What will happen to Irish property values in 2024? Real estate industry players give their view

The past 18 months have been a time of significant upheaval across the economy, with multiple macroeconomic headwinds, including the lingering effects of the pandemic and geopolitical unrest, together with a markedly different and inflationary interest-rate environment all having a significant impact. The Irish real estate sector has not been immune from this.

Myself and my EY colleague Michael Armstrong wanted to gauge the mood of real-estate borrowers to understand their perspective on the Irish real-estate market right now and, crucially, to see where they believe it will be in 12 months’ time. We engaged with both Irish and international real-estate owners and investors across all the main segments of the market, including offices, retail, residential, logistics and hospitality. A number of trends became clear.

Firstly, the majority of real-estate companies (75 per cent) in the Irish market are planning to raise new finance or refinance existing debt in the coming year, with alternative sources of capital playing an increasingly important role. However, some companies may face challenges in raising new debt due as a result of the elevated interest-rate environment, increasing sustainability requirements affecting older buildings in particular, and a slowing market in some segments.

The office market is a different case. Slowing demand due to the impact of hybrid working, slowdowns in some sectors and increasing sustainability requirements are having a somewhat negative effect on valuations, notably for older stock

Against this backdrop it is unsurprising that just 41 per cent of respondents to our survey expect asset values to increase over the next 12 months, while 59 per cent expect asset values to decrease.

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The sentiment among the various property sectors is by no means uniform, however. Hospitality owners are particularly positive, with an overwhelming majority expecting valuations to rise or remain stable. None anticipate a fall. Residential property developers have a similarly positive outlook and express a welcome for the role of initiatives such as the Land Development Agency (LDA) and Approved Housing Bodies (AHBs). Logistics asset owners also express an upbeat outlook.

The office market is a different case. Slowing demand due to the impact of hybrid working – which recent EY studies have found is becoming embedded for workers globally – slowdowns in some sectors, and increasing sustainability requirements are having a somewhat negative effect on valuations, notably for older stock.

That is likely to translate into a more difficult environment for offices owners seeking to refinance existing debt or raise new debt. And if they are not hitting key sustainability metrics, they may find it almost impossible to raise finance due to a reluctance on the part of lenders to advance funding for assets that may become impaired.

Sustainability is key for lenders

Indeed, sustainability is becoming a key factor in lending decisions. Apart from carbon reductions, green buildings offer considerable benefits. They are more marketable, attract better-quality tenants, are better for tenant retention and have lower operating costs. These characteristics usually lead to higher valuations.

Buildings that meet certain standards can also qualify for sustainable loans at advantageous rates. The European sustainable-loan market has experienced strong growth in recent years and will continue to gain relevance as regulatory conditions become more rigorous.

Borrowers, for their part, should strive to position their environmental, social and governance (ESG) objectives within their overarching strategy and disclose the details of any certifications or standards they are seeking to attain to their prospective lenders.

In this context, it is heartening to note that 60 per cent of respondents have already implemented sustainability plans, which could potentially translate into improved access to capital and more favourable terms.

Another positive development in the market is the increasing role being played by alternative lenders, which are providing welcome diversity to the debt pool.

While the domestic Irish banks remain the primary source of debt for 40 per cent of respondents, international and domestic-debt funds are favoured by 32 per cent of real-estate owners. Ireland is well served by alternative lenders, with Cardinal Capital, Earlsfort Capital, Bain Capital, Activate Capital and Home Building Finance Ireland (HBFI) being among the main players bringing additional liquidity to the funding market.

Finance from this source can be more expensive than bank funding, but it tends to come with more flexible terms and conditions, particularly in relation to covenants, which can be appealing to some borrowers.

The high prevalence of hedging among real-estate owners is an indication of growing sophistication as well as underlying financial strength. This bodes well for the future

The increasing prominence, activity and fluidity of alternative lenders is another trend in the Irish real-estate lending market, and we can expect their share of the Irish market to increase in the coming years with new capital providers attracted by the strength of the Irish economy.

While decreasing asset values in certain segments of the market may cause a degree of stress for some owners in terms of covenant pressures and challenges in refinancing, others see it as an opportunity with half of those we spoke to planning to invest in distressed assets in the next 12 months. Companies with strong balance sheets are on the lookout for assets at attractive valuations, which indicates a high degree of confidence in the longer-term prospects for the Irish real estate market.

These buying opportunities are likely to arise as companies experience covenant issues, repayment issues or have difficulty refinancing their existing facilities due to, sustainability, valuation or repayment issues. The most-at-risk sector based on our survey and international sentiment is likely to be offices.

Another finding worthy of note is the fact that 60 per cent of respondents have an interest-rate hedging strategy in place. These strategies have become increasingly important to borrowers seeking certainty on the future cost of funds. The high prevalence of hedging among real-estate owners is an indication of growing sophistication as well as underlying financial strength. This bodes well for the future.

The overarching theme that emerged from our conversations is one of cautious optimism on the part of real-estate owners. They are taking a proactive approach to sustainability and interest-rate management. They are also moving ahead with financing plans, and engaging with lenders and advisers to execute them. That latter point is particularly important as having a well-thought-out debt plan is essential to achieving a successful debt raise in the current environment.

David Martin is a capital and debt-advisory partner at EY Ireland