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Savills Research – Q4 2020
MARKET
IN Ireland
Investment Market
MINUTES
Savills Research
Macro view • Capital flows • Outlook
Ireland Investment Market
INVESTOR APPETITE
Hotels Student Logistics/
Housing Industrial
PRS
Social
Co-Living Housing
Retail
Offices
Key Themes in 2021 INVESTOR APPETITE
1 Figure 1: CFOs talk ESG
The number of mentions of the term “ESG” be Chief Financial
Officers at global companies during quarterly earnings calls
ESG will Hotels
cement its position as the Social
Housing
dominant investment consideration
Student
Housing
Logistics/
250
Industrial
While environmental, social and governance (“ESG”) has
come to the fore over the last number of years, 2021 will 200
Retail its position as being
be the year that it really cements
PRS
the dominant investment consideration for both debt
and equity investors. We have already seen evidence 150
Co-Living
growing in the Irish market of ESG requirements
becoming more prevalent, in-line with internal policy
requirements to meet this growing agenda. In addition, 100 Offices
with disclosures around ESG becoming a regulatory
requirement and with President Biden making it a key
theme of his presidency, the pressure on lenders to have 50
a suite of sustainable loan products will continue to grow
in 2021. Buildings without green credentials will struggle
to attract capital from institutional portfolios which will 0
2015-Q1
2015-Q2
2015-Q3
2015-Q4
2016-Q1
2016-Q2
2016-Q3
2016-Q4
2017-Q1
2017-Q2
2017-Q3
2017-Q4
2018-Q1
2018-Q2
2018-Q3
2018-Q4
2019-Q1
2019-Q2
2019-Q3
2019-Q4
2020-Q1
2020-Q2
2020-Q3
2020-Q4
lead to a widening in the pricing spread between new
and secondary buildings compared to what we have
been used to historically.
Source: Sentieo
savills.com/research 2
Ireland Investment Market
2
Prime office yields will contract
After the GFC, Ireland retained a pricing discount compared between office yields and 10-year Government bonds
to core European markets due to reservations regarding ended 2020 at an all-time high. As a result of these
economic and property market resilience to exogenous dynamics, there is a wall of money seeking to deploy in
shocks. The stability of both through the pandemic is the office sector for the right income streams. Specifically
helping change this perception of a proclivity for volatility green buildings with more than 10-years of A-rated income
and erode this pricing spread. Furthermore, the spread remaining will see yields contract to 3.5% in 2021.
Figure 2: Spread between prime Dublin office yield and 10-year Irish Government Bond
500
400
300
200
100
0
%
-100
-200
-300
-400
-500
2013-Q1
2013-Q3
2014-Q1
2014-Q3
2015-Q1
2015-Q3
2016-Q1
2016-Q3
2017-Q1
2017-Q3
2018-Q1
2018-Q3
2019-Q1
2019-Q3
2020-Q1
2020-Q3
2021-Q1
2021-Q3
2022-Q1
2022-Q3
2023-Q1
2023-Q3
2024-Q1
2024-Q3
2025-Q1
2025-Q3
2026-Q1
2016-Q3
2017-Q1
2017-Q3
2018-Q1
2018-Q3
2019-Q1
2019-Q3
2020-Q1
2020-Q3
Source: Eurostat, Savills Research
3 4
We will see an increase in Forward Debt will continue to follow equity
Fund PRS deals taking place
The level of fundraising that has taken place for direct
property lending in Europe has been unprecedented in
With investor appetite for PRS stock heavily outweighing the last 24-months, with the ‘dry powder’ available to
the universe of investable stock, we will see an increase in lend running into multiple billions of Euro. High-quality
forward-fund deals taking place. Capital will flow to those assets and income streams will continue to attract debt
developers who have strong balance sheets, a track record at competitive terms. On a recent mandate, over eight
in dealing with institutional investors and who are attuned term sheets were received from lenders for a newly
to their reporting requirements. However, do not expect built Dublin office scheme. As well as office assets with
to see these take place under the build-to-rent planning strong WAULTs, we will some of the most competitive
guidelines as the optionality value of being able to sell debt terms being offered in the PRS and social housing
units on a break-up basis within 15 years of construction sectors. Appetite from lenders, notably alternative, has
still outweighs the greater density that can be achieved grown exponentially for industrial and logistics assets
under the BTR planning framework. with many lenders now waiting for borrowers who can
offer them scale in this sector.
Capital will flow to developers who have
strong balance sheets, a track record in
dealing with institutional investors and who
are attuned to their reporting requirements
savills.com/research 3Ireland Investment Market
Global real estate investors will place even importance on the
macro stability and fiscal sustainability of the sovereign when
deciding on capital allocations in 2021
Figure 3: 10-year bond yields
Italy Ireland Germany
3.0
2.5
€3bn 2.0
1.5
worth of investments
1.0
%
changed hands in 20200
0.5
0.0
-0.5
-1.0
2019-01
2019-02
2019-03
2019-04
2019-05
2019-06
2019-07
2019-08
2019-09
2019-10
2019-11
2019-12
2020-01
2020-02
2020-03
2020-04
2020-05
2020-06
2020-07
2020-08
2020-09
2020-10
2020-11
2020-12
Source: Eurostat
€1.2bn Macro view
was spent on both the
Tightening Government bond rates increasing the relative
Office and PRS sectors
attractiveness of Irish commercial property.
Ireland’s economy is estimated to have grown by Germany Ireland
with, inter alia,Italy
the ECB, the Federal Reserve and
3.4% in 2020 according to the3.0ESRI. Incredibly, this the Bank of England all mobilising to inject financial
is higher than the forecast which they made at the liquidity. While interest rates are trading at historic
2.5
start of 2020 of 3.3% and before the pandemic was on lows across the board, Ireland’s 10-year bond yield
the radar. It also represents2.0
an even more remarkable is much more aligned with the European core than
turnaround on the ESRI’s Summer publication, by southern European countries. For example, Ireland’s
which time they expected the 1.5pandemic to result in budget deficit for 2020 – due to the stronger economic
a 12% contraction in the economy for 2020 under growth – is estimated to have been 5.5% compared to
1.0
%
the baseline scenario and 17% under the severe 10.8% for Italy, with much better economic growth
scenario (which modelled a0.5 second wave and which prospects to boot. Therefore, Ireland’s 10-year bond
subsequently came to pass). The positive economic currently trades at a negative yield (-0.29% average in
out-turn for 2020 also puts0.0Ireland in a unique December), which is 87 basis points (bps) below Italy
Industrial market saw the
position at a European level, with the economy of the and just 33 bps above Germany. As we come out of
largest deal of the year -0.5 by 8.0% according to
EU expected to have contracted the pandemic, questions around fiscal sustainability
the EU Commission. Adding to the strangeness of the arising from debt accumulated during the pandemic
-1.0
numbers, and despite the growing economy, Ireland’s will be asked, especially where they intersect with low
unemployment rate rose from 5.0% to 18.4% over the economic growth prospects.
2019-01
2019-03
2019-06
2019-09
2019-12
2020-03
2020-06
2020-09
2020-12
period even though income tax receipts were down In the aftermath of the Global Financial Crisis, it
just 1%. Clearly then, these are not normal times. was the uncertainty regarding the sustainability of
The surprise out-performance of the Irish Ireland’s government debt profile that resulted in
economy can largely be attributed to the strong commercial property yields spiking. While continued
€ performance of multinationals through the
pandemic. In particular, the life sciences and tech
sectors largely continued to grow strongly even as
monetary support means these issues are unlikely to
come to the fore in the next year or two, the pandemic
could bring these countries’ debt sustainability
the retail and hospitality sectors suffered. Given into question once again at some future point. As
that Dublin’s office and PRS markets are heavily a result, global real estate investors will place even
influenced by tech, this is also a positive for these more importance on the macro stability and fiscal
Prime investment yields
property sectors from an occupational perspective. sustainability of the sovereign when deciding on
look increasingly attractive
At an international level, an aggressive monetary capital allocations in 2021. In this context, Ireland’s
relative to bonds
response played a pivotal role in ensuring the financial relative stability during the pandemic period should
stability of the global economy. Major central banks help it attract further global capital flows which will
acted in unison to provide a global monetary stimulus put downward pressure on prime yields in 2021.
savills.com/research 4Ireland Investment Market
Key Offices Retail Multi-family Indu
Investment turnover two of the largest transactions happening Figure 4: Annual investment turnover
Mixed Hotel Student O
in Q4: Amundi bought 28 Fitzwilliam
100 for
Q4 2020 saw a pick-up in investment €177.5m from the ESB while Deka bought
8,000
turnover, with €1.3bn invested in income- Baggot Plaza from Kennedy Wilson
90 for
producing real estate assets across 44 €141m. Significantly, four of the top five
7,000
separate transactions bringing year-to-date transactions occurred after Q1 80when the
investment volumes to €3.0bn. This was pandemic had already reached Ireland,
70 6,000
just ahead of the ten-year average of €2.9bn and all were acquired by European buyers.
but below the five-year average of €4.4bn. This activity reflects that Dublin
60 offices 5,000
Dublin represents 97% of all deal flow. continue to offer attractive yields at a
%
The biggest deal outside Dublin in 2020 European level, but also the continued
50
€m
4,000
was the sale of City East Retail Park in confidence that institutional buyers have in
Limerick for €18m to private buyer 40
the office market more generally.
3,000
Eden Capital. On the debt side, pricing and leverage
ratios have remained stable for 30prime
2,000
Investment by sector office properties over the last year despite
20
the pandemic, with a preference for multi
1,000
OFFICE rather than single let assets in10
the current
Over €365m worth of office assets environment. As on the equity side,
0
transacted during Q4, bringing the total German lenders are the most active
0 and
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
turnover for the office sector to just competitive in their terms, reflective2012
of 2013 2014 2015 2016 2017 2018 2019 20
over €1.2bn in 2020. The office sector the cheaper cost of capital that they have
accounted for 41% of total turnover with access to.
Source: Savills Research
Figure 5: Investment turnover by sector
Offices Retail Industrial Mixed
Hotel Other Student Multi-family
100
90
80
70
60
50
%
40
30
20
10
0
2012
2013
2014
2015
2016
2017
2018
2019
2020
28 Fitzwilliam
Source: Savills Research
Table 1: Top 5 office deals
Quarter Property Vendor Buyer Price
Q2 2020 Bishop's Square, Dublin 2 Hines GLL €183.0m
Q4 2020 28 Fitzwilliam St, Dublin 2 ESB Amundi €177.5m
Q4 2020 Baggot Plaza, Dublin 4 Kennedy Wilson Deka €141.0m
Q1 2020 The Treasury Building, Dublin 2 Private Vendors Google €115.5m
Q3 2020 2 Burlington Road, Dublin 4 Henderson Park KGAL €94.0m
Source: Savills Research
savills.com/research 530%
20%
Ireland Investment Market
10%
0%
2012 2013 2014 2015 2016 2017 2018 2019 2020
PRS OTHER Figure 6: Investment turnover by buyer type
PRS remained in high demand in Q4 The Logistics sector was one of the only
2020, with deals worth €533m transacting sectors in 2020 that saw both its turnover
Institutional/REIT Confidential
bringing full-year expenditure to just under and share of overall turnover grow in
Private Individual/Syndicate Other
€1.2bn. This brought the PRS sector’s share 2020. This was driven by Singaporean
Prop Co. Private Equity
of the investment market for 2020 to 39% – Sovereign Wealth Fund GIC’s Q4
100
its highest-ever share and reflective of the purchase of the Exeter Group Portfolio
defensive characteristics of this sector. for €200m – the largest investment 90
Several noteworthy PRS transactions deal of 2020. The portfolio consists of
took place during Q4, the largest of which over 30 assets around Dublin. The other 80
was the off-market sale of PRS assets significant sale in the ‘other’ category was 70
worth €140m. Another was the sale of the sale by Dalata of the Clayton Hotel in
Blackwood Square on Dublin’s northside Dublin for €65m to Deka. When these two 60
by Cosgrave Property Group to Round Hill deals are excluded, the average deal size
50
%
Capital/QuadReal for €123.5m. Looking at in the ‘other’ category was less than €5m.
the full-year, DWS made the two largest 40
transactions of the year, namely Haliday Investment by buyer type
House and Cheevers Court in South 30
Dublin for €195.0m and the Prestige Private equity investors and institutional
20
Portfolio in North Dublin for €145.0m, investors were the dominant buyer types
both of which transacted in Q3. The in 2020, making up 72% of total flows 10
sector’s appeal to investors is driven by over the year. The third-largest category
Ireland’s high population growth relative is ‘other’ and accounted for 16% of 0
2012
2013
2014
2015
2016
2017
2018
2019
2020
to the rest of the EU and low vacancy rates. transactions in 2020. Sovereign wealth
Rental growth has moderated and the Q3 funds fall under this category with the
2020 RTB index reported private rental GIC deal described above the major driver
growth of 0.9% y/y in Dublin. of this. Source: Savills Research
Table 2: Yields by sector
Yield Q4 Annual
Asset
2020 Change
Offices – Prime CBD Yields 4.00% 0.00%
Offices – Secondary CBD Yields 5.00% 0.00%
Logistics – Prime Yields 4.25% -0.75%
Logistics – Secondary Yields 6.25% -1.25%
Shopping Centres – Prime Yields 5.75% 1.00%
Shopping Centres – Secondary Yields 9.25% 1.25%
Warehouse Retail – Prime Yields 5.00% 1.00%
Warehouse Retail – Secondary Yields 9.50% 1.25%
High Street – Prime Yields 4.25% 0.75%
High Street – Secondary Yields 7.00% 1.00%
PRS – Prime Yields 3.60% -0.15%
Clay Farm
PRS – Secondary Yields 5.00% -0.25%
Source: Savills Research
Table 3: Top 5 PRS deals
Quarter Property Vendor Buyer Price
Q3 2020 Haliday House & Cheevers Court, County Dublin Cosgraves DWS €195.0m
Q3 2020 Prestige Portfolio MKN DWS €145.0m
Q4 2020 P&C Confidential Confidential €140.0m
Q4 2020 Blackwood Square, D9 Cosgraves Round Hill Capital/QuadReal €123.5m
Q3 2020 Clay Farm phase 1c, D18 Park Developments Urbeo €75.0m
Source: Savills Research
savills.com/research 6Ireland Investment Market
Key considerations for real
estate investors
Although monetary intervention – in conjunction with better than
expected economic performance – has supported real estate valuations
through the pandemic, there are a number of risks that investors will
have to be mindful in 2021.
1 2
Vaccine Inflation
The vaccine roll-out is clearly going less smoothly While we are unlikely to see a deviation from
than initially expected. This makes modelling the supportive monetary policy in Europe or the
timing and nature of the recovery phase harder US in 2021, an unexpected inflation spike in
to underwrite from an investor’s point of view. H2 could force Central Banks into difficult
However, once a clear timeline out of the pandemic decisions regarding rate rises. This would put
starts to emerge, occupational markets will upward pressure on real estate yields and
respond quickly in anticipation of the opening-up call into question the sustainability of the
of the economy. For example, in the context of a pandemic debt built up by countries, although
constrained office pipeline where in excess of 60% Ireland is better placed than most in this
of new supply over the next two years is already let, regard as previously discussed.
office occupiers will compete to acquire the best of
the newly developed and available buildings that
were delivered in 2020.
4 3
Secular changes Diversification
in behaviour
The pandemic represents a shock to society – With Central Bank intervention backstopping all
along with previously held norms of behaviour and risk assets, investment classes are becoming more
preference – that we have not seen before in the correlated with each other in their risk-return profile
modern economy. With no past experience to draw as they increasingly rely on Central Bank provided
on, there is uncertainty regarding how occupational liquidity as the source of their returns. Therefore, the
real estate markets will evolve in the post-pandemic diversification benefits normally gained by adding
world. In this environment, defensive assets such as real estate to a portfolio are reduced.
PRS will out-perform.
savills.com/research 7Ireland Investment Market
Outlook As a result, approximately $340bn of dry power was raised
last year for deployment to real estate globally. Ireland is well
In an era of continued ultra-low interest rates, real estate is likely placed to attract real estate capital that will be deployed on a
to retain its relative attractiveness as an asset class. With some pan-European basis this year due to its robust relative economic
investors believing that inflation risk is only going to increase performance through the pandemic.
through 2021, real assets such as property offer a good hedge However, given the fact that foreign buyers account for the
against inflation while offering predictable cash flows with a majority of the investment flow, the market outlook for 2021 will
generous yield spread over Government bonds. be challenged by the practicalities of selling internationally. With
a large spike in cases in early 2021, the Government has put the
country into a full lockdown and these restrictions on mobility
$340bn
will dampen market activity in the first quarter of 2021. As efforts
to inoculate the population progress at home and abroad, the
freeing up of movement will allow for easier access to the Irish
of dry power was raised last year for deployment market for cross-border investors and be supportive of increased
to real estate globally investment volumes.
Figure 7: Global Real Estate Dry Powder by Strategy
Key Value added Opportunistic Core Core-Plus RE debt Others
400
350
300
250
USDbn
200
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: Preqin (November 2020), Savills
Savills team Domhnaill O’Sullivan Fergus O’Farrell John Ring
Director, Investment Director, Investment Director, Research
Please contact us for +353 (0) 1 618 1364 +353 (0) 1 618 1311 +353 (0) 1 618 1431
further information domhnaill.osullivan@savills.ie fergus.ofarrell@savills.ie john.ring@savills.ie
Isobel O’Regan Kevin McMahon Brendan Delaney Brian Farrell Andrew Blennerhassett
Director, Cork Commercial Divisional Director, Investment Divisional Director, Investment Debt Advisory Research Analyst
+353 (0) 21 490 6344 +353 (0) 1 618 1328 +353 (0) 1 618 1715 +353 (0) 87 807 8057 +353 (0) 1 618 1705
isobel.oregan@savills.ie kevin.mcmahon@savills.ie brendan.delaney@savills.ie brian.farrell@savills.ie andrew.blennerhassett@savills.ie
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