Commercial real estate security and yield remain attractive in face of Covid-19

Irish market could still see turnover of up to €3bn in 2020 despite pandemic and Brexit

A computer-generated image of the apartments German fund DWS acquired for €200m from the Cosgrave Property Group at Cheevers Court and Haliday House in Dún Laoghaire. The private rented sector (PRS) market has accounted for 35% of turnover so far in 2020

A computer-generated image of the apartments German fund DWS acquired for €200m from the Cosgrave Property Group at Cheevers Court and Haliday House in Dún Laoghaire. The private rented sector (PRS) market has accounted for 35% of turnover so far in 2020

 

Up to the end of the third quarter 2020 the total volume of deals traded in the Irish real estate investment market was €1.8 billion, which is a 40 per cent drop compared to the same period to end of September 2019, where the market turnover reached €3.05 billion.

But while the falloff was significant on a year-on-year basis, it should be noted that with €681 million in transactional activity, the latest quarter accounted for 38 per cent of turnover in the year to date, and a 58 per cent increase on the value of the deals conducted in the second quarter.

Unsurprisingly the Covid-19 shutdown period materially impacted on the capacity to transact for several months.

The average deal size to date in 2020 is €20.2 million, which is reasonably comparable to the €23.3 million average recorded in the equivalent period in 2019. Investors would appear to have an appetite for the same lot sizes but are doing a combination of fewer and slower deals.

Another similarity in activity is that the private rented sector (PRS) market accounts for 35 per cent of the turnover so far in 2020 compared to the 33 per cent it registered in 2019.

The final quarter of the year is traditionally the most dynamic. In the case of 2019, activity was exceptional, with the €1.34 billion sale of Green Reit boosting the level of turnover in the three months to the end of December to 58 per cent.

These turnover figures include deals done both on and off market, and at present there is €1.86 billion worth of assets for sale on the market and with an additional estimated €1 billion available off market with the potential for loan or asset sales from parties such as Colony Capital.

Traditional push

Although just €390 million (20 per cent) of this €1.86 billion is “in legals” currently, there is a strong sense that the traditional push to get deals done before year-end will see this figure grow further.

The final outturn remains subject to the potential impact or otherwise of the ongoing Covid-19 pandemic, with the level of restriction on travel being just one of the factors that will determine the number and the timing of the deals completed.

Yet while Covid-19 is playing a major role in defining property investment activity in 2020, it is important to consider how real estate is performing relative to other capital markets at this time.

With both deposit rates and 10-year bond rates languishing in negative territory and ongoing volatility in the equity markets, investors continue to be attracted to property as an asset class that can offer security and yield.

Further focus is then needed on how positively Irish real estate is perceived relative to other property jurisdictions internationally.

In this regard it is important to note that the impact of Covid-19 is not unique to the dynamics of the Irish property market. As property is not a short-term investment the focus is on how resilient our market is relative to other jurisdictions and sectors and the timing for future growth.

There is a large pool of buyers with capital to match the supply actively looking for investment opportunities at present, and these requirements are strongly focussed on core assets, in particular in the office and private rented sector (PRS) markets.

These buyers are both domestic and international, and include new international capital, some of whom have been actively trying to buy in the face of overwhelming competition for a number of years.

While these and other parties will be looking now to potentially secure some prime opportunities at a time when there is less competition, there are other investors who may wait to see if the supply increases and if there is movement in pricing in 2021.

Expectations

Apart from the obvious impact of Covid-19, the dampened turnover of 2020 stems from a combination of the reduction in the availability of competitive debt and the reluctance of certain vendors to accept any movement in their pricing expectations.

The 2020 turnover forecast remains particularly sensitive to opportunities currently for sale which were acquired in recent years, and whether market changes and the softening of prime rents can be accepted by the vendor.

As these assets have been through a recent sales process, the conveyancing is typically less time-consuming than properties that have not changed hands for some time. Should these recently-traded assets find buyers between now and December, the market could see a turnover of between €2.5 billion and €3 billion in 2020 even in the absence of buyer or buyers for Colony Capital’s interests in the Dublin market.

Although this is below the levels seen in recent years, it would be a positive outcome for 2020, and a strong sign of the underlying confidence in the Irish market in the medium to long term in the face of the twin challenges of the Covid pandemic and Brexit.

Michele Jackson is a director and co-owner at TWM, a specialist real estate advisory with offices in Dublin and Galway