector: Retail & Office

Sale Date: Q4 2014

Sale Price: €129.25 million

Term Certain: Approximately 8.3 years

Size: Approximately 43,760 sq m (471,026 sq ft) Vendor / Agent: Lloyds with Receiver / Savills & Bannon

Purchaser / Advisor: Vӓrde / HWBC

The Spectrum Portfolio comprised a variety of Dublin and regional based retail properties including a retail warehouse, grocery retail centres, town centre retail and a suburban shopping centre as well as a State let office block. The overall rent from the portfolio was approximately €9.69 million per annum.

Location: Cherrywood Business Park, Dublin 18 Sector: Office & Retail & Future Development Land

Sale Date: Q4 2014

Sale Price: Region €280 million (€140 million of Commercial Investment Property)

Term Certain: Approximately 6 years

Size: Approximately 52,312 sq m (563,085 sq ft) in addition to approximately 388 acres of undeveloped land

Vendor / Agent: Grant Thornton as Receiver / Savills

Purchaser / Advisor: Hines & King Street / Unadvised

Project Cherry comprised a mixed-use business park including offices and ancillary retail totalling approximately 52,312 sq m (563,085 sq ft) in addition to approximately 388 acres of undeveloped land within an SDZ.

The commercial element benefited from a WAULT of approximately 6 years and had an overall income of €7.47 million per annum.

TABLE 10

Spectrum Portfolio

FIGURE 9

Project Cherry

(15)

015 15

Anna Gilmartin Surveyor Savills Ireland +353 (0) 618 1460 [email protected]

Savills Research and Investments

Please contact us for further information

Brendan Delaney Senior Surveyor, Investment Savills Ireland

+353 (0) 1 618 1715 [email protected]

Carol Cavanagh Surveyor, Investment Savills Ireland +353 (0) 1 618 1424 [email protected]

Linda Forsyth Surveyor, Investment Savills Ireland +353 (0) 1 618 1377 [email protected]

Leona Mullan Surveyor, Investment Savills Ireland +353 (0) 1 618 1314 [email protected]

Shane Corby

Graduate Surveyor, Investment Savills Ireland

+353 (0) 1 618 1450 [email protected]

Paul Callanan Senior Surveyor, Investment Savills Ireland

+353 (0) 1 618 1418 [email protected] Kevin McMahon Senior Surveyor, Investment Savills Ireland

+353 (0) 1 618 1328 [email protected] Marguerite Boyle

Senior Surveyor, Investment Savills Ireland

+353 (0) 1 618 1334 [email protected]

Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 180 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. A unique combination of sector knowledge and entrepreneurial flair give clients access to real estate expertise of the highest calibre. We are regarded as an innovative-thinking organisation backed up with excellent negotiating skills. Savills chooses to focus on a defined set of clients, therefore offering a premium service to organisations with whom we share a common goal. Savills takes a longterm view to real estate and works hard to invest in long term and strategic relationships and is synonymous with a high quality service offering and a premium brand. This bulletin is for general informative purposes only. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. All references to space and floor areas are approximate and apply to the greater Dublin area. The bulletin is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research. (c) Savills Ltd September 2015.

John McCartney Director of Research Savills Ireland +353 (0) 1 618 1427 [email protected]

Domhnaill O’Sullivan Director, Investment Savills Ireland +353 (0) 1 618 1364 [email protected]

Fergus O’Farrell Director, Investment Savills Ireland +353 (0) 1 618 1311 [email protected]

Dessie Kilkenny Divisonal Director, Investment Savills Ireland

+353 (0) 1 618 1401 [email protected]

Diane Crean Associate, Investment Savills Ireland +353 (0) 1 618 1495 [email protected]

(16)