Vendors adopting ‘wait-and-see’ approach in sub-€20m market

It has been a very interesting six months in the commercial property market in Ireland, with much debate about the future of both the retail sector and the office market particularly.

This has gone on a little longer than any of us would have expected, but I would hope that we are now at least halfway through a temporary blip. I believe that the Covid-19 pandemic has accelerated the evolution of the real estate sector, which is not a bad thing by any means. What is most important in all of this is that the fundamentals of the economy are in good shape relative to the last major “blip” this country experienced in 2008.

For instance in the office market, I suspect that all major corporates are likely considering their real estate options at present. And while there is a certain amount of hysteria around the future of the office, to my mind it will continue to be the soul of every company for many years to come. I don’t foresee any fundamental change to this dynamic in the medium term.

Personally, I think working from home is fine some of the time. But I and almost everyone else I know would rather have the option of going to the office, rather than stay at home and “live at work”.

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What is undeniable right now, however, is that the office and every other sector within the commercial property market have been hugely affected by the impact of Covid-19 over the past six months.

Here at QRE, we have built a business around the analysis of the sub-€20 million market, which in our view is more reflective of the activity of the private investor, pension investor and family offices in Ireland. We believe this sector of the market provides an excellent insight in relation to the prevailing sentiment within the domestic economy.

Under pressure

We have been saying since the end of 2018 that the sub-€20 million market is under pressure. Our statistics showed that in 2016 and 2017 the value of turnover in this sector of the market was approximately €1 billion, with approximately 250 transactions in each year. In 2018, the level of sub-€20 million turnover fell to €720 million, while in 2019, it fell further to €650 million, with only 160 transactions taking place.

The reason for this? The overriding message we received from investors in 2019 was that they felt value had disappeared from the market in most sectors. There had been very strong rental growth and significant yield compression over a relatively short period of time, which resulted in significant capital growth within all sectors of the commercial property market. As a result, prices had now become too hot for many.

Add to that the uncertainty now being created by Covid-19, and it’s hardly surprising to see the sub-€20 million market coming under renewed pressure. While total investment turnover in the commercial real estate sector amounted to approximately €700 million in the latest quarter, the total spend in the sub-€20 million market came to € 60 million, with just 15 transactions taking place. When compared to the level of activity in the pre-Covid first quarter, this translates to a reduction of 65 per cent in the total number of transactions, or €109 million less in capital allocation to the sector.

In QRE we coined the phrase “price counselling” towards the end of 2019. We use this term to describe the management of vendors’ expectations. On the flip side of this, many of the purchasers in today’s climate believe that investments are there to be acquired on the ‘cheap’. This is simply not the case.

Unless a vendor is under pressure to sell at a discount in the current climate, they will hold. Like myself, most vendors believe the current dip will prove itself to be a temporary inconvenience, which will be reversed with the movement along the upward slope of the much anticipated “V curve” in 2021.

What is certain is that if the fundamentals of an investment, i.e. the covenant, lease term, and repairing and insuring obligations, are correct, there will still be strong demand even in the current climate. If fundamentally sound and pitched to the market at the right guide price, a good property investment will always find its level.