Commercial Property

Property outlook 2019: Investment yields in Cork look attractive

Fringe urban areas likely to perform strongly

Premises on Patrick Street in Cork can offer yields above 6 per cent. Photograph: Eric Luke

Adrian Trueick
Wed Dec 5 2018 - 02:00

Which sectors of the market will be most active next year?
The residential investment market is likely to see another strong year, with increased demand from both European and investors from the US driving activity . There is an estimated €375 billion targeting the Irish private rental sector (PRS), with buyers now looking beyond Dublin to the main population centres in Cork, Limerick and Galway.

As most of the standing blocks have now traded, new stock will come from joint ventures or forward purchase agreements with existing residential developers. The volume of these transactions may remain low in the early months of the year as developers look to revise older planning consents in line with the new PRS design standards before selling. There is also potential for a number of larger office sales, with the major pre-lettings achieved in 2018 likely to result in investment transactions in the new year.

Have rents and yields peaked across the various asset classes?
Although interest rates in the US and UK are trending upward, economic growth across Europe remains subdued and there is limited prospects of the EU increasing borrowing costs in the medium term. Although we do not anticipate any significant further tightening in prime property yields, the continued low interest rate environment supports current price levels, suggesting rates will remain steady across 2019.

For office rents, the development pipeline should deliver an additional 600,000sq m of new space by 2020. However, projected completions fall sharply in 2019. Delivery in Dublin 2, the most active market, is anticipated to be less than 40,000sq m. As much of the stock under construction is already pre-let, there is potential for a further increase in rents by mid-year as the supply falls significantly short of demand.

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Where are the best investment opportunities at this stage?
Fringe city areas including Dublin 1, 7 and 8, as well as some of the suburban markets, are likely to perform strongly in 2019. Rents in these areas have lagged the prime market and both rents and yields are likely to tighten as occupier demand pushes out from the centre. Proposed large-scale developments on O'Connell Street, St James's Gate and Smithfield have the potential to be catalysts for change, creating new prime sub-markets in the city and attracting further investment.

Outside Dublin, the city centre markets of Cork and Galway offer attractive investment opportunities, with new office development in Cork in particular providing institutional-quality assets with potential for higher returns. Similarly, the high- street retail markets in these locations now look attractive relative to Dublin, with yields on Patrick Street above 6 per cent.

One thing to watch out for in 2019?
A number of shopping centre portfolios were acquired between 2014 and 2016. The buyers, typically private-equity funds, generally hold for a four- to five-year year period and so would have anticipated either a trade sale or a gradual sell- down of individual centres.

With retail rents, particularly in provincial locations, continuing to struggle, the opportunities to trade at the projected value levels may be limited. While some investors may retain the assets as long-term holders, it is likely that some owners will elect to recycle their capital in the next 12 months, potentially selling at a discount.

Shopping centre and retail park owners may look to add value by securing permission for residential development over existing retail and surface car parks.

Adrian Trueick is director of investments Ireland at Knight Frank International

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