23 Sep 2019

Irish REITs: Savills research highlights strong Dublin office market

New research by Savills has shown that Dublin office take-up in H1 this year of 160,000 sqm was higher than in the same period of each of the last three years, with the increase largely driven by higher public sector demands. 

Take-up by this sector accounted for 27% of total space leased in H1, the highest proportion for 10 years, reflecting higher public sector employment levels (Brexit is a factor here) and efforts to upgrade office space for State employees. 

In terms of supply, 63,000 sqm of new space was delivered in H1, but net additions – accounting for the stock that has been taken out of the market – amounted to less than half (43%) of the gross space delivered. The Dublin office vacancy rate remained broadly unchanged during the first half of the year, nudging just slightly higher from 8.1% to 8.3%, although this is well below the estimated Natural Vacancy Rate – the rate that typically delineates positive from negative rental growth. However Savills notes only weak inflationary pressures in the market at present in terms of benchmark prime headline rates, although it notes that growth in rents in suburban locations and tightening rent-free periods reflect the strong demand environment. 

Looking ahead, the agency describes prospects for the Dublin office market as “quite favourable”. Net additions to the stock are unlikely to exceed 100,000 sqm this year, with the vast majority of space to come on stream in H2 already committed. When set against a positive demand outlook, Savills expects the modest decline in vacancy rates observed between Q1 and Q2 to continue for the remainder of the year which will ensure that rents remain well supported in the absence of unforeseen shocks (such as a no-deal Brexit next month). A higher level of completions is expected next year however based on an analysis of current on-site activity.

UK this week

The agenda in the UK will continue to be dominated by Brexit, although there is a lack of definitive dates to watch out for. One event which is set to be of interest is the Supreme Court judgement on the PM’s advice to the Queen on proroguing Parliament, which is expected to be delivered on Tuesday. The key issue is whether the Supreme Court judges the issue a matter of the Court and rules against the government. Under such an outcome, the PM has indicated that he would follow the Court’s ruling, which could see a recall of Parliament, possibly as soon as this week. 

Meanwhile, negotiations between the UK and the EU are likely to continue behind the scenes, with the key demand from the EU being some form of concrete proposal from the UK by Monday of next week. Whilst it is very unlikely that any sort of real breakthrough will be made before the 17-18 October EU Summit, talk is set to continue to surround the possibility of a Northern Ireland only ‘backstop’. If anything the PM may be encouraged by comments from DUP leader Arlene Foster, who appeared to be softening her stance on the issue, suggesting the DUP would be willing to be ‘flexible’ when looking at Northern Ireland specific solutions. 

Away from Brexit, economic data is limited to public finance figures for August, GfK consumer confidence and comments from BoE Governor Mark Carney who speaks from Frankfurt on Thursday. 

Europe this week

Within the Euro area, surveys will also be the theme of the week, the highlight being the PMIs on Monday. We suspect that September’s ‘flash’ Composite PMI will see a small rise to 52.1 from August’s reading of 51.9. Germany’s IfO survey will be another one to watch as markets scrutinise data for any signs that Germany might enter a technical recession in Q3. Meanwhile various confidence indicators from a number of member states will also punctuate the economic calendar. We also hear from both ECB chief Mario Draghi & Chief Economist Philip Lane later today.

US & RoW this week

US GDP figures are due on Thursday, but these represent the third estimate of Q2’s performance, where the previous reading stood at 2.0% (saar). If anything, the bigger question is how growth in Q3 is shaping up. Here, PMI survey data could provide some indication of activity in September. Additionally consumer confidence, the Fed’s favoured PCE measure of inflation (both due Friday) and housing market figures are set for release (Wednesday & Thursday). 

After the flood of central bank meetings last week, the only central bank meeting of note is that of the Reserve Bank of New Zealand on Wednesday. Also worth noting is the UN General Assembly meeting starting on Tuesday, where a number of matters from US/China trade (see note below), Brexit, and the recent attacks on Saudi production facilities could come up for discussion. Note that Japanese markets are closed for a public holiday today.

US-China trade talks

US and Chinese deputy negotiators look to have made some positive progress after two days of bilateral negotiations in Washington. China’s Ministry of Commerce described the talks as having been “constructive”, whereas the US Trade Representative labelled them “productive”. 

Markets had initially sold off on Friday after the trade delegation from Beijing cut short their trip by cancelling planned visits to farms in Montana and Nebraska, with the S&P 500 ending 0.5% lower amid concerns that negotiations had broken down. However, subsequently senior Chinese agricultural official Han Jun has sought to play down the significance of the cancellation by telling the state-owned China Business News “the change in the plan had nothing to do with the trade negotiations, as the trip was a stand-alone arrangement”. 

Additionally, the two sides have confirmed that high-level trade negotiations will resume next month in Washington. Nevertheless, despite the signs of progress in the US-China trade dispute, equities remain under pressure with the Shanghai Composite down 1.5%, the Hang Seng falling 0.8%, whereas futures markets point to the S&P 500 rising 0.4% at the open. 

Economic Releases

09.00  EU   Manufacturing PMI

09.00  EU   Services PMI

14.45  US   Manufacturing PMI

14.45  US   Services PMI