Certain events are often tied to a particular word or term. We had two-plus years of “unprecedented” throughout the Covid-19 pandemic, the term “Gubu” will transport those of a particular vintage to another decade, and for 2023, activity within the market will be remembered when the word “subdued” is uttered.

As 2022 came to a close, expectations for 2023 were marked by a sense of caution and observation. This was due to the rapid increase in interest rates, inflation, and the changing dynamics of certain asset classes. Many were eager to see how the office market would evolve in the absence of pandemic restrictions. As predicted, the year began with a “wait-and-see” approach, resulting in lower-than-average investment volumes in commercial real estate. By September, about €1.4 billion had been invested, and it is expected that the year-end figures will reach about €2 billion.

While all sectors experienced declines during the year, short- and long-term outlooks are varied, as sentiment and performance across property types remain bifurcated. The living sector continues to be the most active in Ireland, although fundamentals are more muted, and the strains around borrowing are starting to filter through. Investor sentiment for logistics is still positive even though fundamentals are cooling, propelled by an economy tapering after several years of strong performance. Despite these changes, rents remain at record highs. Additionally, capital values are relatively robust, as seen in the latest JLL Ireland Property Index report. Office pricing and liquidity continue to be under pressure amid weak global sentiment from investors and lenders. The sector has faced several challenges over the past 12 months. However, signs of recovery are evident, with active office leasing requirements in Dublin increasing 57 per cent from the previous year. Furthermore, prime headline rents remain stable for “best-in-class” space.

In 2023 retail differentiated from long-term averages, with a 26 per cent market share in the opening three quarters of the year, its largest market share since 2017. Retail is likely to continue to attract a wide array of investors due to the sector’s favourable returns. Additionally, the fundamentals are steady, with footfall increasing, supported by the recovery in international travel and softening but still resilient labour markets. The sector will probably see some of the market’s more significant one-off deals in 2024, with a few notable shopping centres on the market.

One trend we expect to emerge out of the gate in 2024 is the narrowing of the bid-offer spreads, with vendors selling out of necessity rather than choice.

What’s next?

2024 will be a year when there will be substantial interest in alternative asset classes within the Irish market. In particular, infrastructure, data centres and renewable-energy projects will be at the forefront of funds seeking stable returns that might not be evident in traditional sectors. We have noted in recent months that property funds are beginning to reassess their investment strategies to allow investment in infrastructure that previously did not fall under the property umbrella.

We need to talk about the 48 million square feet elephant in the city

The office market is undergoing a significant reset period, and it is becoming impossible for anyone in the sector to ignore the growing divide between the “best-in-class” properties (estimated to make up about 38 per cent of Dublin’s existing stock) and the rest. It is worth noting that no buildings under construction in Dublin are scheduled for completion after 2026.

The decreasing availability of “best-of-class” properties will present a challenge within the market, as occupiers are increasingly expected to meet ESG targets by 2030. In other words, despite a market size of 48 million square feet and a vacancy rate of 14.4 per cent, there will be a need for more suitable spaces. The effects of this undersupply will become evident by the end of 2025. Buildings that do not adhere to the latest green accreditations are not just at risk of becoming stranded, but rather, they will be stranded.

Rent control

Finally, living investment must be fostered and encouraged to boost the supply of new homes in the country. International institutional investors have been a driving force in creating supply over the past decade, bringing in capital to build that is not available domestically. Rent control, while well-intentioned, has been shown across Europe to hurt the supply of new homes. Rent-control policies that restrict rental price increases without addressing the underlying factors contributing to housing supply and demand imbalances may have limited effectiveness in the face of rising housing demand.

We encourage future housing policies to focus primarily on increasing the construction of new housing. Only when housing supply has met demand will rent controls have the potential to curb excessive rental growth. Adopting a comprehensive approach that integrates rent regulation with proactive measures to stimulate housing construction and foster affordability is imperative. By implementing such a multifaceted strategy, we can attain sustainable housing affordability outcomes for all.

Source : TheIrishTimes

The post ‘Subdued’ Sums Up the 2023 Commercial Property Market as Weak Global Sentiment Hits Investment appeared first on Amora Escapes.

Investment in commercial property and development land in the Republic has fallen sharply this year with 2023 expected to be one of the weakest years on record in both markets, according to Sherry FitzGerald.

In a report published on Monday, the property agent said the sharp rise in interest rates to 22-year highs since last summer has hindered activity in both markets.

Rampant inflation in the price of wholesale construction materials, meanwhile, has “compounded” the difficulties, said Jean Behan, senior economist at Sherry Fitzgerald Research, “affecting the feasibility of developments and dampening forward fund and forward commit structured investments”.

In the three months to the end of September, investment in Irish commercial property totalled €430 million, up 25 per cent quarter-on-quarter, but well below the long-term third-quarter average of €788 million.

Investment in development land was more or less unchanged from the second quarter of the year €82 million but still well below average, according to the report.

Overall, commercial investment turnover has reached €1.4 billion so far this year, a 64 per cent decline from the first nine months of last year while the value of land sold has fallen by around half to €226 million.

Transaction volumes, meanwhile, are down by just over a third in both markets with 57 development land sales and 91 investment sales, suggesting “that 2023 looks set to be one of the weakest years on record in both markets”.

However, there remains “strong interest for sites” with residential development potential, according to the report, reflecting the overall housing shortage. “Looking forward, there is a general positive outlook in the development land market, “ said Brian Carey, commercial director of Sherry FitzGerald. “The pool of purchasers is still quite strong.”

In the investment market, the office sector was “the key driver of investor activity” in the third quarter, accounting for 38 per cent of the market’s total capital spend for the period. Retail assets also remain attractive, the report’s authors noted.

Ross Harris, director of commercial and residential investment at the property agent, said the flight to quality remains a feature of investor demand with buyers keen to refurbish or upgrade older stock.

“Meeting ESG [environmental, social and governance] objectives remains a key component of investment decisions with both investors and occupiers focused on energy efficiency and reducing their carbon footprint,” he said. “This will continue to underpin demand going forward, buoyed by the increased availability of green loans offering favourable terms.”

Source : TheIrishTimes

The post Building and Borrowing Costs Squeezing Commercial Property Investment and Land Sales appeared first on Amora Escapes.