This year promised to be a strong one for the Irish investment market. Following a robust 2021 with turnover reaching €5.5 billion and plenty of work-in-progress going into 2022, we were on course for a record year.
However, that changed on February 24th, 2022 when Russia invaded Ukraine – which was soon followed by increasing debt costs and inflation – creating a perfect storm for investors and vendors.
This resulted in the market going through a transitionary period as it sought a new level for transactions to occur. For example, many of the deals agreed in the first quarter and early on in the second quarter ran into difficulties around May, as investors became increasingly nervous as to where pricing was going. We then had a period of stagnation from May to September, with the buzz word for the summer being “price discovery”.
However, since September, transactions have started to occur again albeit generally at new pricing levels.
Notwithstanding, total turnover for 2022 looks like it will still be in the region of €6 billion. Even if you exclude large-scale transactions such as the Brookfield acquisition of Hibernia Reit and Blackstone’s purchase of Salesforce Tower, total turnover will be in the region of €4.4 billion – a strong outcome by historical standards.
The difference now, compared to the global financial crisis (GFC), is that while investors are still concerned about pricing transparency, there is still equity capital active in the market seeking to be deployed into property assets. Furthermore, debt is still also available, albeit at more expensive and difficult to access terms. This means that pricing is the only inhibitor to transactions, as opposed to a lack of investor demand.
The most worrying trend we have seen in recent months is the significant reduction in the number of forward purchase/forward funding transactions in the PRS sector. This is unsurprising given the outward movement in yields – which is not being fully offset by increases in rent – and increases in construction costs.
As a result many projects that were marginally viable in 2021 are no longer so, which is going to lead to a reduction in new supply. This is likely to mainly affect 2024, as a lot of delivery due in 2023 is based on deals completed earlier this year or late last year.
On the basis that rents have finite room to move and yields are going to remain slightly higher due to debt costs, construction costs will have to fall to make apartment development viable.
The investment market can play a big role in this, as high levels of funding are required to deliver these projects. However, this does not suit the political narrative and that will need to change to allow the sector to deliver the much-needed housing stock at a level that will have a positive impact on the market.
A further area of shortage is in prime offices. Other than Salesforce – and possibly Fibonacci Square – there have been no prime ESG-credentialed fully let office buildings sold this year, with little in the pipeline for next year. This is helping to hold up the pricing of prime office assets in Dublin.
Outlook for 2023
Overall the outlook for 2023, though uncertain, is probably more positive than it was at the end of the summer period.
We are, of course, talking marginally, as there are still significant difficulties across world economies.
However, with the repricing of real estate, and a potential moderation in the inflation rate, property remains an attractive proposition.
Fergus O’Farrell is director of investment at Savills Ireland