‘Depth’ & ‘Duration’ of Covid-19 will Dictate Property Market Impact - Construction Network Ireland - Construction Network Ireland

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Published in Commercial Property on 01/05/2020

‘Depth’ & ‘Duration’ of Covid-19 will Dictate Property Market Impact

CNI Editor reports

CBRE Ireland today released their latest bimonthly report for May 2020 commenting on trends and transactions in all sectors of Ireland’s property market and the impact the unprecedented Covid-19 lockdown has had and will have for different sectors of the market. According to CBRE, the onset of the Covid-19 pandemic and the resulting lockdown has impacted every sector of the Irish economy and real estate market, with sectors of the market that have a high volume of social interaction impacted significantly more than others. The property consultants say that we are in the midst of an unprecedented situation, which unfortunately is going to take some time to resolve. Against this backdrop, they say that collaboration between landlords, tenants and their financiers is critical.

Every sector of the property market has been affected differently. Some transactions are proceeding with notable deals announced in recent weeks in both the occupier and investment sectors. However, for the most part, campaigns have been curtailed for the foreseeable future, which will result in significantly lower transaction volumes being recorded in all sectors in Q2. CBRE say that a lack of transactional evidence will clearly pose challenges from a pricing perspective. Against this backdrop, they say that the quality of underlying income, the sustainability of cashflow and the availability and price of debt become increasingly pertinent.

According to Marie Hunt, Head of Research at CBRE Ireland, “The Irish economy and its real estate market entered this crisis from a position of relative strength. Factors such as structural imbalances between supply and demand, Ireland’s favourable demographics and Ireland’s attractiveness as a destination for occupiers remain unchanged and will continue to prove supportive of investment in the Irish real estate sector post-Covid. Provided the outbreak is brought under control in a reasonable timeframe and we follow the trajectory witnessed in Asia, our house view at this juncture is for a rebound in activity in the Irish commercial real estate sector during the second half of 2020, led initially by the investment sector of the market where there is considerable investor equity in a position to deploy once assets are released for sale in due course. It will however take longer for occupational markets to rebound. The depth and duration of the pandemic will ultimately dictate the extent to which the real estate market is impacted, and it is clear that in every sector of the market, the ‘new normal’ will be a very different place indeed”.


· Take-up in the Dublin office market in Q1 reached almost 100,000 square metres – 50% higher than the 5-year average for Q1 take-up in the capital, boosted by the carryover of some transactions from 2019. The true impact of the Covid-19 lockdown on transaction volumes in this sector wont manifest until Q2 figures are compiled at the end of June. Many office leasing transactions have understandably been put on hold indefinitely as occupiers put off decision-making and adopt a ‘wait and see’ approach with regard to expansions & relocations.

· There are a number of sizeable transactions in legals although the leasing process has slowed considerably with prolonged periods from exclusivity to completion and closing being experienced at present. Approximately 6,000 square metres of office accommodation has been leased in the capital since the Covid-19 lockdown commenced.

· The shutdown of non-essential construction sites and their ultimate re-opening on a phased basis will constrain the development pipeline, pushing out the delivery of some office projects by at least 3 months, insulating the market to some degree from the threat of oversupply, which would typically become a concern in a period of downturn such as this.

· While enforced remote working over recent months might encourage some occupiers to consider their future office space requirements and we are likely to see increased incidences of employees working one or two days from home going forward, the reality is that office space will still be required. It is expected that density rates in offices will reduce to facilitate appropriate social distancing.

· Most companies are now focussing on planning for a return to the workplace. The ‘new normal’ will require significant planning, particularly in terms of reconfiguration of work environments as well as considerations around enhanced cleaning and implementation of hands-free technology.


· More than 86,000m2 of take-up occurred in this sector in the first quarter of 2020 – 17% higher than the 5-year average for Q1. Although transactional activity has, for the most part, been curtailed in recent weeks, with several industrial & logistics requirements as well as a few large land transactions now on hold for the foreseeable future, there has been a spike in short-term requirements from the grocery, parcel delivery, logistics/3PL and pharmaceutical sectors, which is directly attributable to the Covid-19 situation.

· With non-essential construction halted and likely to re-open on a phased basis, it is inevitable that the delivery of new industrial & logistics stock will be delayed somewhat, putting further pressure on availability of modern accommodation in the capital. For this reason, at this juncture, CBRE are not expecting any notable deterioration in headline rents in this sector of the market.


· Other than the grocery and pharmacy sectors, which have witnessed significantly increased activity during March and April, the retail sector of the property market has clearly been very negatively impacted by the Covid-19 lockdown, with all non-essential retailers forced to close their physical stores during the last two months. This has encouraged some retailers to accelerate the rollout of online facilities.

· Many trading businesses have therefore been calling for support from landlords in the form of rent adjustments and abatements or lease restructuring to help them to weather this crisis and be in a position to reopen in due course. Every situation has to be considered on a case-by-case basis. Collaboration between landlords, tenants and their financiers is critical while some form of Government support for this sector of the economy is now clearly merited.

· The expectation is that retail vacancies in some schemes will rise meaning retail rents in some locations could come under pressure in the medium term.

· The ‘new normal’ is expected to look considerably different, with footfall in retail stores is likely to remain compromised due to a combination of weaker consumer demand, restricted trading hours, restricted customer volumes and social distancing requirements that are likely to remain in place for some time.


· According to the latest MSCI Irish Index, Irish real estate achieved a total return of 0.6% during the first quarter of 2020, bringing the annual rate of return in the year to the end of March to 4.3%. With investment spend of approximately €1.3 billion having been recorded in the Irish market during Q1, it is encouraging that despite the Covid-19 lockdown, momentum has continued in April with a number of high-profile investment transactions having completed in recent weeks.

· While a number of other investment transactions are currently in legals and expected to complete in the coming weeks, most sales campaigns are unfortunately now delayed as investors, who are unable to travel to conduct meetings or building inspections in any event, adopt a ‘wait and see’ approach.

· Encouragingly, CBRE say that investor demand for Irish assets remains strong and there is still considerable liquidity, meaning that when we are through this crisis and sales campaigns recommence, market activity is expected to rebound quickly in this particular sector of the market. CBRE are expecting to witness a ‘flight to quality’ however, with particular demand for core assets once trading activity recommences. The property consultants say that pricing for core product is unlikely to alter to any great degree but ‘core plus’ and ‘opportunistic’ assets will be more susceptible to a potential outward movement in yields over the coming months.

· The focus for the foreseeable future will be on preparing assets for sale once liquidity returns with particularly strong appetite anticipated for office, industrial and residential investments.


· Many land transactions have now been put on hold indefinitely, with the bid date on most campaigns pushed out until later this year. This includes the former Aungier Street campus on 2.5 acres in Dublin city centre, which is currently being marketed by CBRE, guiding €110 million.

· The appetite for sites is hugely dependent on the availability and cost of funding. CBRE expect to see some downward pressure exerted on land values in the short to medium term as a result of current uncertainty. With Irish banks relatively well capitalised going into this crisis and in a position to offer a certain level of forbearance, those sites that are funded by alternative lenders are therefore likely to be most vulnerable if this crisis continues for a considerable period of time. This could lead to an increase in the number of sites being offered for sale in the second half of the year.

· According to CBRE, holding a referendum to tackle land prices (as mentioned in the recently published Programme for Government document) would prove difficult, if not impossible, to implement and would likely be challenged on constitutional grounds.


· Q1 2020 was the best first quarter on record for residential investment in the Irish market. €672 million was invested in 12 individual transactions in the quarter, with residential accounting for the largest majority (53%) of total investment spend in the Irish market in the three-month period.

· In recent weeks, holders of residential investments have been focussing attention on stabilising income and sustaining occupancy within their schemes. With some improvement in supply anticipated as short-term lets convert to longer-term leasing and some other units come available, CBRE believe that the Government are now unlikely to pursue rent control as a policy in the short to medium term.

· Just as in every other sector of the market, transactional activity is expected to fall significantly in this sector during Q2 before picking up from Q3 onwards. A number of transactions that were well advanced are reportedly progressing well. Meanwhile, several sales campaigns have now been put on hold until such time as the sizeable capital that is targetting this sector is in a position to deploy later in the year.

· Despite the challenging economic backdrop, pricing for prime multifamily assets remains stable at 3.75% at this juncture. Indeed, CBRE say that pricing in this sector has for the most part remained stable across Europe in recent weeks with residential generally showing more defensive characteristics than other sectors of the property market. CBRE allude to a possibility of some price softening in due course but say that this will depend on the depth and duration of the current crisis and the extent to which employment & wages and ultimately rents are affected longer term. The property consultants say that we could however see some differential emerging in pricing for stabilised standing stock versus forward commit transactions (which comprised 56% of investment spend in this sector in Q1 2020).


· The hotel sector of the economy is one of the most exposed to the current Covid-19 lockdown with a noticeable decline in occupancy in evidence since the second week of March and most hotels now closed. This has inevitably had huge negative repercussions for the hotel property market. While some existing sales mandates are continuing, many hotel sale campaigns have now been put on hold. The sector clearly faces many months of severe disruption.

· CBRE say that it remains to be seen what the impact will be to RevPAR and Occupancy once hotels reopen and markets stabilise, although they believe that domestic business is likely to prove supportive until such time as international tourism and business activity improves once travel restrictions are lifted.

· The property consultants say they are witnessing stronger demand for hotel development projects than standing stock at present, which demonstrates the resilient nature of the hotel sector as well as investor and hotelier confidence of a return to strong trading conditions in due course. Indeed, they say that the recently announced sale of the 187-bed 4-star Clayton Charlemont Hotel in Dublin 2 to German investor DEKA Immobilien in a sale and leaseback transaction with Dalata plc for €65 million provided a welcome boost to the market, signalling underlying confidence in the hotel sector despite the current situation.

· While hoteliers have been appreciative of Government supports including the Wage Subsidy scheme, longer term, the industry will require additional assistance in relation to costs such as VAT, rates and insurance. Similarly, the licensed trade has been particularly badly impacted by Covid-19 restrictions and will require additional supports to enable them to survive until such time as they can safely exit lockdown.


· Transactional activity in the healthcare sector has understandably come to an abrupt halt but CBRE have continued to see strong interest over recent weeks from international investors for opportunities to enter the Irish healthcare market or to expand existing portfolios and expect to see this translate into transactions later in the year.

· Going forward, it is inevitable that the design and configuration of nursing homes will have to adapt to allow for greater social distancing and isolation of patients where necessary.


· There has been good appetite for many of the new office buildings that are at various stages of construction in Cork with particular demand from existing companies looking to expand their operations in the city. In that regard, it is encouraging to see that JCD Group have in recent weeks confirmed lettings to Qualcomm and Sophos at their 23,400m2 Penrose Dock development in the city’s inner Docklands. Qualcomm are to lease approximately 4,645m2 in Building 2, while Sophos are to lease 835m2 in Building 1. They join previously announced tenants such as Varonis, Matheson and Grant Thornton, bringing the scheme to over 65% occupancy.