This year looks like being another bumper year for the investment market in Ireland. As interest rates continue to fall and look set to stay low for the medium to long term, overseas investors are seeing opportunity in the Irish market with yields remaining competitive and rental commitments being long-term relative to other European cities.
However, when you peel back the layers there is an interesting trend establishing in the sub-€20million market which provides a very good indicator of sentiment within the domestic economy. The sub-€ 20 million market is where the local investor will tend to invest be they high net worth, first-time investors, pension investors or family offices.
The value of this market was around €950 million in both 2016 and 2017. In 2018, however, turnover in this sector fell to €720 million, a 24 per cent drop. In the first three quarters of 2019 we have seen turnover of just €448 million in this sector, and we anticipate that end-of-year figures will be in the order of €650 million.
The are many reasons for this slowdown. However, the predominant feedback from investors in this sector is that they just don’t see value in the market.
There has been very strong rental growth over the last five years and significant yield compression, which has resulted in very accelerated capital growth within all sectors of the commercial property market.
“Price counselling” is now a factor of the market, and vendors’ expectations are having to be managed accordingly. If an investment property is pitched at the right guide price it will always find its level. However, if it is pitched too high to the market it is likely to sit and stagnate.
Market uncertainty
Other reasons include market uncertainty around Brexit and other geo-political issues.
Income certainty or the weighted average unexpired lease term will impact on one’s ability to source finance.
Tenant-friendly leases with numerous break options and limited reinstatement provisions will also impact on investment value.
Investors and lenders are savvier and take more time in considering what will happen if a tenant vacates and the likely costs implications of this before agreeing. The discounted cash flow valuation model is bringing income flows to life.
In saying all this we believe that there is still huge appetite from domestic investors. In QRE we talk to buyers every day, and represent many investors, who all remain keen to invest in Ireland. But they will only do so when they perceive value, which could probably be quantified as an adjustment of 50 to 100 basis points on net initial yield levels, depending on the asset profile.
The fundamentals of the Irish market remain strong, but the excesses and mistakes of the mid-00s are still fresh in the mind of the Irish domestic investor.
“Once bitten, twice shy...”
