As we close the book on 2023, few working in the property investment market will be sad to see the year pass. The market suffered from falling values, limited activity and negative sentiment. This led to buyer inertia that was not helped by vendors’ mismatched pricing expectations. To put this into context it is likely investment turnover for 2023 will reach €1.8 billion. This is 60 per cent less than the previous five-year average of €4.5 billion. It is 10 years since the combined volume of transactions was this low.
In the EU and USA interest rates reached 22-year highs and so money followed the path of least resistance and focused on less risky asset classes with better short-term returns. Consequently, capital values in Ireland fell with the MSCI indices showing a fall of 14 per cent in the 12 months to the end of September 2023, as prime yields drifted by 50 to 150 basis points.
For all of that the market is full of contradictions. Ireland still benefits from a robust economy and remains the go-to destination for multinational companies. This has resulted in a very resilient jobs market with consequential population growth. And so, as commerce and the population expand, one would expect occupational demand for both commercial and residential real estate.
Yet the tech sector is offloading surplus office buildings and office property is a sector under pressure (mainly because of flexible-working arrangements and the impact of the costs of complying with ESG regulations) with little investor focus. The pool of active buyers can be counted on one hand.
For those willing to participate there is plenty of choice and value too. The private rented sector (PRS) was not without difficulty either, with the State coming to the rescue by acquiring (through county councils and approved housing bodies) schemes for social housing.
The industrial sector, a previous darling, also witnessed a downward shift in pricing notwithstanding a chronic undersupply of vacant buildings, robust occupier demand and further rental growth during the 2023, which explains why buyers have conviction in this sector.
Retail is the one sector which remained somewhat resilient during the year, although the sector had already been written down in value during the pandemic. It’s a sector which, in certain locations, benefited from population growth and an acceptance of hybrid (working from home) work practices.
Agents active in the investment market tend to have a positive outlook. We always believe market conditions will improve and underestimate the impact on the downward trajectory. And so it is difficult to accurately call 2024. Some will predict a recovery in the second half of 2024, citing interest rate falls as a catalyst for change.
However, it is not that simple, and I believe 2024 will be another year which limps from one quarter to the next with no real change. Inevitably as values fall, distress will come, but lenders will be reluctant to embroil themselves in receiverships and detonate debt writedowns; distress will be very circumstance-specific and sporadic.
Despite this there is some (albeit limited) evidence that appropriate pricing is emerging. If vendors are realistic there are buyers. For institutional vendors, the gap between valuations and market pricing is hampering their ability to trade. It also partially explains why some open-ended funds are seeing outflows. Conversely, closed funds or those with segregated mandates (these make up a large element of the sector) are already back out looking for the right opportunity. They will be active acquiring quality assets in an uncontested marketplace and that is where the opportunity lies. As with all changing markets, 2024 will be good for some but not all buyers.
James Nugent is a senior director and head of the commercial property transaction division in Lisney Commercial Real Estate
