The commercial real estate landscape changed dramatically in the months between the industry’s two main international annual conferences (MIPIM, in France in March, and Expo Real, in Munich in October). This change and the uncertain landscape were in essence a reflection of geopolitical situations: the continuing war in Ukraine, the energy crisis, rapidly rising interest rates, rampant inflation, and climate change concern among other factors.
As we do every year at these conferences, we met a broad selection of international investors, both new and existing, with interest in the Irish market. The marked difference was their mindset change between March and October. In March, it was primarily business as usual with the investors across all sectors – ie private residential, offices, hospitality, healthcare and logistics – seeking a mix of core and core-plus/value-add investment opportunities. By October, however, the mood was more sombre. While, without exception, every investing institution we met had Ireland on their radar, the mood music was cautious. Those who hadn’t transacted by Expo had decided to wait and see how matters pan out globally. But such buyers have not gone away, we expect to see them enter the market once global political issues and the debt markets stabilise.
The questions we are being asked by buyers include who sellers are and are we seeing distress in our market? Sellers include (but are not limited to) those looking to exit certain asset classes, those looking to offload real estate with poorer environmental, social and governance (ESG) credentials, some exiting the Irish market altogether, and owners who have completed their asset-management initiatives or business plans and want to realise their profit.
Are we seeing distress? No, not yet. Is it yet to come? Possibly, in some instances. Some buyers who took out five-year debt terms in 2017 or 2018 – when more than €6 billion was invested – may struggle to refinance in the current, more expensive debt market and will have to release stock to the market. On the flip side, across all sectors, the market needs more transactional activity, and this is one way we are going to get it.
Prime yields have expanded marginally in certain sectors, and there may be further shifts in pricing before year-end, although the extent and direction of adjustment will be offset somewhat by supply and demand fundamentals in each sector.
There is no doubt that buyers want to see price adjustments from the first quarter as they are experiencing in other jurisdictions. Quite frankly, if a price adjustment cannot be demonstrated, then, in many cases, there’s no deal.
ESG criteria is now relevant across all sectors, as large global funds seek to “greenify” their portfolios. We will continue to see more social infrastructure funds targeting “beds-and-meds” next year, so nursing homes, primary health and life sciences will be sought after.
Importantly, Ireland has now risen to the status of a core market for investors. With core markets come core pricing.
French funds were very active in 2022, investing €247 million this year to date, compared with €172 million in 2021. These include Corum, La Française, BNP Paribas REIM, Sofidy and new entrants Iroko ZEN and Novaxia.
For 2023 we expect to see more opportunities coming to the market and a new wave of investors. These will consist of a mixture of core institutional-type buyers and the more opportunistic type, value driven and chasing yield. Pricing will be impacted, by how much is yet to be seen.
The costs of funding will remain an issue in the context of rising interest rates and the fact that we now have just two pillar banks in Ireland is not helpful. This will no doubt impact investment activity, although with high levels of global capital in the market and new funds targeting Ireland, overseas investment should remain robust.
Michele McGarry is director and head of capital markets at Colliers