In the first quarter of 2024, Ireland’s property investment marketplace began on a weak note, as only €160.5 million of income-generating assets were traded. This was the poorest performance since the third quarter of 2012. For clarity, the capital invested in Irish property was just 37% of the investment during the most inactive quarter of the Covid pandemic (Q2 2020).
The sluggishness of buying and selling demonstrates the ongoing state of price discovery. With escalating interest rates and unresolved structural issues in tenant markets, many sellers have not sufficiently lowered their pricing expectations.
The contraction in deal sizes mirrors a variety of factors. The devaluation of Ireland’s investment properties is due to fragile occupational markets and lease term modifications. This is gradually being reflected in the value of the traded assets. Additionally, the increase in interest rates has influenced the cost and accessibility of borrowed capital for leveraged transactions, resulting in tightened budgetary restrictions.
Moreover, there has been a shift towards less expensive regional markets, sectors experiencing more advanced price adaptations, and purchasers looking for ‘wet’ investments that require additional asset management.
Offices
Historically, the office sector has been a significant sector in Ireland’s market, pulling in almost €14 billion of capital from 2004 to 2019. This accounted for about 40% of total investment spent during that period. However, it has since been on a downward trend, plummeting to only 7.8% in this year’s first quarter.
This decline has been due to a combination of cyclical and structural factors. Tenant demand has been hindered by the inactivity of tech firms, leaving a considerable uptake vacuum. ICT constituted over half of Dublin’s office leasing from 2017 to 2021. A global reduction in tech employment, initiated by the 2022 tech crisis, is still ongoing. In the past year, tech firms have only leased 20,000 sq m (215,278 sq ft) of office space in Dublin. Sadly, this has coincided with an increase in new office space, leading to a rise in vacancies.
Despite the current slowdown in hiring for tech jobs, Dublin remains an internationally recognised tech hub and is anticipated to recover in due course. However, other long-term factors are affecting the office market that are more structurally based. The growth in the trend of working remotely has weakened the need for office spaces, despite visible signs that the number of remote workers in Ireland has plateaued, they continue to spend more days at home than in the office. The impact of this hybrid-working lifestyle on the downsizing of office spaces remains to be seen, as it’s unclear whether this trend will be fully reversed.
Moreover, changes to the structure of leasing are creating uncertainty around future rental income. Post February 2010’s contracts no longer include rent reviews that only move upwards. Also, lease durations have been shortening over a 20-year period. The once standard 25 to 30-year commitment for institutional office renting in Dublin has now been reduced to 15 years, with average terms for a mixed-basket of property assets being considerably shorter.
Along with the reduction in lease term durations, the time to first lease break has also lessened over two decades, which suggests a structural change. This essentially brings less certainty to future rental income from office properties.
Another challenge to the office sector arises from a change in top-end market preferences towards green, energy-efficient buildings. The relationship between Ber ratings and the headline office rents in Dublin city is nearly linear, implying that a building’s energy performance has a bearing on capital values. However, as most Dublin offices do not have an A-rating, considerable capital investment may be required to safeguard against environmental risks, and to secure premium rents.
Certain factors are influencing the prices achieved in transacted office agreements. Often, the bid-ask spreads have been too wide to allow transactions due to vendors’ unwillingness to accept lower prices without comparable evidence. This is especially prevalent in the premium Dublin city centre market where no new-build offices have sold since Q3 of 2022. Notably, the advanced stage negotiation for the purchase of 40 Molesworth Street, a redeveloped block in one of Dublin’s premier locations, is seen as a positive sign for the market as Q1 ended.
Retail sector
Despite the struggles faced by office investment, the retail sector has seen a rise in action, the likes of which has not been witnessed since 2016. However, considering the low total turnover, the absolute value of trading in retail assets remained about two-thirds below the 10-year quarterly average.
About €69.06 million worth of retail assets were traded in the quarter, making up 43% of the total. Various factors have driven this trend. Certain retail segments, including grocery, convenience, and retail warehousing, have drawn in capital in a less certain macro-environment. This persisted into Q1, with two large retail parks, Gulliver’s Retail Park in Santry and Kilkenny Retail Park, trading for €28.3 million and nearly €25 million respectively, making them the second and third largest deals of the quarter.
Opposed to offices and logistics buildings that tend to cluster in designated locations, different types of retail property are spread throughout towns, villages, and neighbourhoods nationwide.
While the promise of secure income is undeniably an incentive, value has also been a fundamental factor driving capital into the retail property. There are two aspects to this. Firstly, the market has had an ample amount of time to factor in the structural challenge posed by online shopping, hence retail property has undergone more repricing than logistics or offices (in which the structural problem of remote working is a newer concept).
Retail property, unlike office spaces and logistic buildings that are usually grouped in specific areas, is intrinsically spread across numerous locations such as towns, villages, and neighbourhoods throughout the nation. This wide dispersion offers valuable opportunities for investors driven by yields, helping them locate underpriced assets in thriving provincial towns where the employment hazards don’t align with the regional discount. This fact is evidenced by the 73% of all retail investments made in Ireland since the beginning of 2022, which have been outside the capital, Dublin.
Also, the retail investment opportunities supply has increased its fluidity due to numerous international private equity investors looking to withdraw and Irish funds attempting to reorganise their portfolios. As seen in past discussions, retail units located on prime streets in Dublin were rarely made available for purchase, as they were typically held by institutions. However, the availability of these assets has increased in recent years. From the start of 2022, there have been ownership changes in 23 shops in Dublin 2, inclusive of six on Grafton Street. Three additional trades have been made on Wicklow Street, along with two on College Green.
PRS
Changes in interest rates and the structure of the Irish rent control system have limited institutional investment in the private rental sector, according to earlier reports. However, the biggest deal of Q1 went against this trend, with German fund KGAL purchasing 104 apartments in Shackleton Park, west Dublin, for €42 million. While there is a significant pipeline for apartment development in Dublin, existing yields suggest that government-funded entities will likely be the primary sales avenue for developers.
Dr John McCartney, Director and Head of Research at BNP Paribas Real Estate, provided this information.