Better year in prospect for 2021 as range of European investors eye Ireland

Volatile equities, low interest rates and lack of yield elsewhere make real estate attractive

Hines secured €183m from the sale of Bishop’s Square to the Macquarie Group and Patrizia AG in April

Hines secured €183m from the sale of Bishop’s Square to the Macquarie Group and Patrizia AG in April

 

Despite the challenging market conditions as a result of the pandemic, a significant amount of global liquidity has continued to find a home in Irish commercial real estate, with more than €1.8 billion invested in the first nine months of this year. Already in the fourth quarter, transactions worth close to €850 million have been completed, with total turnover for 2020 likely to reach the 10-year average of just under €3 billion.

Volatile equity markets, low interest rates and a lack of yield elsewhere have kept the levels of “dry powder” targeting real estate quite high. The range of recent transactions gives a clear indication that foreign investors see Ireland as a stable, low-risk destination, something that 10 years ago would have been unimaginable.

European investors in particular continue to seek opportunities in Ireland. This is despite challenges posed by the pandemic in relation to changing travel restrictions and ongoing quarantine rules that have hampered on-site visits. Their funds are euro-denominated, which removes any risk regarding currency fluctuations, there is no drag on returns from hedging costs and the prime yield in Dublin remains relatively attractive compared with other European capital cities. This year we have seen some new entrants from countries such as France and Luxembourg seeking opportunities in Dublin.

Core office and private rented sector assets have been the most sought after, highlighting confidence in the long-term prospects for both Ireland’s economy and the Dublin office and residential markets. Despite the temporary closure of so many offices and widespread adoption of remote working during the pandemic, prime office rents have remained stable, with rent collections anecdotally strong. When it came to unwinding restrictions over the summer, the relatively compact nature of the city gave Dublin a distinct advantage over other cities such as London and Paris in terms of getting staff back to the office quickly and safely and nullified any talk of the much vaunted “hub-and-spoke” model for Dublin.

Big office deals

Large office transactions such as Fitzwilliam 28 (€ 168 million), Bishop’s Square (€183 million), both acquired by European investors, have underscored the continued appetite for core Dublin office assets, with more than €1.25 billion invested in the office sector so far this year. Similarly, the chronic undersupply of housing in recent years has led to intense competition among Irish and overseas investors for public rented sector opportunities, with more than 2,400 units traded and spend reaching just under €1 billion already this year.

The retail and hospitality sectors have been hardest hit by the pandemic. However, the impact has been more severe in some subsectors than others. In contrast to the high street and shopping centres – retail parks, supermarkets and neighbourhood centres have proven defensive with stable income streams and minimal (if any) supply chain disruption. In addition, recent figures have shown Irish households are now better off than ever, with a strong increase in household savings likely to lead to a resurgence in spending in 2021. In terms of retail investment, there will be repricing as we enter a new cycle for the sector. On a selective basis, however, I would definitely be a buyer with the old adage in mind: “location, location, location”, but I would add to this also “covenant, covenant, covenant”.

The pandemic has accelerated existing trends, with major surges in ecommerce and growth in the grocery and distribution sectors resulting in record demand for logistics space. The development of prime logistics space on a speculative basis only began relatively recently, meaning demand is still outstripping supply in this sector leading to rental growth and yield compression.

As with most countries across Europe, Ireland is currently emerging from a second lockdown. Unlike the first lockdown, however, business and consumer confidence have remained high this time round, buoyed by positive news of vaccine trials with strong levels of efficacy and the continuation of certain activities such as construction and education. The US election results have also instilled confidence, with my fellow Ballina man Joe Biden set to bring a renewed pro-Ireland stance to the White House. So while we may define 2020 as an “annus horribilis” there are certainly green shoots for a quick recovery in 2021 in Ireland and with the real estate sector very well poised to benefit from this.

Kenneth Rouse is managing director at BNP Paribas Real Estate