Despite 2024 being undoubtedly one of the most challenging years on record for the investment market (particularly offices), there are solid signs that early 2024 will be seen as the bottom of this investment market cycle, as market fundamentals slowly improve.
Two outstanding factors determine a return to healthy capital flows: strong fundraising, and the cost of debt reaching a level where acceptable risk-benefit returns can be made and as such have become accretive. With most recent data showing inflation is now below the European Central Bank target of 2 per cent, and with the interest rate trajectory on a downward path, investment managers and their clients are eagerly monitoring their positions as to when to re-enter the market - accepting that interest rates will not be returning to the historic lows of pre-summer 2022.
While some of the €1.26 billion of investment activity transacted this year up to the end of the third quarter was driven by debt recovery from funders calling in loans due to covenant/loan-to-value breaches, the trough in this investment cycle will not be remembered for the high levels of default that was seen during the financial crisis from 2008. Albeit at comparatively very low levels, (at about 50 per cent of the 10-year trading volume average) property investment trading in the main has been consensual, strategic and opportunistic.
We have also seen a significant level of discretionary private capital take advantage of the absence of institutional/fund capital, while they focus more on balancing portfolio exposures (particularly those with larger exposures in secondary offices). The most significant prime office transaction of the third quarter was the sale by Irish Life of One Warrington in Dublin 2, to a private Irish investor for €41 million. In a more normalised market, private capital of this nature would be unlikely to compete with the weight of institutional capital for such assets.
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Retail is expected to top the polls again this year, as it did in 2023, as the most traded and liquid of the commercial asset classes for 2024.
Investor activity was steady on a quarterly basis, and volumes in Q4, and throughout 2025, are anticipated to trend upwards to more normalised levels by the second half of 2025. We anticipate the re-emergence of global institutional capital as we move into 2025 with a targeted focus for best-in-class office, residential and industrial stock likely to see most interest. “Off-market” activity is also likely to play a substantial role in managing perceptions, and indeed misconceptions, around disposal rationales over the next six-12 months.
Office investment strategies incorporating “brown to green” and repositioning strategies are also expected to increase. However, the cost and structure of capital stacks and the highly variable capex requirements for each unique refurbishment project will dictate that pricing sensitivity is going to be paramount to viability in each instance.
Living sector trading continues to be very low, compared with the five-year average of €1.8 billion between 2018-22, but certain assets, such as purpose-built student accommodation (PBSA), long-income social leases and co-living have been gaining investor interest. Several PBSA assets have come to the market/off-market, with Hines’s purchase of Scape being one of the largest deals of the year. We expect this to continue into 2025 where Dublin in particular will be a focus for new core funds that are emerging.
Ross Fogarty is a director at Knight Frank.
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