In September, the ECB raised its base interest rate by a further 25 basis points, with the main refinancing rate now standing at 4.50 per cent. This was the 10th consecutive interest rate increase in this cycle. The impact of higher interest rates on investment volumes and real-estate pricing has been significant in 2023. By the end of Q3, Irish real estate investment volumes totalled €1.4 billion, leaving the market on course for a full-year spend that will likely be less than 50 per cent of the 10-year annual average of €4.3 billion. Nevertheless, the Irish market is not an outlier. In the same period, European real estate investment volumes were down by about 60 per cent across all sectors. In line with the rest of Europe, commercial asset pricing in Ireland has adjusted considerably over the last 12 months. Prime yields in the Irish market have drifted and in many instances are continuing to trend “weaker”.
Offices
It is widely acknowledged that the rise of flexible working patterns has led to a dampening in demand for office space, however it may not be by as much as many anticipate, particularly at the prime end of the market. We continue to see a bifurcation in the Dublin office market with positive occupier demand for high-quality, sustainable, and well-designed office spaces. Regardless, there is no hiding behind the overall Dublin office vacancy rate, which has now risen to close to 15 per cent, its highest point since 2014.
Dublin offices, particularly older or non-core located buildings, have experienced the sharpest pricing declines, driven by a combination of the necessity to reposition buildings to meet ESG requirements and dampening investor sentiment globally. Pricing is likely to continue to adjust over the course of 2024, but once this adjustment is complete, office refurbishment opportunities in prime locations will become an interesting play for value-add investors.
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Industrial and Logistics
Dublin remains massively undersupplied of modern distribution and warehousing facilities, demonstrated by the vacancy rate of sub 2 per cent. There is about 1.3 million sq ft of new industrial and logistics stock under construction to be delivered in the next 12-18 months in Dublin, 40 per cent of which pre-let or reserved.
Investment in the sector continues to be strong, driven by the robust occupational market and investors searching for rental growth.
Residential
In a sector that should be thriving, it was certainly a more muted year for PRS sales. At the end of Q3 the total investment volume was just over €420 million following spend of close to €2 billion in 2022. The undersupply of residential stock remains a key issue for the Government.
Capital Flows 2024
By the end of H1, $70 billion (€64 billion) had been raised for real estate capital globally and this figure has grown further in H2, resulting in a significant amount of capital ready to deploy. Of this $70 billion, 80 per cent was raised seeking ‘value-add’ returns. In the last quarter we have observed a significant increase in value-add investors, largely private equity, looking to deploy into the Dublin market once pricing adjustments have fully bottomed out.
In many instances, the larger European institutional funds who dominated the Irish market before 2023 need pricing to solidify and macro trends to stabilise before they can return to the market. This could happen in late 2024.
An Evolving Market
In the short term the market has fundamentally changed, and the real estate industry needs to adapt to compete for a slice of global capital allocations.
When investors have the option to acquire Irish 10-year Government bonds at approximately 3 per cent, the industry needs to provide appropriate risk-adjusted returns. Price adjustments over the last 18 months have gone some way to improving the attractiveness of real estate assets, but more focus is required in relation to value creation through proactive asset management and focusing on ESG repositioning. Cooling inflation and slowing European economic growth means borrowing costs should come down in the medium term, making debt-backed deals attractive again towards the back end of next year and into 2025.
2024 is likely to be another challenging year for the real estate industry, particularly in H1, but once pricing adjustments bottom out, the second half of the year will bring some of the most interesting opportunities the market has seen in many years.
