Resilience shown in 2020 paves way for robust recovery

While Covid-19 hit values, the impact has been less dramatic than that experienced in the global financial crisis

The  sale of the  475 apartments planned for Hartfield Place  in   Dublin 9 has seen significant interest from international investors.

The sale of the 475 apartments planned for Hartfield Place in Dublin 9 has seen significant interest from international investors.

 

Following a bumper year for investment in the Irish commercial property market in 2019, the expectation was for a lower volume of trades and some easing in total returns in 2020.

The onset of the Covid-19 pandemic, however, and the Government’s response meant that the international investors who have been such a significant driver of activity here for the last decade simply couldn’t travel to inspect investment opportunities. As a result, many sales campaigns had to be postponed.

Despite this, demand for core assets remained remarkably resilient throughout 2020. A number of sales campaigns, most of which had commenced before lockdown, continued both on and off market and transactional activity reached about €2.4 billion by the end of September. The likelihood is that annual investment spend for 2020 will be close to €3 billion, which is a decent result considering the challenging market conditions.

Several high-profile transactions are currently under way and while they might not make it past the finishing line by December 31st, they will kick-start spend in the opening months of 2021. Covid has served to extend the era of low interest rates, negative bond yields and volatility in equities. This supports increased allocations by investors to real estate which will underpin stronger activity in the years ahead.

The vast majority of transactions concluded in 2020 have been office and residential investments, with multifamily coming into its own this year, having firmly demonstrated its countercyclical characteristics in the last nine months.

The slowdown in transaction volumes during 2020 has had a divergent impact on pricing across Europe. Although yields in sectors such as retail, hotels and student accommodation understandably softened, it has been interesting to observe the resilience of yields in sectors such as industrial, offices and multifamily.

Financial crisis

This is in stark contrast to the last cyclical downturn in the Irish commercial property market following the global financial crisis, which saw yields in almost all sectors effectively double in response to the complete removal of liquidity. Values have been adversely affected in 2020 but not as drastically as in 2008.

Another striking contrast between this downturn and the last is the fact that there is considerable international capital looking to deploy into Ireland as soon as stakeholders can travel to inspect and undertake due diligence. For this reason, the recovery in transactional activity in the investment sector of the market will be brisk when it occurs.

Security of cashflow has become increasingly important from a pricing perspective. While some sectors have demonstrated great resilience during 2020 (with industrial yields having contracted to 4.75 per cent and expected to contract by a further 25 to 50 basis points next year), pricing for core-plus and value-add opportunities in other sectors has come under pressure with divergence between bid and asking prices in sectors such as retail.

Next year will see investors focusing on core assets with some considering alternative niche investment sectors such as social housing, healthcare, data centres and life sciences.

The focus for the coming weeks will be on getting as many investment transactions as possible completed before the end of the year, as well as preparing mandates that are due to be launched in the first quarter of 2021. There has been increased appetite for sale and leasebacks over recent months and this is likely to escalate in 2021 as companies look to release equity and reduce costs while securing continuity of their core business following what has been a difficult year economically for many.

Myles Clarke is managing director at CBRE Ireland