2021 has been a mixed bag; a marathon rather than a sprint. At the start of the year, we had full-on lockdown, no international travel, no vaccines and, in the world of commercial property, no investors or occupiers.
Silver linings? Well, there’s no comparison between the impact of coronavirus on investment volumes and that of the 2008/9 global financial crisis throughout Europe. Plus, Ireland’s corporation tax negotiations, which represented market uncertainty, are resolved.
While we still have the evolving pandemic, ongoing Brexit uncertainties, the return of inflation, and supply chain difficulties, there is much to be optimistic about.
Volumes remain high, as today’s credit conditions are not tight. Investors don’t expect major deflation in secure asset prices in most markets. Cash is there, and definitely king, and there’s the usual Q4 flurry to get year-end deals over the line.
Relative value continues to attract capital to Ireland. Commercial property investment doubled from €1.8 billion in Q1-Q3 2020, to €3.5 billion for the same period in 2021. 140 investment deals to Q3 have already outstripped the 2020 full-year figure of 138. Nearly €800 million in property assets traded in Q3 alone, which is 14 per cent up year on year, and 12 per cent above the five-year average.
Two star players
The pandemic appears to have affected the supply side of the equation, as opposed to demand, while the private rented sector (PRS) and logistics were the new star players on the investment field.
PRS has accounted for 54 per cent of trading in the year to date, with 4,107 units purchased. Huge investor interest derives from Ireland’s strong population growth that will underpin long-term demand. So too, rents are at a high starting point, providing headroom for future slippage and mitigating risk of policy intervention controlling rental growth. Residential investment is also seen as socially responsible, so ticks the “environmental, social and governance” box.
Logistics investment is on course for its strongest ever year; no surprise with ecommerce booming, driving demand for supply chain services. Rents have and will continue to increase, and yields have and will continue to compress. Consumer demand for internet sales won’t wane, and traditional retailers are improving internet solutions.
Retail investment has been subdued since 2019, but saw a stronger Q3 with €110 million invested. There are “40 shades of retail” with some subsectors more attractive than others. Prime yields for retail parks and neighbourhood centres for example are compressing in France, Germany and Spain, so it’s one to watch in 2022 as smart investors take advantage of comparative pricing dislocation vis a vis other asset classes.
Dublin offices saw good recovery in Q2 and Q3, mirroring other EU cities. 2021 has been the best year for office development since 2008, with more than 200,000sq m (2.1 million sq ft) of quality, energy-efficient business infrastructure delivered.
The office vacancy rate rose from 5 per cent in 2019 to 10.7 per cent currently, and will peak at about 14 per cent in 2022. Rents have eased by about 7.5 per cent and the market will continue to evolve in favour of tenants in 2022 and into 2023.
Offices are undergoing a similar structural shift, as retail did five years ago but prime, best-in-class properties still remain the darling of core investors.
Overall, with €3.5 billion investment turnover so far, and potentially €5 billion for the year, the market is robust and suggests strong liquidity. Remarkably, we may have the second strongest year ever, and continued growth, when supply realigns with demand.
Kenneth Rouse is managing director and head of capital markets at BNP Paribas Real Estate in Ireland