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Which sectors of the market will be most active next year?
I expect to see continued activity in the Dublin and Cork office markets in 2018 on the back of continued strong demand from a range of occupier types with expansion of technology companies remaining particularly prevalent. The ongoing growth in online retail and the consequential requirement for improved logistics facilities, will continue to drive occupier and investor requirements in industrial and logistics assets.
More funds are seeking to diversify their income profile, leading to a large amount of capital looking to invest in alternative real State sectors such as Build to Rent residential, this is further backed up by the supply demand imbalance in the housing sector in Dublin and other large cities.
Have rents and yields peaked across the various asset classes?
While prime headline office rents in Dublin have now peaked, there remains scope for rental growth in the office sector, particularly in suburban and provincial locations. We are also confident that the strong demand and limited supply of stock will drive further rental growth in the industrial and logistics sector in 2018. The outlook for retail rents is not as clear cut with dominant centres and locations seeing strong demand and consequential growth however some peripheral assets are not as active.
Regarding yields, we have seen a significant hardening of office yields in the latter half of 2017, this is reflective of the strong occupier market and the extent of yield arbitrage with most other markets in Europe. Further yield compression for best in class assets is possible given the current low cost of capital internationally and the growth fundamentals Ireland shows versus other locations.
Where are the best investment opportunities at this stage?
Considering the strength of occupier demand, prime well-let office investment opportunities remain attractive, generating returns that satisfy the income generation and wealth preservation aspirations of international and indeed domestic investors.
Demand for modern logistics investments is strong although supply is expected to remain largely constrained in this sector. I expect strongest demand to be for build-to-rent residential investment opportunities considering the extent to which the residential market in major cities is undersupplied, this area also shows very good predictable income characteristics which attracts investors late in the market cycle.
One thing to watch out for in 2018?
While we expect interest rates to remain ‘lower for longer’ in this cycle, one would need to be mindful of a gradual change to quantitative easing and in turn monetary policy over the course of 2018, which in turn will have implications for real estate.
Increased activity is expected in the “alternative real estate sector” especially investment in specialised build-to-rent apartment schemes, student accommodation and primary care facilities. We may also see an increase in investment activity in data centres given the increasing demand by cloud occupiers.
Johnny Horgan is executive director, head of capital markets at CBRE Ireland