Building and borrowing costs squeezing commercial property investment and land sales – report

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 had 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.

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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 about 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”.

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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.”