Despite negative headwinds from increasing inflation and interest rates, Q2 saw strong property investment activity of more than €2.3bn, bringing the half-year total to €3.2bn – according to new data from property advisor, Savills Ireland.
This is the largest H1 total on record, 17% higher than 2021 and 11% higher than the previous record in H1 2016. Even after controlling for the Hibernia REIT sale, total transactions totalled €1.2bn in Q2 and €2.1bn for the first half of the year. This half-yearly total would still be considered a strong start to the year, as it remains 26% higher than the average H1 transactions over the last five years.
Market sentiment has, however, started to soften within certain sub sectors amongst some investors in recent months, as interest rate hikes from the US Fed and confirmation of increases from the ECB have dampened investor confidence. Transactions are increasingly becoming harder to underwrite, with volatility in the debt markets particularly elevated at the end of H1 which has led to increased borrowing costs. The largest impact will be seen by those buyers that rely heavily on leverage to complete, this could also impact development opportunities and funds that are already heavily impacted by sustained build cost inflation.
The global financing environment is changing rapidly, with that being said, the Irish macroeconomy and commercial real estate sector remain in a relatively favourable position. Employment in the country is at record levels, and in the European commission’s last forecast, Ireland was expected to be the fastest-growing economy until 2023. The undersupply of residential units, ESG-compliant offices, and modern industrial assets will continue to propel investment transactions in the commercial real estate market over the longer term.
The quarter’s largest transaction was the sale of Hibernia REIT to one of the world’s largest alternative investors, Brookfield Asset Management. The Canadian investor bought the office-focused REIT for approximately €1.1bn. Outside this mega transaction and rounding off the top five largest transactions in the quarter were three PRS transactions and one CBD office deal.
These transactions range in price from €97.5m – €122m, the largest of which saw the forward funding of a PRS asset in Citywest by Ardstone Capital, which financed the transaction at an approximate yield of 4.35% from the listed developer, Glenveagh Properties. The largest single asset office transaction of the quarter saw US-based LCN Capital Partners acquire three redeveloped office blocks occupied by Flutter Entertainment in the Founders District in Dublin 4 at a NIY of approximately 4.75%, with Spear Street Capital being the vendor in this transaction.
Brendan Delaney, Divisional Director, Investments at Savills Ireland, said“Investor sentiment has been impacted by the volatility and uncertainty of the global macroeconomic environment. However, Ireland’s commercial real estate market continues to see strong interest and transactional values. The spread between real estate yields and the risk-free rate has narrowed over the first half of the year. However, Ireland’s attractive yield discrepancy between itself and other European property markets provides a relative cushion to the impact of higher borrowing costs and the stronger yields on offer from the bond market.
This quarter, removing the large REIT sale, we have seen strong interest in the Multi-family and Office sectors, making up 35% and 22% of transactional volumes, respectively. In Q2 we saw strong demand from American investors across all sectors and Irish-based investors taking a growing portion of investment volumes”.