Following a series of interest rate increases and an extended period of higher rates, in June the ECB implemented its first interest rate cut of a new cycle. Since then, two further rate reductions have been implemented and a further series of cuts are anticipated in 2025, which will be clearly positive for real estate debt liquidity and transactional activity.
By the end of the third quarter, Irish real estate investment totaled €1.3 billion. While investment volumes are down almost 10 per cent year-on-year, the fourth quarter should be a particularly strong quarter, with more than €1 billion worth of transactions expected to close, particularly on the back of the recent announcement that the Blanchardstown Centre has transacted. This means that full year volumes could be in the region of €2.5 billion. Encouragingly, this will mean a 35 per cent increase year-on-year, while this increase is also mirrored in markets across Europe, with European investment volumes up nearly 9 per cent year-on-year.
Sentiment in the Dublin office market has improved in recent quarters, and notably, the level of take-up in the last two quarters surpassed that of full-year 2023 take-up, with a number of large-scale requirements being fulfilled and the vacancy rate close to peaking. This has led to an improvement in investor confidence in the sector.
In the year to date, the office sector has accounted for just 21 per cent of spend. However, we expect that investment into the sector will increase year-on-year in 2025, and in fact, the office sector could likely be the most-invested sector in 2025. The maturing of debt on many office buildings, financed in a lower interest rate environment, will result in a requirement to either refinance or sell, while the valuation declines that have been seen for older non-sustainable buildings will lead to some further consensual and forced sales in the next 12 months.
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Both domestic and global challenges have weighed on the industrial sector this year and have resulted in a slowdown in take-up. However, although leasing activity is down year on year, the key demand drivers for modern warehousing and distribution facilities remain in place. Indeed, the supply-demand imbalance in the Dublin market persists, demonstrated by the low vacancy rate of just 2.4 per cent.
Opportunistic capital, French property investment vehicles and core-plus investors will continue to be the most active participants in 2025, while core capital will become a feature in the second half of 2025
While the cost of capital and higher construction costs are playing a role in constraining investment into the private rented sector, the main factor we hear from international capital is related to Irish rent control policy. Rent pressure zone legislation expires at the end of 2025, and we urge the new government to review this rent control policy in order to re-attract investment into the Irish market.
Despite the slowdown in direct investment in the residential sector, recent CBRE-led residential refinancing processes in Dublin have attracted a wide array of lenders and very competitive terms. Financiers across Europe continue to view the residential sector favourably, because of the strong occupational fundamentals in many European capital cities, including Dublin.
Industrial and logistics and retail assets both continue to attract strong terms from an array of lenders, albeit fewer opportunities of scale arise in the Irish market.
We are experiencing a significant shift in sentiment towards lending on offices in Europe, and there is now more debt liquidity for the sector, particularly for assets that have significantly re-priced and offer strong ESG credentials or a route to sustainability improvements. We have already started to see lenders underwrite both development and refinancing loans for Dublin offices again.
On a relative basis, the spread from prime Irish real-estate investment yields to the risk-free rate has widened in 2024. Irish 10-year bonds are yielding an average of 2.5 per cent in recent months, versus prime office yields of 5 per cent. This is an attractive premium for core institutional investors and will attract investors back into the market next year.
Opportunistic capital, French property investment vehicles (SCPIs) and core-plus investors will continue to be the most active participants in 2025, while core capital will become a feature in the second half of 2025.
Further interest rate cuts will carry the positive momentum seen in the fourth quarter into 2025. Improving debt liquidity, the stabilisation of yields and a narrowing of the bid-ask spread (as more vendors realise current market valuations) will also lead to more transactional activity, while investor confidence is generally growing on the back of improving market fundamentals.
It is clear to us that the market has bottomed out, and next year could mark the beginning of a new cycle of improved liquidity.
Kyle Rothwell is head of capital markets with CBRE Ireland.
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