Ireland Commercial Real Estate Market Update 2nd Quarter 2016

Kurt Wright, CFA Chief Executive Officer www.quadrantrea.com ATLANTA  DUBLIN  LONDON  SYDNEY

+1 770 752 6713 [email protected]

IRELAND COMMERCIAL REAL ESTATE MARKET UPDATE

2nd Quarter 2016

Table of Contents Ireland Market Summary……………………………………………………………………………………………………………....2 Dublin…………………………..……………………………………………………………………………………………………………......3 The Dublin Commercial Real Estate Market…………………………………………………………………................….4 Contacts…………………………………………………………………………………………………………………………..............….7 Important Disclosures……………………………………………………………………………………………………………….. ….7

About Quadrant Real Estate Advisors Quadrant Real Estate Advisors LLC (“Quadrant”) is a United States SEC registered investment adviser and Australian Securities and Investments Commission (“ASIC”) Foreign Registered Corporation (ABN 39 123 863 963). QREA Europe LLP ("QREA") is a subsidiary of Quadrant. QREA Europe LLP (registration number 610613) is authorised and regulated by the Financial Conduct Authority. Quadrant has approximately $7.1 billion of commercial and multifamily real estate investments under management on behalf of institutional investors. Clients include insurance companies, pension funds, sovereign wealth management funds, and high net worth investors. Since 1993 Quadrant’s senior management has worked together as a team providing the firm’s clients with access to both privately placed and publicly traded U.S. commercial real estate debt and equity investments through commingled funds and single client accounts. In addition to experience, senior management controls 100% of the firm, thereby providing true alignment of interests and accountability. The firm’s executive leadership includes Kurt Wright, Chief Executive Officer; Thomas Mattinson, Executive Vice President; and Walter Huggins, Executive Vice President.

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IRELAND COMMERCIAL REAL ESTATE MARKET UPDATE Kurt Wright, CFA Chief Executive Officer

2nd Quarter 2016

Ireland Market Summary

+1 (1) 770 752 6713 [email protected]

 Real Gross Domestic Product (“GDP”) growth in Ireland year-on-year for the June 2016 quarter recorded a rise of 0.4% from the previous quarter to reach 6.0%.

Richard Sauerman Head of Global Research

 The European Central Bank (“ECB”) Main Refinancing Rate remained at 0.00% during the June 2016 quarter, down from 0.05% at the conclusion of 2015.

+1 (1) 770 410 3716 [email protected]

www.quadrantrea.com www.quadrantrea.com ATLANTA ATLANTA

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DUBLIN DUBLIN

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LONDON LONDON

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SYDNEY SYDNEY

 The ECB corporate bond stimulus scheme began on June 8 with the purchase of €348 million corporate bonds. Alongside its current sovereign-bond buying program started in early 2015, the ECB is on track to buy debt worth €7.9 billion a month. The program is expected to be enough to drive inflation to the ECB’s target.  Following Brexit, policy makers raised concerns that the pool of securities eligible for quantitative easing has shrunk after investors piled into the region’s safest assets and pushed yields on some sovereign debt down too far to meet its current criteria.  This may cause the ECB to consider loosening the rules for its bond purchases to ensure enough debt is available in the aftermath of the Brexit vote.  Inflation in the Eurozone returned to positive during June 2016, recording 0.1% growth, which still sits significantly below the ECB’s target rate of 2.0%.  Irish unemployment improved during the June quarter, falling to 7.8%, down from 8.8% in March. Bloomberg forecasts the rate will continue to drop during the remainder of 2016 to reach 7.4%.

Key Economic Indicators

Source: Bloomberg, Central Statistics Office Ireland Note: The 2012 10-Yr Irish Government Bond Yield is a linear interpolation of the 2011 and 2013 yields because no benchmark 10 year bond existed in 2012. A consensus forecast for the 2016 10-Year Irish Government Bond Yield is not available as of the issuance of this report.

 The Irish commercial real estate (“CRE”) market remained buoyant throughout Q2 2016. The unexpected result of the June 23 Brexit Referendum is expected to bode well for the Irish market as firms seek to relocate to euro-denominated areas.  The CRE market is strengthening from an increase in development-related activity within all sectors, especially the Dublin office and hotel sectors. There has also been a notable shift in investment activity to provincial regions outside of Dublin and alternative sectors such as purpose-built student accommodation and aged care accommodation. Quadrant Real Estate Advisors LLC www.quadrantrea.com

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IRELAND COMMERCIAL REAL ESTATE MARKET UPDATE

2nd Quarter 2016

 Prime yields remained stable across Dublin Office, Retail and Industrial sectors during Q2 2016. Vacancy rates also remained stable with rents continuing to rise from late 2015.

Prime Property Yields Property Type Office (1) Retail (2) Industrial (1)

March 2016 4.65% 3.25% 5.75%

June 2016 4.65% 3.25% 5.75%

Change 0.00% 0.00% 0.00%

Source: CBRE, Savills (1) Metric presented for property in the greater Dublin area. (2) Metric presented for the high street retail district of Dublin.

 Relevant benchmark rates as of June 30, 2016 are as follows: Benchmark 3-month Euribor 5-year EUR Swap 10-year EUR Swap

March 2016 -0.24% 0.23% 0.56%

June 2016 -0.29% -0.60% 0.42%

Source: Bloomberg.

 A material capital gap remains for financing high quality development opportunities. o Capital gap is expected to increase due to the Brexit result. o Lending continues to be bank dominated, with the banks generally limited to 65% loan-to-value and restricted from lending on speculative development.  Dublin banks have indicated their willingness to lend on student accommodation, albeit restricted to 65%-loan-to-cost. o Pricing for loans is not expected to improve materially within the Dublin market. o Furthermore, most non-bank mezzanine lenders are too expensive for Irish property owners.  It is expected that the Leave result in the Brexit vote may lead to an influx of companies to Ireland in the medium to long term. A gradual increase in construction for office space, hotels and residential developments will create opportunities for investors to realize attractive risk-adjusted returns on development/redevelopment stretch senior loans and competitively-priced mezzanine debt.

Dublin Dublin is the largest city in, and the capital of, the Republic of Ireland. Home to nearly 40% of Ireland’s population, the city is the country’s cultural and social hub. Dublin is also the center of Ireland’s economic infrastructure. According to the Dublin Chamber of Commerce, the greater Dublin region accounted for 42% of Ireland’s 2014 GDP (most recent data available). Following an especially severe recession and the collapse of the Irish banking system (2008-to-2009 global financial crisis), Ireland’s business-friendly tax environment (12.5% general corporate tax rate) has spurred a strong economic recovery. Primary drivers of the Dublin market are an influx of leading tech-based companies (e.g. Facebook, Google, Amazon, Linked In, etc.) and a resurgence in the financial and tourism sectors. These industries (among others) are hiring thousands of new employees each quarter, bringing in young, highly skilled professionals. This is driving demand for 1) high quality office space into which businesses can expand, 2) residential housing (including, increasingly, rental housing) for new Quadrant Real Estate Advisors LLC www.quadrantrea.com

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IRELAND COMMERCIAL REAL ESTATE MARKET UPDATE

2nd Quarter 2016

employees, 3) retail space near population centers for major retailers seeking prime exposure, and 4) hotel rooms for business travelers. All of these trends are contributing to positive CRE fundamentals in Dublin.

The Dublin Commercial Real Estate Market 

Dublin Office sector outlook is favorable.  Prime rent remained stable throughout Q2 2016 between €57.5 and €60 per sq ft (City Centre); 2016 forecast – €65 per sf.  Prime yield (cap rate): 4.65% (City Centre), remaining stable from the previous quarter.  Gross take-up in Dublin during the second quarter of 2016 totaled 400,406 sq ft across 65 individual lettings. The total amount for the first half of 2016 reached 964,887 sq ft compared to the same period in 2015 at 1,313,197 sq ft. The decreased amount is due to limited supply and a number of large lease negotiations expected to be completed in Q3.  €691.2 million of office investment transactions greater than €1 million occurred during the second quarter of 2016, accounting for 32% of Irish market transactions. €198 million of these transactions were for mixed-use properties, which included office properties.  At the conclusion of Q2 2016, there were 27 office schemes under construction in Dublin, accounting for approximately 3,713,550 sq ft of new office space available to the market between now and early 2019.  The overall vacancy rate in Dublin increased slightly during Q2 2016 from 8.0% to 8.36%.  The unexpected outcome of the Brexit referendum is leading to a potential increase in demand for Dublin office properties, as firms from London seek to relocate to alternative Eurodenominated capitals.

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o

Financial services is a particular source of jobs in Dublin, in particular, fund asset management is a €3 trillion industry, which employs a large work force including investment managers, accountants, legal, fund managers, depositaries etc. In the wake of Brexit, certain fund asset managers are reportedly seeking to relocate their fund activities to either Dublin or Luxembourg in order to maintain access to European investors.

o

Service firms such as audit firms (PWC, KPMG, Deloitte, etc.) and law firms (Arthur Cox, William Fry etc.), are all expanding to service the above growth.

Dublin Retail sector outlook is favorable.  Prime (Zone A) rent approximation: €5,500 per m2 (Grafton Street); €4,000 per m2 (Dundrum); €4,000 per m2 (Henry Street); €3,000 per m2 (Blanchardstown). o

Zone A represents the first 20 feet of storefront that is closest to the window.

o

Rent approximations for the entire ground floor are not available as of the date of issuance of this report.

 Prime yield (cap rate): 3.25% (High Street)  According to the CSO Ireland Retail Sales Index, sales volumes increase by 0.7% during the month of May 2016, with an increase of 6.5% in the annual figure. Sectors which saw the greatest increases include Hardware, Paints & Glass, and Books, Newspapers & Stationery. Quadrant Real Estate Advisors LLC www.quadrantrea.com

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IRELAND COMMERCIAL REAL ESTATE MARKET UPDATE

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 The pace of continued positive trajectory in sales values is uncertain given cost increases (including wages and double digit rent increases in certain prime retail spaces). Ongoing LUAS disputes are also likely to impact Dublin retail.  The result of the Brexit referendum has created a level of uncertainty in the Dublin retail market, especially pertaining to UK retailers already established in the Irish market. British retailers may limit their investment in the Dublin market in favor of their domestic stores creating concerns for the Dublin retail sector.

 Dublin Industrial sector outlook is favorable.  Prime rent approximations: €85 per m2, expected to increase in H2 2016.  Prime yield (cap rate): 5.75%  Transactional activity remained strong throughout the second quarter 2016, however, due to supply constraints no sales occurred for large properties over 100,000 sq ft.  Activity was primarily focused on the Dublin North East (N1/M1) corridor, accounting for 35% of all sales and lettings in Dublin during Q2 2016. The North West (N3) corridor accounted for 20% of activity, while 19% occurred in the Dublin South West (N7) corridor.  Take-up volume in the second quarter reached 54,988 m 2, bringing the total for H1 2016 to 119,705 m2, down 35% from the same period in the previous year.  Appetite for attractive industrial properties remains strong within the Dublin market; however, supply remains constrained, especially for larger properties.  Supply shortages are expected to continue in the short-to-medium term, leading to a tightening in tenant incentives as landlords remain in control of the sector. Note: For industrial property in Ireland, industry convention is to include both lettings and acquisitions by owner-occupiers in the total take-up for the period.

 Dublin Hotel sector outlook is highly favorable.

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PriceWaterhouseCoopers believes Dublin will be the second-best performing city behind Rome, by RevPAR during 2016 at a rate of 9.1%. They forecast further that this trend will continue into 2017 and Dublin will be the best performing city with a rate of 8.2%.

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Savills believes the hotel industry will remain robust in 2016, maintaining the strength of 2015 where occupancy rates increased by 4%. Demand continues to be driven by international travelers, both in the business and leisure travel sectors.

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Supply continues to be an issue in the Dublin hotel market, with only 2,000 new hotel rooms expected to come to market in the next five years. The Irish Tourism Industry Confederation (“ITIC”), however, estimates that Dublin requires an additional 5,000 new rooms by 2020 to manage increased tourist numbers.

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The O’Connell Street area is due to increase its number of hotels, with three new properties planned, including a 107-bed property on Moore Lane. Approvals have also been granted for new hotels in the Docklands, Christchurch and the Liberties (near Dublin Airport).

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Recent Brexit news has not hindered appetite for hotel properties, with three Dublin hotels managed by Fitzpatrick Lifestyle Hotels attracting bids of up to €150 million. There are currently €400 million of similar assets on the market in Dublin with a number of overseas investors signaling strong interest. 5

IRELAND COMMERCIAL REAL ESTATE MARKET UPDATE

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 Dublin Multi-family sector outlook is favorable.  Dublin residential development is expected to receive a boost from the Brexit vote as office occupiers seek to relocate to Dublin over the medium term. Additional supply will be required to satisfy demand.  There is a currently significant undersupply in the Dublin multi-family market, with Savills forecasting a need for approximately 12,000 new units per annum to satisfy demand..  There have been a number of announcements during Q2 2016 relating to the Irish multi-family development sector including: o

The appointment of a dedicated Minister for Housing in the new administration.

o

Publication of the recommendations of the Government’s Housing Committee that will feed into the new Housing Strategy due out later this Summer.

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The announcement of a new Local Infrastructure Housing Fund, which will help the viability of development.

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Relaxation of height restrictions in Dublin City.

o

The publication of new development plans in some local authorities.

 The government has also implemented a number of new supply-side measures to promote construction in the multi-family and residential sectors including: o

Rebates of local authority levies in respect of affordable housing developments in Dublin.

o

Reduced minimum design standards to cut apartment building costs.

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The National Asset Management Agency (“NAMA”) to deliver 20,000 residential units before the end of 2020.

Sources            

Quadrant Real Estate Advisors LLC www.quadrantrea.com

Bloombergs, www.bloomberg.com; Central Statistics Office Ireland (CSO), www.cso.ie; ECB splurged in Buying Corporate Bonds on Program’s First Day, WSJ, June 2016. Lisney’s view on the impact of Brexit on the Irish Property Market, Lisney, June 2016; Ireland Bi-Monthly Research Report, CBRE, July 2016; Dublin Office Market View Q2 2016, CBRE, July 2016; Dublin Industrial & Logistics Market Viet Q2 2016, CBRE, July 2016; Market in Minutes – Ireland Retail, Savills, July 2016; Residential Ireland Report, Savills, March 2016; Staying Power: European Cities hotel forecast for 2016 and 2017, March 2016; The Irish Times, www.irishtimes.com; and Irish Independent, www.independent.ie.

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IRELAND COMMERCIAL REAL ESTATE MARKET UPDATE

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Contacts United States: Thomas Mattinson Executive Vice President +1 770 752 6714 [email protected]

Ireland / United Kingdom: Linda Nel Senior Vice President +1 770 752 6726 [email protected]

Australia: Evan Goldszak Senior Analyst +61 (0) 2 9917 8303 [email protected]

Important Disclosures This report is for informational purposes only and does not constitute, form, nor should be construed as an offer to sell or a solicitation of an offer to buy investments or any fund and does not constitute any commitment or recommendation on the part of Quadrant Real Estate Advisors. An investment offering will be made only through a confidential private offering memorandum subject at all time to revision and completion. The information contained herein is derived from various sources which Quadrant believes but does not guarantee to be accurate as of the date hereof. Neither Quadrant nor any of its affiliates nor any other person makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this newsletter and nothing contained herein shall be relied upon or construed as a promise or reorientation of past or future performance.

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