Which sectors of the market will be most active next year?
Transaction volumes in the investment sector have fallen from €4.47 billion in 2016 to an estimated €2.5 billion for 2017. The fall in volumes is directly linked to a drop in the supply of investment assets – a trend we will continue to see into 2018.
Due to the supply shortage, coupled with an increase in demand, we will continue to see all sectors of the market remain active, with a particular focus on the office and residential sectors. Supply in both sectors is particularly constrained, which is having a positive effect on rental growth.
The outlook for the offices sector remains very positive, notwithstanding the 30 per cent increase in rents we have seen over the last three years. The level of active demand is at peak levels and this is with little or no activity yet from Brexit, which will eventually materialise.
Have rents and yields peaked across various asset classes?
In the prime sector of all asset classes, there is still room for further rental growth and yield compression. Looking specifically at yields, we continue to look attractive relative to our European peers, though the gap is narrowing.
The margin for downward movement becomes smaller as you move towards peak levels, however the multipliers at these yield levels are so large, small movements can have a significant effect on capital value.
Where are the best investment opportunities at this stage?
The best investment opportunities really depend on the risk profile of the particular investor. As a result of the significant supply/demand imbalance in the marketplace, our outlook for residential and student accommodation remains very positive.
Elsewhere, prime offices and retail continue to provide a safe haven for core investors. In particular, I am most positive – in the short term – towards city centre office development, especially for stock delivering in 2018/ 2019.
Clearly there are inherent risks with office development, but looking at the demand side, the opportunity to develop, let and exit to a core investor remains a manageable risk, notwithstanding current site prices and development costs.
One thing to watch out for in 2018?
We have had significant rental growth over the last 4 years and this raises questions about sustainability and future growth prospects.
It is unprecedented times for the investment sector in Ireland, as we are now a global player in the sector. From an investor and occupier point of view, this augers well for continued performance.
However, in 2018 I believe investors will look hard at the data to try to determine future growth prospects, with a specific focus on rental growth.
Fergus O’Farrell is director of investments at Savills