The real estate market at the beginning of 2022 continued the momentum seen during the latter half of 2021, with year-end volumes predicted to reach €6 billion. However, a combination of external factors has resulted in investors, during the second half of the year, retrenching and getting to grips with the new world. The era of “price discovery” commenced.
The shift in sentiment became apparent in July when institutional and private-equity investors started to take a watching brief and a number of deals that were under offer during the earlier part of the year started to be renegotiated.
The conflict in Ukraine, inflation pressures, the rising cost of debt and the more recent negative headlines on tech companies have given real-estate investors strong reasons to delay decision-making.
The question is, when will the market return to more normal trading? Unlike the global financial crisis, there is no run on the banks and there are billions of euro in “dry powder” sitting on the sidelines waiting to play a part. Opportunistic investors are already on the ground seeking “distress”, and there may well be some opportunities. However, given that lending rates over the last number of years were typically between 50 and 60 per cent loan to value, the market will require a significant fall in values before this triggers enough “distress” to infect the market. This is highly unlikely to happen given the majority of investors over the past number of years have been institutional grade and many hold assets for a minimum period of 10 years or more.
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The outlook for commercial property in Ireland for 2023 is an adjustment across all sectors. There will be those sectors that bounce back more quickly than others, such as logistics as it’s been driven by a shortfall of suitable space, so strong rental growth should see investors return to this sector quickly. There is currently some hesitation with regards to the office sector but fundamentally, with regards to Dublin offices, the story remains upbeat despite the headlines. There is a shortage of investable stock so those offices that hit core investors’ criteria should hold value. Retail had fallen out of favour with many investors but again there is a strong case to invest in this sector. Ireland’s rapid population growth since 2016 added 400,000 people, which is the population of Cork, Limerick and Galway cities combined. Very little retail has been built in Ireland since the mid-2000s and this is leading to a shortage of suitable space, but we are, perhaps, some time off before mass retail development takes place again.
On a positive note, indications are that the volatility we have seen in recent months in the debt markets is starting to subside
The private retail sector market has continued to forge ahead, with volumes for 2022 predicted to be similar to 2021, albeit the pipeline of product for 2024 onward is going to be a serious challenge as rising construction costs may place the delivery of many schemes in jeopardy. However, investor interest remains and will remain robust in this sector. The purpose-built student accommodation (PBSA) market has also seen very strong investor and leasing actively. Most PBSA buildings across Ireland are experiencing full occupancy and there is an ever-growing demand pool. There is a large stock of recently developed, modern, high-quality buildings in Ireland and with the limited future pipeline of new beds, it is envisaged that these investment fundamentals will continue to support the robustness of the PBSA sector in these uncertain times.
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On a positive note, indications are that the volatility we have seen in recent months in the debt markets is starting to subside and we may see the early part of 2023 start to gather momentum as this stabilisation will spread and give investors confidence that asset pricing is finally finding its floor.
Kevin Donohue is director and head of capital markets at Cushman & Wakefield Ireland
