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Emerging REIT sector offers direct exposure to recovering Irish commercial property market

Improving real estate and economic fundamentals, along with legislation introduced in April, have paved the way for the launch of Ireland’s real estate investment trust (REIT) sector, says Davy Research.

To date, there have been two REIT listings – Green REIT, followed by Hibernia REIT. Combined, these vehicles raised almost EUR700m.
 
Hibernia REIT is as yet uninvested, while Green REIT has already spent circa 60 per cent of the EUR310m it raised.
 
After a dearth of activity between 2009 and 2011, the price discovery process in the Dublin office market is now firmly underway. Prime Dublin office yields have compressed from 7.5 per cent in 2012 to 5.75 per cent currently and capital values have appreciated 25-40 per cent since September 2012. A recent feature of the market has been the arrival of foreign capital; overseas investors have been responsible for 60 per cent of the EUR2.4bn invested over the last two years.
 
Occupier levels are also healthy: office take-up in 2013 at 171,000 square metres (1.8m square feet) was the highest since 2007. Prime office rents are up 27 per cent since bottoming in 2012. While the overall vacancy rate at 15.33 per cent remains elevated, it is as low as 4.5 per cent for Grade A space in the core Dublin 2/Dublin 4 central business district.
 
“The Irish commercial real estate sector has entered a new phase of office development and refurbishment. There has effectively been no new commercial build since 2010, but the uplift in values and fundamentals now supports new projects,” says Ray Crowley of Davy Research. “But with near-term supply likely to be constrained, we believe rents can get back to EUR538 per square metre (EUR50 per square foot) from EUR377 per square metre (EUR35 per square foot) currently. In addition, some further yield compression is likely. All this suggests further upside to capital values.
 
“We also expect volume levels to remain strong, underpinned by almost EUR32bn of real estate-backed debt that is earmarked for disposal.
 
“Although significantly less liquid, we are also positive on the prospects for the industrial sector given the supply/dynamics at play here. However, for now, we are relatively more cautious on retail given lower levels of investment liquidity and rental growth prospects.”

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